-----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, VvIaXwDYYC+59gMpTTRFMbj4f1ykOJzgG8jxt/vd78kDQy1Kc0q4w6ttfQvgJbxZ JnhLCzBI6YSt4JJcvgcbvg== 0000895345-98-000523.txt : 19980901 0000895345-98-000523.hdr.sgml : 19980901 ACCESSION NUMBER: 0000895345-98-000523 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19980831 SROS: NYSE 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: 1229 FILING VALUES: FORM TYPE: POS AM SEC ACT: SEC FILE NUMBER: 333-50761 FILM NUMBER: 98701676 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 POS AM 1 As Filed With The Securities And Exchange Commission On August 31, 1998 Registration No. 333-50761 ============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------------- POST-EFFECTIVE AMENDMENT NO. 2 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 SALANT CORPORATION (Exact Name Of Registrant As Specified In Its Charter) Delaware 2320 13-3402444 (State Or Other (Primary Standard (I.R.S. Employer Jurisdiction Of Industrial Identification Incorporation Or Classification Code Number) Organization) Number) -------------------- 1114 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10036 (212) 221-7500 (Address, Including Zip Code, And Telephone Number, Including Area Code, Of Registrant's Principal Executive Offices) Todd Kahn Executive Vice President, General Counsel And Secretary Salant Corporation 1114 Avenue of the Americas New York, New York 10036 (212) 221-7500 (Name, Address, Including Zip Code, And Telephone Number Including Area Code, Of Agent For Service) COPIES TO: Brad Eric Scheler, Esq. Lawrence A. First, Esq. Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, New York 10004 (212) 859-8000 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after: (i) a post-effective amendment to the Registration Statement becomes effective and (ii) the occurrence of the expiration date of the Exchange Offer described in each of the Exchange Restructuring Prospectus and the Proxy Statement/Prospectus included as part of the Registration Statement. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. |_| CALCULATION OF REGISTRATION FEE =============================================================================== Title of each Class of Amount to Proposed Proposed Amount of Securities to be be Maximum Per Maximum Registration Registered Registered Unit Offering Aggregate Fee Price Offering Price - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Common Stock, par 22,169,790 value $1.00 per share Shares -- (3) (1)(2) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Warrants 2,216,979 Warrants (2) -- (3) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Total -- -- $123,199,456 $36,580* =============================================================================== (1) Maximum number of shares of common stock, par value $1.00 per share (the "New Common Stock"), (i) to be issued initially by Salant Corporation (the "Company") pursuant to the Registration Statement and (ii) to be issued subsequently upon the exercise of newly created warrants (the "Warrants"), issued pursuant to the Warrant Agreement (as defined herein), to purchase New Common Stock also being registered hereby. Such number reflects a one-for-ten reverse stock split (the "Reverse Split") as further described herein. (2) Each $1,000 principal amount of 10-1/2% Senior Secured Notes due December 31, 1998 (the "Senior Notes") will be exchanged for 175.97755 shares of New Common Stock, representing an aggregate of 18,456,350 shares. Each share of the Company's previously issued and outstanding common stock, par value $1.00 per share (the "Old Common Stock"), will receive one-tenth of a share of New Common Stock (representing, in the aggregate, 1,496,461 shares of New Common Stock) and .14814815 Warrants to purchase, in the aggregate, 2,216,979 shares of New Common Stock at an exercise price of $6.2648 per share, subject in each case to adjustment. (3) The Proposed Maximum Aggregate Offering Price has been calculated pursuant to Rule 457(f) as the sum of (i) the aggregate market value of the Old Common Stock as of April 21, 1998 ($11,223,456 which is the product of (a) $0.75, the closing price of the Old Common Stock on the New York Stock Exchange on April 21, 1998, and (b) 14,964,608, the number of shares of Old Common Stock issued and outstanding on such date), and (ii) the aggregate book value of the Senior Notes (plus accrued and unpaid interest) as of April 21, 1998 ($111,976,000, or the sum of the aggregate book value of $104,879,000 and accrued and unpaid interest of $7,097,000). This Post-Effective Amendment shall become effective in accordance with Section 8(c) of the Securities Act of 1933 on such date as the Securities and Exchange Commission, acting pursuant to Section 8(c), may determine. [LOGO OF SALANT CORPORATION] _________, 1998 Dear Stockholder: You are cordially invited to attend the annual meeting (the "Stockholders' Meeting") of the stockholders of Salant Corporation (the "Company") to be held at the offices of Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York on _______, 1998, at _____ __.m., New York City time. At the Stockholders' Meeting, you will be asked to consider and vote on certain proposals relating to the financial restructuring of the Company in connection with an exchange offer (the "Exchange Restructuring") whereby holders of the Company's 10-1/2% Senior Secured Notes due December 31, 1998 (the "Senior Notes") immediately prior to the Exchange Restructuring would exchange each $1,000 principal amount of Senior Notes (plus all accrued but unpaid interest thereon) for 175.977555 shares of common stock, par value $1.00 per share, of the Company ("New Common Stock") and stockholders of the Company ("Stockholders") as of immediately prior to the Exchange Restructuring would receive, for each outstanding share of common stock, par value $1.00 per share, of the Company (the "Old Common Stock"), one-tenth of one share of New Common Stock, plus .14814815 warrants (the "Warrants") to purchase additional shares of New Common Stock. Fractional shares of New Common Stock and fractional Warrants will be rounded up to the nearest share of New Common Stock or Warrant, as the case may be. Stockholders will be asked to consider and vote upon proposals (the "Restructuring Proposals") to implement the Exchange Restructuring, consisting of (a) an amendment (the "Charter Amendment") of the Company's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation"), in order to effect (i) a ten-to-one reverse stock split (the "Reverse Split") of each outstanding share of Old Common Stock, into one-tenth of a share of New Common Stock, and (ii) an increase in the number of shares of New Common Stock authorized; (b) to approve the issuance (the "Issuance") of (i) shares of New Common Stock to holders of Senior Notes ("Noteholders") in exchange for their Senior Notes and to Stockholders in exchange for their Old Common Stock upon consummation of the Exchange Restructuring, (ii) the Warrants, and (iii) shares of New Common Stock to holders of Warrants upon exercise of their Warrants (such shares of New Common Stock being hereinafter referred to as the "Warrant Shares"); and (c) to elect new directors to the Board of Directors (the "Board") of the Company (the "Election of the New Board") upon consummation of the Restructuring. In addition, the Stockholders will be asked to (i) consider a proposal (the "Plan Proposal") to approve the adoption of the Salant Corporation 1998 Stock Award and Incentive Plan (the "Stock Award and Incentive Plan"), and (ii) ratify the appointment of Deloitte & Touche LLP as independent auditors to the Company (together with the Restructuring Proposals and the Plan Proposal, the "Proposals"). The Company is also soliciting acceptances of a prepackaged plan of reorganization (the "Prepackaged Plan") of the Company under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") from Stockholders under which the Old Common Stock would be exchanged for the same consideration as under the Exchange Restructuring. The proposed financial restructuring of the Company in connection with the Exchange Offer, as described in the accompanying Proxy Statement/Prospectus, is referred to as the "Exchange Restructuring." The proposed financial restructuring of the Company pursuant to the Prepackaged Plan, as described in the accompanying Proxy Statement/Prospectus is referred to as the "Prepackaged Restructuring." The term "Restructuring" as used herein means the financial restructuring of the Company pursuant to either the Exchange Restructuring or the Prepackaged Restructuring. If the Prepackaged Restructuring is pursued and the Company commences a chapter 11 bankruptcy case and files the Prepackaged Plan, the Company expects that each of the Restructuring Proposals will be implemented pursuant to the Prepackaged Plan. Apollo Apparel Partners, L.P. ("Apollo"), the beneficial owner of 5,924,352 shares (the "Apollo Shares") of Old Common Stock, which represents approximately 39.6% of the issued and outstanding shares of Old Common Stock, has entered into a Voting Agreement with the Company, dated August ___, 1998, wherein Apollo has agreed, among other things, to vote all of the Apollo Shares held by it in favor of each of the Restructuring Proposals and the Prepackaged Restructuring. Assuming all of the conditions to the consummation of the Exchange Restructuring are fulfilled, the Issuance will result in the Noteholders receiving 92.5% of the issued and outstanding shares of New Common Stock (subject to dilution for shares of New Common Stock issued under the Stock Award and Incentive Plan, the Warrant Shares, and in the case of the Exchange Restructuring only, the shares of New Common Stock issued under the Company's 1987 Stock Plan, 1988 Stock Plan, 1993 Stock Plan and 1996 Stock Plan (the "Old Plans")). In addition, Stockholders would receive 7.5% of the outstanding shares of New Common Stock as a result of the Reverse Split (subject to dilution for shares of New Common Stock issued under the Stock Award and Incentive Plan, the Warrant Shares, and in the case of the Exchange Restructuring only, the shares of New Common Stock issued under the Old Plans) and, upon exchange of certificates of their Old Common Stock, would receive Warrants which, upon exercise, would represent 10% of the New Common Stock outstanding immediately following consummation of the Exchange Restructuring and the Reverse Split (on a fully diluted basis). Each Stockholder would receive, in exchange for each share of Old Common Stock held, .14814815 Warrants and one-tenth of a share of New Common Stock. The Warrants would be exercisable for seven years from the date of consummation of the Exchange Restructuring (the "Exchange Restructuring Date"). The Warrants would have an exercise price ("Exercise Price") of $6.2648 per share and each Warrant would be exercisable for one share of New Common Stock, in each case subject to adjustment. Stockholders will not be entitled to receive Warrants unless and until they exchanged their certificates of Old Common Stock for certificates of New Common Stock. Copies of the Notice of Annual Meeting of Stockholders and the Proxy Statement/Prospectus, which serves as a prospectus for the shares of New Common Stock, the Warrants and Warrant Shares to be issued to the Stockholders, are enclosed herewith, covering the formal business to be conducted at the Stockholders' Meeting. The Stockholder votes with respect to the Issuance and the Election of the New Board will not be effective unless and until the Charter Amendment is approved at the Stockholders' Meeting and filed with the Secretary of State of the State of Delaware and the Exchange Restructuring has been consummated. Each of the Restructuring Proposals is conditioned upon the approval by the Stockholders of each of the other Restructuring Proposals. If any or all of the Restructuring Proposals are not approved by the Stockholders at the Stockholders' Meeting, then none of the Restructuring Proposals will become effective. If the Stockholders approve the Stock Award and Incentive Plan, the Stock Award and Incentive Plan will become effective regardless of whether the Exchange Restructuring is implemented or any of the Restructuring Proposals are approved. However, the approval of the Stock Award and Incentive Plan is not a condition to the consummation of the Restructuring. Stockholders will not be entitled to dissenters' rights or rights of appraisal in connection with the Charter Amendment, the Issuance, the Plan Proposal of the Election of the New Board. The Exchange Restructuring is conditioned on, among other things, 100% of the outstanding Senior Notes being validly tendered (the "Minimum Tender Condition") pursuant to the Exchange Restructuring and the approval by the Stockholders of each of the Restructuring Proposals. If each of the Restructuring Proposals is not approved by the Stockholders or the Minimum Tender Condition is not satisfied or waived, but the Company receives sufficient acceptances of the Prepackaged Plan to obtain confirmation thereof by the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"), then the Company intends instead to pursue the Prepackaged Restructuring by means of the filing of a petition under Chapter 11 of the Bankruptcy Code and the Prepackaged Plan and to use such acceptances to obtain confirmation of the Prepackaged Plan. The Prepackaged Restructuring may be effected with the approval of (i) Noteholders holding at least two-thirds in amount of the Senior Notes and more than one-half in number of the Noteholders voting on the Prepackaged Plan, and (ii) Stockholders holding at least two-thirds in amount of shares of Old Common Stock voting on the Prepackaged Plan. However, under certain circumstances described in more detail in the accompanying Proxy Statement/ Prospectus, the Prepackaged Restructuring may be effectuated even if less than the requisite number of Stockholders vote in favor of the Prepackaged Plan. Magten Asset Management Corp. ("Magten"), the beneficial owner of, or the investment manager on behalf of the beneficial owners of, approximately $74 million in aggregate principal face amount of the Senior Notes, representing approximately 71% of the aggregate principal amount of all Senior Notes, has agreed to the terms of the Restructuring. If Magten votes in favor of the Prepackaged Plan, the requisite acceptances of the Prepackaged Plan by the Noteholders with respect to the dollar amount required will be assured. If the Prepackaged Restructuring is pursued, the Company expects that each of the Restructuring Proposals will be implemented pursuant to the Prepackaged Plan. THE COMPANY'S SUBSIDIARIES WOULD NOT BE PARTIES TO THE PREPACKAGED PLAN, AND WOULD NOT BECOME DEBTORS IN CONNECTION WITH THE PREPACKAGED RESTRUCTURING. THEREFORE THE SUBSIDIARIES OF THE COMPANY WOULD CONTINUE TO OPERATE IN THE ORDINARY COURSE OF BUSINESS DURING THE COMPANY'S CHAPTER 11 CASE. AS SUCH, THE PREPACKAGED PLAN WOULD NOT AFFECT THE CONTINUING AND TIMELY PAYMENT IN FULL OF THE SUBSIDIARIES' OBLIGATIONS TO SUPPLIERS, EMPLOYEES, AND OTHER CREDITORS. IN ADDITION, THE PREPACKAGED PLAN PROVIDES FOR ALL PREPETITION UNSECURED CREDITORS OF THE COMPANY, INCLUDING, WITHOUT LIMITATION, TRADE CREDITORS, TO BE PAID IN FULL IN ACCORDANCE WITH THEIR TERMS, AND SUCH CREDITORS WOULD NOT, THEREFORE BE IMPAIRED BY, AND WOULD BE DEEMED TO ACCEPT, THE PREPACKAGED PLAN, AND THEIR VOTE ON THE PREPACKAGED PLAN WOULD NOT BE SOUGHT. The purpose of the Restructuring is to help ensure the long-term viability and to contribute to the success of the Company by deleveraging the Company's capital structure. Specifically, in accordance with the Three-Year Operating Plan for 1998-2000 (the "Three-Year Business Plan") developed by the Company, the Restructuring is designed to recapitalize the Company by converting all of the Company's long-term debt obligations under the Senior Notes (which, as of February 28, 1998, was $110.379 million, consisting of $104.879 million aggregate principal amount of, and $5.5 million of accrued interest on, the Senior Notes) into New Common Stock. Interest charges for the Company will be reduced by $11 million per year and stockholders' equity should be substantially increased as a result of the Restructuring. The Company's consolidated debt at the completion of the Restructuring will include approximately $28 million in revolver debt plus $15 million from the term loan portion of its working capital facility. This significantly lower debt-to-equity ratio should help the Company to achieve the objectives as described in the Three-Year Business Plan and make the Company more attractive to investors. The Company believes that by reducing the uncertainty surrounding its ability to pay or retire the Senior Notes which are due in their entirety on December 31, 1998, the Restructuring should maximize liquidity for the Company's business operations and thereby provide a platform for future growth and enhance the Company's total enterprise value. The Company further believes that by providing the Company with a deleveraged capital structure, the company that results from the Restructuring should be positioned favorably to withstand the normal market fluctuations in the highly volatile apparel industry. In addition, in contemplation of the Restructuring, the Company elected not to pay the interest payment of approximately $5.5 million that was due and payable under the Senior Notes on March 2, 1998, subject to a 30 day grace period. Because the Company elected not to pay the interest due on the Senior Notes by the expiration of the applicable grace period, an event of default has occurred with respect to the Senior Notes entitling the Noteholders to accelerate the maturity thereof. Pursuant to a certain letter agreement, dated March 2, 1998 (the "Letter Agreement"), Magten has, in accordance with Section 6.5 of the Indenture, dated September 20, 1993, as amended (the "Indenture") governing the Senior Notes, caused a written direction to be provided to the Trustee under the Indenture, to forbear during the term of the Letter Agreement from taking any action under the Indenture in connection with the failure by the Company to make the interest payment on the Senior Notes that was due and payable on March 2, 1998. On April 8, 1998, the Trustee issued a Notice of Default stating that as a result of the Company's failure to make the interest payment due on the Senior Notes, an event of default under the Indenture had occurred on April 1, 1998. In addition, the Company's working capital lender, the CIT Group/Commercial Services Inc., agreed to forbear until November 30, 1998, subject to certain conditions, from exercising any of its rights or remedies under the Revolving Credit, Factoring and Security Agreement, dated as of September 20, 1993, as amended (the "Credit Agreement"), arising by virtue of the Company's failure to pay such interest on the Senior Notes. Failure to consummate the Restructuring could result in the acceleration of all of the indebtedness under the Senior Notes and/or the Credit Agreement. ABSENT THE RESTRUCTURING, THE COMPANY DOES NOT BELIEVE IT WILL BE ABLE TO SATISFY ITS OBLIGATIONS UNDER THE SENIOR NOTES WITHOUT A REFINANCING OF THE COMPANY'S INDEBTEDNESS UNDER THE CREDIT AGREEMENT AND/OR THE SENIOR NOTES OR AN ADDITIONAL CAPITAL INFUSION, AND IT IS UNLIKELY THAT THE COMPANY WILL BE ABLE TO OBTAIN SUCH REFINANCING OR ADDITIONAL CAPITAL INFUSION. IF THE COMPANY DETERMINES THAT IT IS OR WILL BE UNABLE TO COMPLETE THE RESTRUCTURING, THE COMPANY WILL CONSIDER ALL OTHER AVAILABLE FINANCIAL ALTERNATIVES, INCLUDING THE SALE OF ALL OR A PART OF THE COMPANY'S BUSINESSES, THE IMPLEMENTATION OF AN ALTERNATIVE RESTRUCTURING ARRANGEMENT OUTSIDE OF BANKRUPTCY, OR THE COMMENCEMENT OF A CHAPTER 11 CASE WITHOUT A PRE-BANKRUPTCY ACCEPTED PLAN OF REORGANIZATION. THERE CAN BE NO ASSURANCE, HOWEVER, THAT ANY ALTERNATIVE WOULD BE ON TERMS AS FAVORABLE TO NOTEHOLDERS AND STOCKHOLDERS AS THE RESTRUCTURING. IN ORDER TO EXPEDITE THE SOLICITATION OF ACCEPTANCES UNDER THE PREPACKAGED PLAN, SHOULD IT BE NECESSARY, THE COMPANY IS CONCURRENTLY SOLICITING SUCH ACCEPTANCES TOGETHER WITH PROXIES FOR THE STOCKHOLDERS' MEETING. ACCORDINGLY, THIS PROXY STATEMENT/PROSPECTUS ALSO SERVES AS A SOLICITATION BY THE COMPANY FOR ACCEPTANCE OF THE PREPACKAGED PLAN. Stockholders may vote in favor of the Prepackaged Plan by signing, marking and returning the enclosed ballot for that purpose in the enclosed envelope. Unlike the proxy, the ballot must be marked FOR or AGAINST acceptance for it to be counted for any purpose. IF THE MINIMUM TENDER CONDITION IS NOT SATISFIED OR WAIVED, BUT THE COMPANY RECEIVES SUFFICIENT ACCEPTANCES OF THE PREPACKAGED PLAN TO OBTAIN CONFIRMATION THEREOF BY THE BANKRUPTCY COURT, THEN THE COMPANY INTENDS TO PURSUE CONFIRMATION OF THE PREPACKAGED PLAN UNDER CHAPTER 11 OF THE BANKRUPTCY CODE AND TO ATTEMPT TO USE SUCH ACCEPTANCES TO OBTAIN CONFIRMATION OF THE PREPACKAGED PLAN. IF THE COMPANY DETERMINES THAT IT IS OR WILL BE UNABLE TO COMPLETE THE RESTRUCTURING, THE COMPANY WILL CONSIDER ALL FINANCIAL ALTERNATIVES AVAILABLE TO IT AT SUCH TIME, WHICH MAY INCLUDE THE SALE OF ALL OR PART OF THE COMPANY'S BUSINESS, THE IMPLEMENTATION OF AN ALTERNATIVE RESTRUCTURING ARRANGEMENT OUTSIDE OF BANKRUPTCY, OR THE COMMENCEMENT OF A CHAPTER 11 CASE WITH OR WITHOUT A PRE-BANKRUPTCY ACCEPTED PLAN OF REORGANIZATION. THERE CAN BE NO ASSURANCE, HOWEVER, THAT ANY ALTERNATIVE RESTRUCTURING WOULD RESULT IN A REORGANIZATION OF THE COMPANY RATHER THAN A LIQUIDATION, OR THAT ANY SUCH REORGANIZATION WOULD BE ON TERMS AS FAVORABLE TO THE NOTEHOLDERS AND STOCKHOLDERS AS THE TERMS OF THE RESTRUCTURING. IF A LIQUIDATION OR A PROTRACTED AND NON-ORDERLY REORGANIZATION WERE TO OCCUR, THERE IS A RISK THAT THE ABILITY OF THE NOTEHOLDERS AND STOCKHOLDERS TO RECOVER THEIR INVESTMENTS WOULD BE EVEN MORE IMPAIRED THAN UNDER THE RESTRUCTURING AND WOULD BE SUBSTANTIALLY DELAYED. A NON-CONSENSUAL RESTRUCTURING WOULD LIKELY HAVE A MATERIAL ADVERSE IMPACT ON THE COMPANY AND ITS EMPLOYEES, SUPPLIERS AND CUSTOMERS. ACCORDINGLY, YOUR BOARD BELIEVES THE EXCHANGE RESTRUCTURING AND THE PREPACKAGED RESTRUTURING ARE IN THE BEST INTERESTS OF THE COMPANY'S STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE APPROVAL OF THE RESTRUCTURING PROPOSALS AND FOR THE ACCEPTANCE OF THE PREPACKAGED PLAN. ON _____ ___, 1998, AT THE BOARD'S REQUEST, ERNST & YOUNG LLP ("E&Y"), FINANCIAL ADVISORS TO THE COMPANY, DELIVERED TO THE BOARD A WRITTEN OPINION ADDRESSED TO THE BOARD THAT, AS OF THAT DATE AND BASED UPON AND SUBJECT TO THE FACTORS AND ASSUMPTIONS SET FORTH THEREIN, THE CONSIDERATION TO BE RECEIVED BY STOCKHOLDERS PURSUANT TO THE RESTRUCTURING IS FAIR TO PUBLIC STOCKHOLDERS FROM A FINANCIAL POINT OF VIEW. E&Y SUBSEQUENTLY DELIVERED TO THE BOARD THEIR WRITTEN OPINION ADDRESSED TO THE BOARD THAT, AS OF THE DATE OF THIS PROXY STATEMENT/PROSPECTUS AND BASED UPON AND SUBJECT TO THE FACTORS AND ASSUMPTIONS SET FORTH THEREIN, THE CONSIDERATION TO BE RECEIVED BY STOCKHOLDERS PURSUANT TO THE RESTRUCTURING IS FAIR TO PUBLIC STOCKHOLDERS FROM A FINANCIAL POINT OF VIEW. Regardless of the size of your holdings, it is important that your shares be voted at the Stockholders' Meeting and with respect to the Prepackaged Plan. Whether or not you plan to attend the Stockholders' Meeting, please sign and return both your proxy and ballot in the enclosed envelope by no later than ___________, 1998 to assure that your shares will be voted with respect to each of the Restructuring Proposals. Your vote on the Prepackaged Plan will not be counted unless you return a properly completed ballot. Sincerely, Jerald S. Politzer Chairman of the Board and Chief Executive Officer SALANT CORPORATION NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON __________, 1998 NOTICE IS HEREBY GIVEN that an annual meeting of stockholders (the "Stockholders") of Salant Corporation (the "Company") will be held at the offices of Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York on _________, 1998, at ____ __.m., New York City time (the "Stockholders' Meeting"), for the purpose of implementing a financial restructuring of the Company in connection with an exchange offer (the "Exchange Restructuring") whereby holders of the Company's 10-1/2% Senior Secured Notes due December 31, 1998 (the "Senior Notes") immediately prior to the Exchange Restructuring would exchange each $1,000 principal amount of Senior Notes (plus all accrued but unpaid interest thereon) for 175.977555 shares of common stock, par value $1.00 per share, of the Company ("New Common Stock") and stockholders of the Company ("Stockholders") as of immediately prior to the Exchange Restructuring would receive, for each outstanding share of common stock, par value $1.00 per share, of the Company (the "Old Common Stock"), one-tenth of one share of New Common Stock, plus .14814815 warrants (the "Warrants") to purchase additional shares of New Common Stock. Fractional shares of New Common Stock and fractional Warrants will be rounded up to the nearest share of New Common Stock or Warrant, as the case may be. Specifically, Stockholders will be asked to consider and vote upon the following proposals, all of which are more fully described in the accompanying Proxy Statement/Prospectus: 1. An amendment (the "Charter Amendment") of the Company's Amended and Restated Certificate of Incorporation, which would authorize (i) a ten-to-one reverse stock split of the Company's outstanding shares of Old Common Stock (the "Reverse Split") and (ii) an increase in the number of shares of New Common Stock authorized; 2. The issuance of (i) shares of New Common Stock (the "Issuance") to Noteholders in exchange for their Senior Notes and to Stockholders in exchange for their shares of common stock, par value $1.00 per share (the "Old Common Stock") pursuant to the terms of the Exchange Restructuring, (ii) the Warrants, and (iii) shares of New Common Stock to holders of Warrants upon exercise of their Warrants; 3. The election of new directors to the Board of Directors (the "Board") of the Company (the "Election of the New Board," and together with the Charter Amendment and the Issuance, the "Restructuring Proposals"); 4. The proposal (the "Plan Proposal") to approve the adoption of the Salant Corporation 1998 Stock Award and Incentive Plan (the "Stock Award and Incentive Plan"); 5. The ratification of the appointment of Deloitte & Touche, LLP as independent auditors to the Company (together with the Restructuring Proposals and the Plan Proposal, the "Proposals"); and 6. Such other business as may properly come before the Stockholders' Meeting or any adjournments or postponements thereof. A summary of the Charter Amendment is set forth in the accompanying Proxy Statement/Prospectus. The proposed text of the Stock Award and Incentive Plan was filed as Exhibit 10.50 to the Company's Registration Statement on Form S-4, as amended, filed with the Securities and Exchange Commission. The Exchange Offer Prospectus and Disclosure Statement pursuant to which, if the Exchange Restructuring is consummated, the Noteholders would receive shares of New Common Stock is being mailed separately to the Noteholders. Stockholders may obtain copies of any or all of these documents by contacting Todd Kahn, General Counsel and Executive Vice President of the Company, at (212) 221-7500. The Issuance and the Election of the New Board will not become effective unless and until the Charter Amendment is approved at the Stockholders' Meeting and filed with the Secretary of State of the State of Delaware and the Exchange Restructuring is consummated. Each of the Restructuring Proposals is conditioned upon the approval by the Stockholders of each of the other Restructuring Proposals. If any or all of the Restructuring Proposals are not approved by the Stockholders at the Stockholders' Meeting, then none of the Restructuring Proposals will become effective. If the Stockholders approve the Stock Award and Incentive Plan, the Stock Award and Incentive Plan will become effective regardless of whether the Exchange Restructuring is implemented or any of the Restructuring Proposals are approved. However, the approval of the Stock Award and Incentive Plan is not a condition to the consummation of the Restructuring. The Board has fixed the close of business on ________, 1998 as the record date ("Record Date") for the determination of Stockholders entitled to notice of and to vote at the Stockholders' Meeting and any adjournments or postponements thereof. Only Stockholders of record at the close of business on such date are entitled to notice of and to vote at the Stockholders' Meeting. Common Stock, par value $1.00 per share, of the Company is the only security of the Company whose holders are entitled to vote upon the proposals to be presented at the Stockholders' Meeting. Apollo Apparel Partners, L.P. ("Apollo"), the beneficial owner of 5,924,352 shares (the "Apollo Shares") of the Old Common Stock, which represents approximately 39.6% of the issued and outstanding shares of Old Common Stock, has entered into a Voting Agreement with the Company, dated August ___, 1998, wherein Apollo has agreed to vote all of the Apollo Shares in favor of each of the Restructuring Proposals. Your vote is important regardless of the number of shares you own. Each Stockholder, even though he or she now plans to attend the Stockholders' Meeting, is requested to sign, date and return the enclosed proxy, without delay in the enclosed postage-paid envelope. You may revoke your proxy at any time prior to its exercise. Any Stockholder present at the Stockholders' Meeting or at any adjournments or postponements thereof may revoke his or her proxy and vote personally on each matter brought before the Stockholders' Meeting. By Order of the Board of Directors, Todd Kahn Executive Vice President, General Counsel and Secretary ________, 1998 THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR EACH OF THE PROPOSALS PLEASE DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND HAS BECOME EFFECTIVE. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME A POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION AS OF AUGUST 31, 1998 SALANT CORPORATION [LOGO OF SALANT CORPORATION] PROXY STATEMENT/PROSPECTUS AND DISCLOSURE STATEMENT FOR THE SOLICITATION OF ACCEPTANCES FOR PREPACKAGED PLAN OF REORGANIZATION This Proxy Statement/Prospectus and Disclosure Statement (this "Proxy Statement/Prospectus") is being furnished to holders ("Stockholders") of common stock, par value $1.00 per share ("Old Common Stock"), of Salant Corporation, a Delaware corporation (the "Company"), in connection with (A) the solicitation of proxies by the Board of Directors of the Company (the "Board") for use at the annual meeting of Stockholders to be held on _______, 1998 at _____ __.m., New York City time, at Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York 10004 and any adjournments or postponements thereof (the "Stockholders' Meeting"), and (B) the solicitation of acceptances of a prepackaged plan of reorganization of the Company (the "Prepackaged Plan") under Chapter 11 of title 11 of the United States Code, as amended (the "Bankruptcy Code"). References herein to the "Company" shall, unless the context otherwise require, refer to Salant Corporation and its operating subsidiaries. The Board is soliciting proxies to be voted at the Stockholders' Meeting. The Stockholders' Meeting will be held to consider the proposals described herein to implement a financial restructuring of the Company in connection with an exchange offer (the "Exchange Restructuring") whereby (i) the holders (the "Noteholders") of 10-1/2% Senior Secured Notes due December 31, 1998 (the "Senior Notes") immediately prior to the Exchange Restructuring would exchange their Senior Notes for, in the aggregate, 18,456,350 shares of common stock, par value $1.00 per share, of the Company ("New Common Stock") (after giving effect to a ten-to-one reverse stock split (the "Reverse Split") of each outstanding share of Old Common Stock into one-tenth of a share of New Common Stock), constituting 92.5% of the New Common Stock issued and outstanding immediately following consummation of the Exchange Restructuring (subject to dilution for shares of New Common Stock issued under the Company's proposed 1998 Stock Award and Incentive Plan (the "Stock Award and Incentive Plan")), the shares of New Common Stock (the "Warrant Shares") issuable upon exercise of the warrants (described in more detail below) to be issued to Stockholders pursuant to the Exchange Restructuring (the "Warrants"), and in the case of the Exchange Restructuring only, the shares of New Common Stock issued under the Company's 1987 Stock Plan, 1988 Stock Plan, 1993 Stock Plan and 1996 Stock Plan (the "Old Plans"), and (ii) Stockholders immediately prior to the Exchange Restructuring would receive, in the aggregate, 1,496,461 shares of New Common Stock, constituting 7.5% of the New Common Stock issued and outstanding immediately following consummation of the Exchange Restructuring (subject to dilution for shares of New Common Stock issued under the Stock Award and Incentive Plan, the Warrant Shares, and in the case of the Exchange Restructuring only, the shares of New Common Stock issued under the Old Plans), plus an aggregate of 2,216,979 Warrants, representing the right to purchase, in the aggregate, 2,216,979 additional shares of New Common Stock (subject to adjustment). Specifically, this Proxy Statement/Prospectus seeks Stockholder approval of proposals (the "Restructuring Proposals") (A) to amend (the "Charter Amendment") the Company's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") to effect (i) the Reverse Split, and (ii) an increase in the number of shares of New Common Stock authorized; (B) to approve the issuance (the "Issuance") of New Common Stock and Warrants pursuant to the Exchange Restructuring, including the issuance of (i) the shares of New Common Stock issuable to the Noteholders upon consummation of the Exchange Restructuring and to Stockholders in exchange for their Old Common Stock, (ii) the Warrants, and (iii) the Warrant Shares, and (C) to elect new directors to the Board (the "Election of the New Board") upon consummation of the Exchange Restructuring. In addition, the Stockholders will be asked to (i) consider a proposal (the "Plan Proposal") to approve the adoption of the Stock Award and Incentive Plan; and (ii) ratify the appointment of Deloitte & Touche LLP as independent auditors to the Company (together with the Restructuring Proposals and the Plan Proposal, the "Proposals"). The proposed financial restructuring of the Company in connection with the Exchange Offer, as described herein, is referred to as the "Exchange Restructuring." The proposed financial restructuring of the Company pursuant to the Prepackaged Plan, as described herein, is referred to as the "Prepackaged Restructuring." The term "Restructuring" as used herein means the financial restructuring of the Company pursuant to either the Exchange Restructuring or the Prepackaged Restructuring. If the Prepackaged Restructuring is pursued and the Company commences a chapter 11 bankruptcy case and files the Prepackaged Plan, the Company expects that each of the Restructuring Proposals will be implemented pursuant to the Prepackaged Plan. Apollo Apparel Partners, L.P. ("Apollo"), the beneficial owner of 5,924,352 (the "Apollo Shares") of the Old Common Stock, which represents approximately 39.6% of the issued and outstanding shares of the Old Common Stock, has entered into a Voting Agreement with the Company, dated August , 1998, wherein Apollo has agreed to vote all of the Apollo Shares in favor of each of the Restructuring Proposals and the Prepackaged Restructuring. Assuming that all of the conditions to consummation are fulfilled, based upon the current number of shares of Old Common Stock issued and outstanding, the Exchange Restructuring will result in the Noteholders receiving, in the aggregate, 18,456,350 shares of New Common Stock (after giving effect to the Reverse Split), constituting 92.5% of the New Common Stock issued and outstanding immediately following consummation of the Exchange Restructuring (subject to dilution for the Stock Award and Incentive Plan, the Warrant Shares, and in the case of the Exchange Restructuring only, the shares of New Common Stock issued under the Old Plans). The Stockholders currently own 100% of the common equity of the Company in the form of the Old Common Stock. As of March 16, 1998, there were 14,964,608 shares of Old Common Stock issued and outstanding. Assuming all of the conditions to the Exchange Restructuring are fulfilled, the Exchange Restructuring will result in the Stockholders receiving, in exchange for their shares of Old Common Stock, an aggregate of 1,496,461 shares of New Common Stock after giving effect to the Reverse Split, constituting 7.5% of the New Common Stock issued and outstanding immediately following consummation of the Exchange Restructuring (subject to dilution for the Stock Award and Incentive Plan, the Warrant Shares, and in the case of the Exchange Restructuring only, the shares of New Common Stock issued under the Old Plans). In addition, the Stockholders will receive the Warrants, which would represent the right to purchase up to 10% of the New Common Stock issued and outstanding immediately after giving effect to the Exchange Restructuring and the Reverse Split (on a fully diluted basis). The Warrants would be exercisable for seven years from the date of the Exchange Restructuring. Each Stockholder would receive, for each share of Old Common Stock held, .14814815 Warrants. The Warrants would have an exercise price ("Exercise Price") of $6.2648 per share, and each Warrant would be exercisable for one share of New Common Stock, in each case, subject to adjustment. SEE "DISCUSSION OF RISK FACTORS" ON PAGES __ TO __ FOR A DISCUSSION OF CERTAIN RISK FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE RESTRUCTURING AND THE PREPACKAGED RESTRUCTURING. NEITHER THE SECURITIES OFFERED HEREBY NOR THE PREPACKAGED PLAN HAS BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF THESE TRANSACTIONS OR THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS [_______ ___], 1998. The Company's obligation to accept Senior Notes tendered pursuant to the Exchange Restructuring is conditioned, among other things, on (a) 100% of the Senior Notes being validly tendered and not withdrawn prior to the expiration date of [_________] (the "Minimum Tender Condition"), and (b) approval by the Stockholders of each of the Restructuring Proposals. The Company reserves the right to waive any of the conditions to the Exchange Restructuring but does not currently intend to waive any condition. Pursuant to a certain letter agreement, dated March 2, 1998 (the "Letter Agreement"), the prior written consent of Magten Asset Management Corp., the beneficial owner of, or the investment manager on behalf of the beneficial owners of ("Magten"), approximately $74 million in aggregate principal face amount of the Senior Notes, is required for the Company to waive the Minimum Tender Condition. The Issuance and the Election of the New Board will not become effective unless and until the Charter Amendment is approved at the Stockholders' Meeting and filed with the Secretary of State of the State of Delaware and the Exchange Restructuring is consummated. Each of the Restructuring Proposals is conditioned upon the approval by the Stockholders of each of the other Restructuring Proposals. If any or all of the Restructuring Proposals are not approved by the Stockholders at the Stockholders' Meeting, then none of the Restructuring Proposals will become effective. If the Stockholders approve the Stock Award and Incentive Plan, the Stock Award and Incentive Plan will become effective regardless of whether the Exchange Restructuring is implemented or any of the Restructuring Proposals are approved. However, the approval of the Stock Award and Incentive Plan is not a condition to the consummation of the Restructuring. Should less than 100% of the Noteholders tender their Senior Notes pursuant to the Exchange Restructuring and/or the Stockholders do not approve each of the Restructuring Proposals, but the Company receives sufficient acceptances of the Prepackaged Plan to obtain confirmation thereof by the Bankruptcy Court, then the Company intends to pursue the financial restructuring of the Company by means of the filing of the Prepackaged Plan. The Company's ability to seek confirmation of the Prepackaged Plan depends upon certain minimum levels of acceptance thereof, as further set forth in this Proxy Statement/Prospectus. In the event that the requisite percentage and number of Noteholders have executed acceptances of the Prepackaged Plan, but the Minimum Tender Condition has not been satisfied or the Company determines in its sole discretion that it is unlikely to be satisfied at or prior to [_________] (the "Expiration Date") the Company may elect to terminate the Exchange Offer at or prior to its scheduled expiration and proceed directly to the Prepackaged Plan. THE SUBSIDIARIES OF THE COMPANY WOULD NOT BE PARTIES TO THE PREPACKAGED PLAN, AND WOULD NOT BECOME DEBTORS IN CONNECTION WITH THE PREPACKAGED RESTRUCTURING. THEREFORE THE SUBSIDIARIES OF THE COMPANY WOULD CONTINUE TO OPERATE IN THE ORDINARY COURSE OF BUSINESS DURING THE COMPANY'S CHAPTER 11 CASE. AS SUCH, THE PREPACKAGED PLAN WOULD NOT AFFECT THE CONTINUING AND TIMELY PAYMENT IN FULL OF THE SUBSIDIARIES' OBLIGATIONS TO SUPPLIERS, EMPLOYEES, AND OTHER CREDITORS. IN ADDITION, THE PREPACKAGED PLAN PROVIDES FOR ALL PREPETITION UNSECURED CREDITORS OF THE COMPANY, INCLUDING, WITHOUT LIMITATION, TRADE CREDITORS, TO BE PAID IN FULL IN ACCORDANCE WITH THEIR TERMS, AND SUCH CREDITORS WOULD NOT, THEREFORE, BE IMPAIRED BY, AND WOULD BE DEEMED TO ACCEPT, THE PREPACKAGED PLAN, AND THEIR VOTE ON THE PREPACKAGED PLAN WOULD NOT BE SOUGHT. The purpose of the Restructuring is to help ensure the long-term viability and to contribute to the success of the Company by deleveraging the Company's capital structure. Specifically, in accordance with the Company's Three-Year Operating Plan for 1998-2000 (the "Three-Year Business Plan") developed by the Company, the Restructuring is designed to recapitalize the Company by converting all of the Company's long-term debt obligations under the Senior Notes (which as of February 28, 1998, was $110.379 million, consisting of $104.879 million aggregate principal amount of, and $5.5 million of accrued interest on, the Senior Notes) into New Common Stock. Interest charges for the Company will be reduced by $11 million per year and stockholders' equity should be substantially increased as a result of the Restructuring. The Company's consolidated debt at the completion of the Restructuring will include approximately $28 million in revolver debt plus $15 million from the term loan portion of its working capital facility. This significantly lower debt-to-equity ratio should help the Company to achieve the objectives as described in the Three-Year Business Plan and make the Company more attractive to investors. The Company believes that by reducing the uncertainty surrounding its ability to pay or retire the Senior Notes which are due in their entirety on December 31, 1998, the Restructuring should maximize liquidity for the Company's business operations and thereby provide a platform for future growth and enhance the Company's total enterprise value. The Company further believes that by providing the Company with a deleveraged capital structure, the company that results from the Restructuring should be positioned favorably to withstand the normal market fluctuations in the highly volatile apparel industry. In contemplation of the Restructuring, the Company elected not to pay the interest payment of approximately $5.5 million that was due and payable under the Senior Notes on March 2, 1998, subject to a 30 day grace period. Because the Company elected not to pay the interest due on the Senior Notes by the expiration of the applicable grace period, an event of default has occurred with respect to the Senior Notes entitling the Noteholders to accelerate the maturity thereof. Holders of at least 25% in the aggregate principal face amount of the Senior Notes may accelerate all outstanding indebtedness under the Senior Notes pursuant to the terms of the Indenture. If such holders accelerate the indebtedness under the Senior Notes, the Company may be required to commence a proceeding under Federal bankruptcy law without having solicited acceptances for the Prepackaged Plan prior to the commencement of such proceeding. Pursuant to the Letter Agreement, Magten has, in accordance with Section 6.5 of the Indenture, dated September 20, 1993, as amended (the "Indenture"), caused a written direction to be provided to the Trustee under the Indenture (the "Trustee"), to forbear during the term of the Letter Agreement from taking any action under the Indenture in connection with the failure by the Company to make the interest payment on the Senior Notes that was due and payable on March 2, 1998. On April 8, 1998, the Trustee issued a Notice of Default stating that as a result of the Company's failure to make the interest payment due on the Senior Notes, an event of default under the Indenture had occurred on April 1, 1998. In addition, the Company's working capital lender, The CIT Group/Commercial Services, Inc., agreed to forbear until November 30, 1998, subject to certain conditions, from exercising any of its rights or remedies under the Revolving Credit, Factoring and Security Agreement, dated as of September 20, 1993, as amended (the "Credit Agreement"), arising by virtue of the Company's failure to pay such interest on the Senior Notes. Failure to consummate the Restructuring could result in the acceleration of all of the indebtedness under the Senior Notes and/or the Credit Agreement. ABSENT THE RESTRUCTURING, THE COMPANY DOES NOT BELIEVE IT WILL BE ABLE TO SATISFY ITS OBLIGATIONS UNDER THE SENIOR NOTES WITHOUT A REFINANCING OF THE COMPANY'S INDEBTEDNESS UNDER THE CREDIT AGREEMENT AND/OR THE SENIOR NOTES OR AN ADDITIONAL CAPITAL INFUSION, AND IT IS UNLIKELY THAT THE COMPANY WILL BE ABLE TO OBTAIN SUCH REFINANCING OR ADDITIONAL CAPITAL INFUSION. IF THE COMPANY DETERMINES THAT IT IS OR WILL BE UNABLE TO COMPLETE THE RESTRUCTURING, THE COMPANY WILL CONSIDER ALL OTHER AVAILABLE FINANCIAL ALTERNATIVES, INCLUDING THE SALE OF ALL OR A PART OF THE COMPANY'S BUSINESSES, THE IMPLEMENTATION OF AN ALTERNATIVE RESTRUCTURING ARRANGEMENT OUTSIDE OF BANKRUPTCY, OR THE COMMENCEMENT OF A CHAPTER 11 CASE WITHOUT A PRE-BANKRUPTCY ACCEPTED PLAN OF REORGANIZATION. THERE CAN BE NO ASSURANCE, HOWEVER, THAT ANY ALTERNATIVE WOULD BE ON TERMS AS FAVORABLE TO NOTEHOLDERS AND STOCKHOLDERS AS THE RESTRUCTURING. This Proxy Statement/Prospectus also constitutes the Company's Prospectus, filed with the Securities and Exchange Commission (the "Commission") as part of a Registration Statement (the "Registration Statement") on Form S-4 under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the New Common Stock, Warrants and the Warrant Shares to be issued to Stockholders in the Exchange Restructuring. A copy of the Warrant Agreement pursuant to which the Warrants would be issued to the Stockholders upon consummation of the Restructuring is attached to the Company's Registration Statement as Exhibit 10.52. A copy of the Stock Award and Incentive Plan is attached to the Company's Registration Statement as Exhibit 10.50. Stockholders may obtain a copy of the Warrant Agreement and the Stock Award and Incentive Plan by contacting Todd Kahn, General Counsel and Executive Vice President of the Company, at (212) 221-7500. A copy of the Prepackaged Plan is attached hereto as Annex II. The Company has registered the offering and the Issuance of the shares of New Common Stock, Warrants and Warrant Shares to be issued under the Exchange Restructuring with the Commission under the Company's Registration Statement. In addition, the Company has also registered the offering of the shares of New Common Stock, Warrants and Warrant Shares to be issued under the Prepackaged Restructuring in accordance with the Prepackaged Plan with the Commission under the Company's Registration Statement. The Old Common Stock is currently traded on the New York Stock Exchange (the "NYSE") and is quoted on the NYSE under the symbol "SLT". On _____ __, 1998, the closing sale price for the Old Common Stock was $[ ] per share. The NYSE requires approval by Stockholders of the Issuance of the New Common Stock, the Warrants and the Warrant Shares and the Stock Award and Incentive Plan. The Company has fallen below the continued listing criteria of the NYSE for net tangible assets available to common stock together with average net income after taxes for the past three years. However, the NYSE has reviewed the terms and conditions of the Restructuring set forth herein and has informed the Company that it will continue to list the Company's common stock during the period prior to consummation of the Restructuring and intends to list the Company's common stock from and after the Restructuring Date. However, the NYSE has advised the Company that after consummation of the Restructuring, the NYSE intends to monitor the performance of the Company based upon the Projections set forth herein to ensure compliance with the NYSE's original listing standards in respect of the New Common Stock. The Company believes that as a result of the consummation of the Restructuring, following the Restructuring Date, the Company will be able to return to compliance with the original listing standards in respect of the New Common Stock and the Warrants and that the New Common Stock and the Warrants will continue to be listed for trading on the NYSE. However, the NYSE has advised the Company that the Company's failure to meet the Projections following the Restructuring could result in the suspension from trading and subsequent delisting of the New Common Stock. THE SOLICITATION PERIOD FOR ACCEPTANCES OF THE PREPACKAGED PLAN WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON _________, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). VOTES ON THE PREPACKAGED PLAN MAY BE WITHDRAWN OR CHANGED, SUBJECT TO THE PROCEDURES DESCRIBED HEREIN, AT ANY TIME PRIOR TO THE EXPIRATION DATE. IF A BANKRUPTCY CASE HAS BEEN COMMENCED, WITHDRAWAL OR CHANGES OF SUCH VOTES THEREAFTER MAY BE EFFECTED ONLY WITH THE APPROVAL OF THE BANKRUPTCY COURT. The record date for purposes of determining which Stockholders are eligible to vote on the Prepackaged Plan and at the Stockholders' Meeting is ________, 1998 (the "Record Date"). Stockholders are not required to vote at the Stockholders' Meeting in order to vote on the Prepackaged Plan. It is important that all Stockholders vote to accept or to reject the Prepackaged Plan because, under the Bankruptcy Code, for purposes of determining whether the requisite acceptances have been received, only Stockholders who vote will be counted. Failure by a holder to send a duly completed and signed Ballot will be deemed to constitute an abstention by such holder with respect to a vote on the Prepackaged Plan. Abstentions as a result of not submitting a duly completed and signed Ballot will not be counted as votes for or against the Prepackaged Plan. Any Ballot which is executed by a holder but does not indicate an acceptance or rejection of the Prepackaged Plan will not be counted as a vote for or against the Prepackaged Plan. See "VOTING AND CONFIRMATION OF THE PREPACKAGED PLAN." STOCKHOLDERS WHO COMPLETE A PROXY ("PROXY") WITH RESPECT TO THE STOCKHOLDERS' MEETING SHOULD ALSO DULY COMPLETE AND SIGN A BALLOT ("BALLOT") IN ORDER TO VOTE ON THE PREPACKAGED PLAN. BECAUSE NO PREPACKAGED BANKRUPTCY CASE HAS BEEN FILED, THIS PROXY STATEMENT/PROSPECTUS HAS NOT BEEN APPROVED BY ANY BANKRUPTCY COURT WITH RESPECT TO THE ADEQUACY OF THE INFORMATION CONTAINED HEREIN. IF SUCH A CASE IS SUBSEQUENTLY COMMENCED, THE COMPANY INTENDS TO SEEK AN ORDER OF THE BANKRUPTCY COURT DETERMINING THAT THE SOLICITATION OF VOTES ON THE PREPACKAGED PLAN BY MEANS OF THIS PROXY STATEMENT/PROSPECTUS WAS IN COMPLIANCE WITH SECTION 1126(b) OF THE BANKRUPTCY CODE WHICH PERMITS VOTES RECEIVED BEFORE THE FILING OF A CHAPTER 11 PETITION TO BE COUNTED FOR PURPOSES OF CONFIRMATION OF A PLAN IF CERTAIN DISCLOSURE REQUIREMENTS HAVE BEEN MET. IN ORDER FOR THE PREPACKAGED RESTRUCTURING TO BE CONSUMMATED, AMONG OTHER THINGS, THE BANKRUPTCY COURT MUST DETERMINE THAT THE SOLICITATION OF ACCEPTANCES FOR THE PREPACKAGED PLAN WAS IN COMPLIANCE WITH ANY APPLICABLE NON-BANKRUPTCY LAW, RULE OR REGULATION GOVERNING THE ADEQUACY OF SUCH DISCLOSURE. YOUR BOARD BELIEVES THE EXCHANGE RESTRUCTURING AND THE PREPACKAGED RESTRUCTURING ARE IN THE BEST INTERESTS OF THE COMPANY'S STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE APPROVAL OF EACH OF THE RESTRUCTURING PROPOSALS AND FOR THE ACCEPTANCE OF THE PREPACKAGED PLAN. ON __________, 1998, AT THE BOARD'S REQUEST, ERNST & YOUNG LLP ("E&Y"), FINANCIAL ADVISOR TO THE COMPANY, DELIVERED TO THE BOARD A WRITTEN OPINION ADDRESSED TO THE BOARD (THE "E&Y FAIRNESS OPINION") THAT, AS OF THAT DATE AND BASED UPON AND SUBJECT TO THE FACTORS AND ASSUMPTIONS SET FORTH THEREIN, THE CONSIDERATION TO BE RECEIVED BY STOCKHOLDERS PURSUANT TO THE RESTRUCTURING IS FAIR TO PUBLIC STOCKHOLDERS FROM A FINANCIAL POINT OF VIEW. E&Y SUBSEQUENTLY DELIVERED TO THE BOARD THEIR WRITTEN OPINION ADDRESSED TO THE BOARD THAT, AS OF THE DATE OF THIS PROXY STATEMENT/PROSPECTUS AND BASED UPON AND SUBJECT TO THE FACTORS AND ASSUMPTIONS SET FORTH THEREIN, THE CONSIDERATION TO BE RECEIVED BY PUBLIC STOCKHOLDERS PURSUANT TO THE RESTRUCTURING IS FAIR TO PUBLIC STOCKHOLDERS FROM A FINANCIAL POINT OF VIEW. A COPY OF THE E&Y FAIRNESS OPINION IS ATTACHED HERETO AS ANNEX I. This Proxy Statement/Prospectus, the Proxy and the applicable Ballot and Master Ballot are first being mailed to Stockholders on or about _________, 1998. AVAILABLE INFORMATION The Company has filed a Registration Statement on Form S-4 (the "Registration Statement") with the Commission under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities offered hereby. As permitted by the rules and regulations of the Commission, this Proxy Statement/Prospectus omits certain information, exhibits and undertakings contained in the Registration Statement. Such additional information, exhibits and undertakings can be inspected at and obtained from the Commission in the manner set forth below. For further information with respect to the Company and to the securities offered hereby reference is made to the Registration Statement, and the financial schedules and exhibits filed as a part thereof and the exhibits thereto. Statements contained in this Proxy Statement/Prospectus as to the terms of any contract or other documents are not necessarily complete and, in each case, reference is made to the copy of each such contract or other document that has been filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Company is subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files periodic reports, proxy statements and other information with the Commission. Such reports and other information filed by the Company with the Commission, as well as the Registration Statement and the exhibits thereto, can be inspected and copied at the public reference facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at the Commission's regional offices located 700 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and at 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material can also be obtained by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains an Internet Web Site that contains reports, proxy and information statements, and other information regarding the Company and other registrants that file electronically with the Commission. The address of such site is: http://www.sec.gov. In addition, the Old Common Stock is listed and traded on the NYSE, and such reports, proxy statements and other information concerning the Company should be available for inspection and copying at the New York Stock Exchange, Inc., 11 Wall Street, New York, New York 10005. THIS PROXY STATEMENT/PROSPECTUS INCORPORATES EXHIBITS TO THE REGISTRATION STATEMENT BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED UPON WRITTEN OR ORAL REQUEST DIRECTED TO SALANT CORPORATION, ATTENTION: TODD KAHN, EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY, 1114 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK, 10036; TELEPHONE NUMBER (212) 221-7500. IN ORDER TO ASSURE TIMELY DELIVERY OF SUCH DOCUMENTS PRIOR TO THE STOCKHOLDERS' MEETING, ANY REQUEST SHOULD BE RECEIVED BY __________, 1998. COPIES OF SUCH DOCUMENTS WILL ALSO BE AVAILABLE UPON REQUEST THEREAFTER UNTIL THE DATE OF CONSUMMATION OF THE RESTRUCTURING. No person has been authorized to give any information or to make any representation in connection with the Restructuring Proposals, the Restructuring, the Prepackaged Plan or the solicitation of votes for the Restructuring Proposals or the Prepackaged Plan, other than those contained in this Proxy Statement/Prospectus and in the exhibits attached hereto or referred to herein. If given or made, such other information or representation may not be relied upon as having been authorized by the Company. This Proxy Statement/Prospectus does not constitute an offer to sell or the solicitation of an offer to buy any securities other than those to which it relates, or an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction in which, or to any person to whom, it is unlawful to make such offer or solicitation. Neither the delivery of this Proxy Statement/Prospectus nor any distribution of securities hereunder shall under any circumstances create any implication that the information contained herein is correct as of any time subsequent to the date hereof or that there has been no change in the information set forth herein or in the affairs of the Company since the date hereof. Any estimates of claims and equity interests set forth in this Proxy Statement/Prospectus may vary from the final amounts of claims or equity interests allowed by the Bankruptcy Court. FORWARD LOOKING INFORMATION Certain of the financial information contained herein contains forward-looking statements within the meaning of Section 27A of the Securities Act. 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 upon 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 expectation or belief will result or be achieved or accomplished. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The words "believe," "expect," "estimate," "project," "seek," "anticipate" and similar expressions may identify forward-looking statements. Taking into account the foregoing, the risk factors set forth in this Proxy Statement/Prospectus are identified as important factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company. TABLE OF CONTENTS AVAILABLE INFORMATION...................................................S-viii FORWARD LOOKING INFORMATION...............................................S-ix SUMMARY....................................................................S-1 The Company.............................................................S-1 Summary Distribution Table..............................................S-2 Benefits of Restructuring to Officers, Directors and Certain Related Parties..............................................................S-2 Diagram of Transaction..................................................S-4 The Exchange Restructuring and Prepackaged Restructuring................S-5 Summary of the Prepackaged Plan.........................................S-9 Notice to Holders of Claims and Interests..............................S-12 Comparison of Exchange Restructuring and Prepackaged Restructuring.....S-12 Purpose of the Restructuring...........................................S-15 Stockholders' Meeting..................................................S-17 Summary of Warrants....................................................S-20 Summary of New CIT Credit Agreement....................................S-21 Summary of Registration Rights Agreement...............................S-22 Summary of Rights Plan.................................................S-22 Summary Historical Consolidated Financial Information..................S-23 Capitalization Summary.................................................S-25 Summary of Risk Factors................................................S-25 Risk Factors Relating to the Exchange Restructuring and the Prepackaged Restructuring.......................................................S-25 Additional Risk Factors Relating to the Prepackaged Restructuring......S-26 DISCUSSION OF RISK FACTORS................................................S-27 Risk of Nonconsummation of the Restructuring...........................S-27 Company Results of Operations Subject to Variable Influences; Intense Competition.........................................................S-27 Dilution...............................................................S-27 Limitation on Use of Net Operating Losses..............................S-28 Lack of Trading Market for Warrants and New Common Stock; Volatility; Potential De-Listing of the New Common Stock........................S-28 Possible Volatility of Stock Price; Effect of Restructuring on Stock Price.......................................................S-29 Concentrated Ownership of New Common Stock.............................S-29 Absence of and/or Restrictions on Dividends............................S-29 History of Losses; Effect of Transaction...............................S-30 Cash Flow From Operations..............................................S-30 Declines in Net Sales and Gross Profits................................S-30 Retail Environment.....................................................S-31 Apparel Industry Cycles and Other Economic Factors.....................S-31 Seasonality and Fashion Risk...........................................S-31 Dependence on Certain Customers and Licensees; Effect of Restructuring on Licenses............................................S-31 Foreign Operations and Sourcing; Import Restrictions...................S-32 Dependence on Contract Manufacturing...................................S-32 Information Systems and Control Procedures.............................S-33 Leverage and Debt Service..............................................S-33 Restrictive Covenants..................................................S-34 Need for Sustained Trade Support.......................................S-34 Disruption of Operations Relating to Bankruptcy Filing.................S-35 Prior Chapter 11 Filings...............................................S-35 Certain Risks of Non-Confirmation......................................S-35 Certain Other Bankruptcy Considerations................................S-36 BACKGROUND OF RESTRUCTURING...............................................S-38 Background of the Restructuring........................................S-38 The Letter Agreement...................................................S-39 The Voting Agreement...................................................S-43 The Waiver and Forbearance Under the Credit Agreement and Commitment for New Credit Agreement.................................S-44 PURPOSE OF THE RESTRUCTURING..............................................S-45 RESTRUCTURING FINANCIAL CONSIDERATIONS....................................S-47 Background of the Restructuring Financial Analysis.....................S-47 Fairness Opinion.......................................................S-47 The Three-Year Business Plan...........................................S-51 Liquidation Analysis...................................................S-52 SALANT CORPORATION HYPOTHETICAL LIQUIDATION ANALYSIS......................S-53 DISTRIBUTION OF NET PROCEEDS..............................................S-57 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.....................S-58 Notes to the Unaudited Pro Forma Consolidated Financial Statements.....S-62 PROJECTED CONSOLIDATED FINANCIAL INFORMATION..............................S-63 General................................................................S-63 Principal Assumptions..................................................S-63 Sales..................................................................S-64 Gross Margin...........................................................S-64 Operating Expenses.....................................................S-64 Working Capital........................................................S-65 Capital Expenditures...................................................S-65 Interest Expenses......................................................S-65 Income Taxes...........................................................S-65 The Three-Year Business Plan...........................................S-65 PROJECTED CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS..............S-67 PROJECTED CONDENSED CONSOLIDATED BALANCE SHEETS........................S-68 PROJECTED STATEMENTS OF CONSOLIDATED CASH FLOWS........................S-69 BUSINESS AND PROPERTIES OF THE COMPANY....................................S-70 Overview...............................................................S-70 Properties.............................................................S-74 Legal Proceedings......................................................S-75 SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION....................S-76 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................................S-78 Overview...............................................................S-78 Results of Operations..................................................S-78 Liquidity and Capital Resources........................................S-91 Year 2000 Compliance...................................................S-94 Seasonality............................................................S-95 Backlog................................................................S-95 Factors that May Affect Future Results and Financial Condition.........S-95 Substantial Level of Indebtedness and the Ability to Restructure Debt..S-96 Competition............................................................S-96 Apparel Industry Cycles and other Economic Factors.....................S-96 Retail Environment.....................................................S-96 Seasonality of Business and Fashion Risk...............................S-96 Foreign Operations.....................................................S-96 Dependence on Contract Manufacturing...................................S-97 STOCKHOLDERS' MEETING, VOTING RIGHTS AND PROXIES..........................S-97 Date, Time and Place of Stockholders' Meeting..........................S-97 Solicitation of Proxies; Record Date...................................S-97 Purpose of Stockholders' Meeting.......................................S-98 The Charter Amendment..................................................S-98 The Issuance..........................................................S-100 The Stock Award and Incentive Plan....................................S-100 Election of the New Board.............................................S-101 Ratification of Appointment of Independent Auditors...................S-102 Voting of Proxies.....................................................S-102 Voting Rights; Quorum.................................................S-102 No Dissenters' Rights.................................................S-102 Revocation of Proxies.................................................S-102 Prepackaged Plan......................................................S-102 DISCUSSION OF THE PROPOSALS..............................................S-103 The Charter Amendment.................................................S-103 The Issuance..........................................................S-104 Stock Award and Incentive Plan........................................S-105 Election of the New Board.............................................S-109 DESCRIPTION OF NEW COMMON STOCK..........................................S-110 Distributions.........................................................S-110 Voting................................................................S-111 Election of Directors.................................................S-111 Shares Reserved In Connection With the 1993 Chapter 11 Plan...........S-111 DESCRIPTION OF WARRANTS..................................................S-111 General...............................................................S-111 Adjustments...........................................................S-112 Amendment.............................................................S-113 Governing Law.........................................................S-113 DESCRIPTION OF NEW CIT CREDIT AGREEMENT..................................S-113 DESCRIPTION OF REGISTRATION RIGHTS AGREEMENT.............................S-114 DESCRIPTION OF CERTAIN EXISTING INDEBTEDNESS OF THE COMPANY..............S-114 General...............................................................S-114 Revolving Credit Agreement............................................S-114 The Senior Notes......................................................S-116 DESCRIPTION OF RIGHTS PLAN...............................................S-118 DESCRIPTION OF THE CHAPTER 11 CASE.......................................S-118 Timetable for the Chapter 11 Case.....................................S-118 Adequacy of Disclosure................................................S-118 Committees............................................................S-119 Actions to Be Taken Upon Commencement of Case.........................S-119 DESCRIPTION OF THE PREPACKAGED PLAN......................................S-122 Brief Explanation of Chapter 11.......................................S-122 General Information Concerning Treatment of Claims and Interests......S-122 Classification and Treatment of Claims and Interests..................S-123 Unclassified Claims...................................................S-124 Classified Claims And Interests....................................S-126 Sources of Cash to Make Prepackaged Plan Distributions.............S-128 Executory Contracts and Unexpired Leases...........................S-128 Implementation of This Plan........................................S-129 Provisions Covering Distributions..................................S-131 Procedures For Resolving Disputed Claims...........................S-134 Discharge, Injunction, Releases and Settlements of Claims..........S-135 Conditions Precedent to Confirmation Order and Effective Date......S-137 Miscellaneous Provisions...........................................S-137 FEASIBILITY OF THE PREPACKAGED PLAN AND THE BEST INTERESTS OF CREDITORS TEST........................................................S-140 Confirmation Hearing..................................................S-140 Feasibility of the Prepackaged Plan...................................S-141 Best Interests Test...................................................S-142 Nonconsensual Confirmation............................................S-143 No Unfair Discrimination..............................................S-144 Fair and Equitable Test...............................................S-144 SECURITIES ISSUED UNDER PREPACKAGED PLAN -- APPLICATION OF SECURITIES ACT......................................S-144 The Solicitation......................................................S-144 Issuance and Resale of New Securities Under the Prepackaged Plan......S-144 ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PREPACKAGED PLAN....S-145 Continuation of the Chapter 11 Case...................................S-146 Liquidation Under Chapter 7 or Chapter 11.............................S-146 CERTAIN CONSEQUENCES OF THE RESTRUCTURING................................S-146 VOTING AND CONFIRMATION OF THE PREPACKAGED PLAN..........................S-147 Voting Procedures for Prepackaged Plan and Requirements...............S-148 Who May Vote..........................................................S-149 Procedures for Holders of Old Securities to Vote on Prepackaged Plan..S-149 Beneficial Owners of Old Securities...................................S-150 Brokerage Firms, Banks and Other Nominees.............................S-150 Securities Clearing Agent.............................................S-151 Importance of Proper and Timely Submission of Completed Ballots.......S-151 Voting Deadline and Extensions........................................S-151 Withdrawal of Votes on the Prepackaged Plan...........................S-152 Information Agent.....................................................S-152 MARKET AND TRADING INFORMATION...........................................S-152 MARKET FOR OLD COMMON STOCK AND RELATED STOCKHOLDER MATTERS..............S-153 MARKET PRICES OF THE SENIOR NOTES........................................S-155 OTHER INFORMATION REGARDING THE EXISTING BOARD...........................S-156 EXECUTIVE OFFICERS.......................................................S-157 SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS.............................S-157 Beneficial Owners of More Than 5% of the Outstanding Shares of Salant Common Stock................................................S-157 SECURITY OWNERSHIP OF MANAGEMENT.........................................S-157 Beneficial Ownership of Salant Common Stock by Directors and Executive Officers of the Company..................................S-158 Section 16(a) Beneficial Ownership Reporting Compliance...............S-159 EXECUTIVE COMPENSATION...................................................S-159 OPTION GRANTS FOR FISCAL 1997............................................S-163 OPTION EXERCISES AND VALUES FOR FISCAL 1997..............................S-163 THE COMPANY'S RETIREMENT PLAN............................................S-164 PERFORMANCE GRAPH........................................................S-165 MANAGEMENT...............................................................S-165 Directors.............................................................S-166 Executive Officers....................................................S-167 MANAGEMENT COMPENSATION..................................................S-168 Employment Agreements and Change-in-Control Arrangements..............S-168 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION..............S-170 JOINT REPORT OF THE COMPENSATION AND STOCK PLAN COMMITTEES ON EXECUTIVE-COMPENSATION................................................S-170 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........................S-171 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................................S-172 Federal Income Tax Consequences To Stockholders.......................S-172 Federal Income Tax Consequences To The Company........................S-173 INFORMATION REGARDING NOMINEES...........................................S-173 POST RESTRUCTURING STOCK OPTION GRANTS...................................S-174 Exchange Restructuring................................................S-174 Prepackaged Restructuring.............................................S-174 PAYMENTS TO MANAGEMENT...................................................S-175 ADVISORS AND REPRESENTATIVES.............................................S-175 ESTIMATED FEES AND EXPENSES..............................................S-176 LEGAL MATTERS............................................................S-177 EXPERTS..................................................................S-177 STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING............................S-177 OTHER MATTERS............................................................S-177 GLOSSARY OF CERTAIN DEFINED TERMS..........................................S-i CONSOLIDATED ANNUAL FINANCIAL STATEMENTS: Independent Auditors' Report............................................F-1 Consolidated Statements Of Operations...................................F-2 Consolidated Balance Sheets.............................................F-3 Consolidated Statements Of Shareholders Equity..........................F-4 Consolidated Statements Of Cash Flows...................................F-5 Notes To Consolidated Financial Statements..............................F-6 CONDENSED CONSOLIDATED INTERIM UNAUDITED FINANCIAL STATEMENTS: Condensed Consolidated Interim Unaudited Statements of Operations......F-25 Condensed Consolidated Interim Unaudited Statements of Comprehensive Income.................................................F-26 Condensed Consolidated Interim Unaudited Balance Sheets ...............F-27 Condensed Consolidated Interim Unaudited Statements of Cash Flows......F-28 Notes to Condensed Consolidated Interim Unaudited Financial Statements.F-29 ANNEX I - E&Y FAIRNESS OPINION........................................... ANNEX II - PREPACKAGED PLAN .............................................. ...............EXHIBIT A - WARRANT AGREEMENT................................. EXHIBIT B - REGISTRATION RIGHTS AGREEMENT..................... EXHIBIT C - STOCK AWARD AND INCENTIVE PLAN.................... EXHIBIT D - INITIAL BOARD OF REORGANIZED SALANT............... EXHIBIT E - LIST OF EXECUTORY CONTRACTS TO BE REJECTED........ EXHIBIT F - REORGANIZED SALANT CERTIFICATE OF INCORPORATION... UNDERTAKINGS..............................................................II-1 SUMMARY The following is a summary of certain information contained elsewhere in this Proxy Statement/Prospectus. Reference is made to, and this summary is qualified in its entirety by, the more detailed information contained in this Proxy Statement/Prospectus, the Annexes hereto and the documents incorporated by reference herein. Stockholders are urged to read this Proxy Statement/Prospectus and the Annexes hereto in their entirety. References herein to the "Company" shall, unless the context otherwise requires, refer to Salant Corporation and its operating subsidiaries. Capitalized terms used herein shall have the meanings ascribed to them as set forth under the section entitled "GLOSSARY OF CERTAIN DEFINED TERMS." THE COMPANY The Company, which was incorporated in Delaware in 1987, is the successor to a business founded in 1893 and incorporated in New York in 1919. The Company is a designer, manufacturer, importer and marketer of a broad line of men's apparel, neckwear and belts and children's sleepwear and underwear. The Company's corporate headquarters is located at 1114 Avenue of the Americas, New York, New York 10036, and its telephone number at that address is (212) 221-7500. The Company's apparel products are sold under internationally recognized owned and licensed brand names, including Perry Ellis, Manhattan, John Henry and Joe Boxer trademarks, as well as under retailers' private labels. The Company's collection of Perry Ellis menswear which includes collection sportswear, casual and dress shirts, slacks, jeans, neckwear and belts, is the Company's largest product offering. In Fiscal 1997, products sold under the Perry Ellis, Perry Ellis Portfolio and Perry Ellis America brand names (the "Perry Ellis Trademarks") represented 44% of the Company's total Fiscal 1997 net sales. The Company's merchandise is sold throughout the United States to a wide variety of retailers, including Federated Department Stores, Inc., May Company, Dillards Department Stores, Dayton Hudson, Sears, Roebuck & Co., Wal-Mart, and K-Mart. The Company believes its relationships with a wide variety of retailers, design expertise, low-cost manufacturing operations and sourcing relationships allow it to participate in numerous areas of the men's apparel industry. For additional information concerning the Company and its business, financial position and operations, see "BUSINESS AND PROPERTIES OF THE COMPANY," "SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." SUMMARY DISTRIBUTION TABLE The following chart summarizes the consideration to be received by the Stockholders and the Noteholders pursuant to the Restructuring. NEW EXISTING COMMON SECURITY STOCK WARRANTS -------- ------- -------- To Stockholders: Per 1,000 Shares........ 1,000 100 148.14815 In Aggregate............ 14,964,608 1,496,461 2,216,979 To Noteholders: Per $1,000 Principal Face Amount of, and all accrued and unpaid interest through the Exchange Restructuring $1,000 175.977555 -- Date on, the Senior Notes................... In Aggregate............ $104,879,000 18,456,350 -- BENEFITS OF RESTRUCTURING TO OFFICERS, DIRECTORS AND CERTAIN RELATED PARTIES Consummation of the Restructuring will result in (a) the Noteholders receiving 92.5% of the shares of New Common Stock to be issued by the Company under the Restructuring (subject to dilution for the Stock Award and Incentive Plan, the Warrant Shares and, in the case of the Exchange Restructuring only, the Old Plans), and (b) the Stockholders receiving 7.5% of the shares of New Common Stock (subject to dilution for the Stock Award and Incentive Plan, the Warrant Shares and, in the case of the Exchange Restructuring only, the Old Plans) plus Warrants to purchase up to 10% of the issued and outstanding shares of New Common Stock (on a fully diluted basis). As a result of the consummation of the Restructuring, Magten, the beneficial holder of approximately $74 million in aggregate principal amount of the Senior Notes, representing approximately 71% of the Senior Notes, will receive its pro rata share of the shares of New Common Stock to be issued to Noteholders (i.e., Magten will receive approximately 65% of the shares of New Common Stock (subject to dilution)) in exchange for the Senior Notes beneficially held by Magten. The Stockholders currently own 100% of the common equity of the Company in the form of the Old Common Stock. The issuance of New Common Stock to the Noteholders, including Magten, pursuant to the Exchange Restructuring or the Prepackaged Restructuring, as applicable, will result in significant dilution of the equity interests of the existing holders of Old Common Stock as a percentage of the total number of outstanding shares of the common stock of the Company. As a result of the Restructuring, Apollo, the beneficial holder of approximately 39.6% of the issued and outstanding shares of Old Common Stock will receive its pro rata share of the shares of New Common Stock and Warrants to be issued to Stockholders (i.e., Apollo will receive approximately 3% of the shares of New Common Stock (subject to dilution) and approximately 39.6% of the Warrants) in exchange for the shares of Old Common Stock beneficially held by Apollo. Consummation of the Restructuring will also result in a distribution of New Common Stock and Warrants to certain officers and directors of the Company, based upon the number of shares of Old Common Stock owned by them on the Record Date. See "MARKET FOR OLD COMMON STOCK AND RELATED STOCKHOLDER MATTERS." In addition, in the event that the Exchange Restructuring is consummated, all options to purchase shares of Old Common Stock outstanding granted under the Old Plans and held by directors, officers and employees of the Company (the "Old Options") will not be terminated but will continue to remain outstanding, subject to adjustment as provided for in each of the Old Plans. Moreover, under the Stock Award and Incentive Plan, directors, officers and employees of the Company will become eligible to receive additional options to purchase shares of New Common Stock as determined by the new Board after the Restructuring Date, subject to the approval by the Stockholders of the Company. In the event that the Prepackaged Restructuring is consummated, pursuant to the Prepackaged Plan, all Old Options held by directors, officers and employees of the Company to purchase shares of Old Common Stock outstanding as of the commencement of the Chapter 11 Case granted under the Old Plans will be terminated and of no further force or effect as of the consummation of the Prepackaged Plan. In addition, each of the Old Plans shall be terminated and of no further force or effect as of the consummation of the Prepackaged Plan. The Stock Award and Incentive Plan will remain in effect after the consummation of the Prepackaged Plan; provided, that, if the Stock Award and Incentive Plan has not been approved by the Stockholders prior to the commencement of the Chapter 11 Case, any awards granted thereunder shall be subject to the subsequent approval of the Stockholders of the Company. It is the Company's intention that certain directors, officers and employees of the Company will be granted new options to purchase shares of New Common Stock under the Stock Award and Incentive Plan. The persons to receive such grants, the number of shares of New Common Stock subject to such grants, and such other terms and conditions applicable to such grants, shall be determined by the Board of Reorganized Salant in its sole discretion, except for automatic stock option grants to certain non-employee directors of the Company. See "POST RESTRUCTURING STOCK OPTION GRANTS." On March 2, 1998, Magten, Apollo and the Company entered into the Letter Agreement setting forth the basic terms and conditions of the Restructuring. The Letter Agreement was subsequently amended on June 1, 1998. See "BACKGROUND OF RESTRUCTURING -- The Letter Agreement" for a full discussion of the terms of the Letter Agreement. CIT, the Company's working capital lender, agreed to support the Company's restructuring efforts under the Letter Agreement and, on March 2, 1998, the Company entered into the Twelfth Amendment and Forbearance Agreement (the "Twelfth Amendment") with CIT, wherein, among other things, CIT waived certain existing financial covenant defaults under the Credit Agreement as of January 3, 1998 and agreed to forbear (subject to certain conditions) from exercising any of its rights or remedies arising under the Credit Agreement arising from the Company's failure to make certain interest payments on the Senior Notes. In consideration for CIT's agreement to enter into the Twelfth Amendment, pursuant thereto, the Company agreed to pay CIT a forbearance and waiver fee in the amount of $150,000. In addition, in consideration of a New Credit Agreement proposed by CIT, the Company agreed to pay CIT a non-refundable and fully-earned fee of $1,050,000, payable in three equal installments of $350,000 each on April 1, May 1 and June 1, 1998. See "BACKGROUND OF RESTRUCTURING -- The Waiver and Forbearance Under the Credit Agreement and Commitment for New Credit Agreement." Subsequent to the execution of the Twelfth Amendment, after reviewing various proposals for a new credit agreement, the Company entered into a commitment letter (the "CIT Commitment Letter") with CIT, which sets forth the terms and conditions of an agreement for a new $140 million secured credit facility with CIT, to be entered into by the Company on the Restructuring Date (the "New CIT Credit Agreement"). See "DESCRIPTION OF NEW CIT CREDIT AGREEMENT." In conjunction with the CIT Commitment Letter, CIT and the Company entered into the Thirteenth Amendment and Forbearance Agreement (the "Thirteenth Amendment") further extending CIT's agreement to continue to forbear from exercising its rights or remedies under the Credit Agreement. In accordance with the Twelfth Amendment, no additional closing fees, facility fees or amendment fees were charged to the Company by CIT in consideration of the execution and delivery of the Thirteenth Amendment and the CIT Commitment Letter, and no other closing fee or facility fee will be charged in connection with the execution and delivery of the New CIT Credit Agreement. See "BACKGROUND OF RESTRUCTURING -- The Waiver and Forbearance Under the Credit Agreement and Commitment for New Credit Agreement." DIAGRAM OF TRANSACTION The following chart diagrams the significant events (which are set forth in chronological order) involved in order to consummate the Restructuring either by means of the Exchange Restructuring or the Prepackaged Restructuring: [OBJECT OMITTED] THE EXCHANGE RESTRUCTURING AND PREPACKAGED RESTRUCTURING Consideration Offered: To Stockholders...............For each share of Old Common Stock, Stockholders will be entitled to receive upon exchange (i) a certificate for one-tenth of one share of New Common Stock reflecting the ten-to-one reverse stock split (the "Reverse Split") and (ii) certificates for .14814815 Warrants. Each Warrant shall be exercisable for one share of New Common Stock. The Stockholders currently own 100% of the common equity of the Company in the form of the Old Common Stock. As of March 16, 1998, there were 14,964,608 shares of Old Common Stock issued and outstanding. Assuming all of the conditions to the Restructuring are fulfilled, the Exchange Restructuring will result in the Stockholders receiving, in exchange for their shares of Old Common Stock, an aggregate of 1,496,461 shares of New Common Stock after giving effect to the Reverse Split, constituting 7.5% of the New Common Stock issued and outstanding immediately following consummation of the Exchange Restructuring (subject to dilution for shares of New Common Stock issued under the Stock Award and Incentive Plan, the Warrant Shares, and in the case of the Exchange Restructuring only, shares of New Common Stock issued under the Old Plans). In addition, the Stockholders will receive, the Warrants, which represent the right to purchase up to 10% of the New Common Stock issued and outstanding immediately following consummation of the Exchange Restructuring (on a fully diluted basis). The Warrants would be exercisable for seven years from the date of the Exchange Restructuring and would be issued with an exercise price of $6.2648 per share, subject to adjustment. Should the Prepackaged Restructuring be consummated, the Stockholders will receive the same consideration as the Stockholders would receive in the Exchange Restructuring. To Noteholders................For each $1,000 principal amount of Senior Notes (plus accrued but unpaid interest), Noteholders will receive 175.977555 shares of New Common Stock. As a result of the Exchange Restructuring, as of the Exchange Restructuring Date, Noteholders will receive, in the aggregate, shares of New Common Stock equivalent to 92.5% of the New Common Stock issued and outstanding immediately following consummation of the Exchange Restructuring, based on the number of outstanding shares of Old Common Stock as of the Record Date, and subject to dilution for shares of New Common Stock issued under the Stock Award and Incentive Plan, the Warrant Shares, and in the case of the Exchange Restructuring only, shares of New Common Stock issued under the Old Plans. The allocations of distributions of the New Common Stock under the Exchange Restructuring to the Noteholders will be pro rata based on the amount of the Noteholders' respective claims relating to the Senior Notes held by them. Noteholders will not be entitled to receive Warrants. Should the Prepackaged Restructuring be consummated, the Noteholders will receive the same consideration as the Noteholders would receive in the Exchange Restructuring. Expiration Date...............With respect to the Exchange Offer and the solicitation of acceptances of the Prepackaged Plan, the term "Expiration Date" shall mean 5:00 p.m., New York City time, on ________, 1998, unless the Company, in its sole discretion, extends the Exchange Offer or solicitation period, in which case the term "Expiration Date" for the Exchange Offer or solicitation period shall mean the last time and date to which the Exchange Offer or solicitation period is extended. See "VOTING AND CONFIRMATION OF THE PREPACKAGED PLAN." Old Common Stock..............As of the Record Date, there were 30,000,000 shares of Old Common Stock authorized for issuance, of which 14,964,608 shares were issued and outstanding (or 1,496,461 shares of New Common Stock after the giving effect to the Reverse Split). As part of the Exchange Restructuring, Stockholders will be asked to consider and approve the Charter Amendment, the Issuance and the Stock Award and Incentive Plan and to elect new directors pursuant to the Election of the New Board. If the Stockholders approve the Stock Award and Incentive Plan, the Stock Award and Incentive Plan will become effective regardless of whether the Exchange Restructuring is implemented or any of the Restructuring Proposals are approved. However, the approval of the Stock Award and Incentive Plan is not a condition to the consummation of the Restructuring. If the Prepackaged Restructuring is consummated, the Company expects that each of the Restructuring Proposals will be implemented pursuant to the Prepackaged Plan. See "STOCKHOLDERS' MEETING" and "DISCUSSION OF THE PROPOSALS." Conditions to Exchange Restructuring.................The Company's obligation to accept Senior Notes tendered pursuant to the Exchange Restructuring is conditioned, among other things, on (a) the Minimum Tender Condition, (b) approval by the Stockholders of each of the Restructuring Proposals, and (c) obtaining the waiver of certain provisions under the Company's licensing agreements with certain licensors to the Company, and any other consents or waivers that the Company determines are necessary to effectuate the terms and conditions of the Exchange Restructuring. The Company has reserved the right to waive or seek the waiver of any one or more of these conditions but does not currently intend to waive or seek the waiver of any condition. Pursuant to the Letter Agreement, Magten's prior written consent is required for the Company to waive the Minimum Tender Condition. If any or all of the Restructuring Proposals are not approved by the Stockholders at the Stockholders' Meeting and/or the Minimum Tender Condition is not satisfied or waived, but the Company receives sufficient acceptances of the Prepackaged Plan to obtain confirmation thereof by the Bankruptcy Court, then the Company intends to pursue confirmation of the Prepackaged Plan under Chapter 11 of the Bankruptcy Code and to attempt to use such acceptances to obtain confirmation of the Prepackaged Plan. Conditions to Prepackaged Restructuring.................The Bankruptcy Code requires that the Bankruptcy Court determine that the Prepackaged Plan complies with the requirements of Section 1129 of the Bankruptcy Code. Approval of two-thirds of the principal amount and a majority in number of the Noteholders voting on the Prepackaged Plan is required for the consummation of the Prepackaged Restructuring. See "DESCRIPTION OF THE PREPACKAGED PLAN." Certain Federal Income Tax Considerations to Stockholders..................In general, the receipt of New Common Stock and Warrants by Stockholders pursuant to the Restructuring will not be a taxable event. Subject to certain exceptions described herein (see "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS: STOCKHOLDERS"), the Company will realize cancellation of indebtedness income for Federal income tax purposes as a result of the Restructuring if the fair market value of the New Common Stock received by Noteholders pursuant to the Restructuring is less than the adjusted issue price (including any accrued but unpaid interest) of the Senior Notes. The Company has approximately $55 million of operating losses and net operating loss carryovers ("NOLs") which are available to offset any such cancellation of indebtedness income that may be recognized. In the event that the Restructuring is consummated by means of the Prepackaged Restructuring, such cancellation of indebtedness income would not be included in income for Federal income tax purposes. If the Restructuring is implemented by means of the Exchange Restructuring, the Company may recognize some cancellation of indebtedness income, depending upon the trading price of the Company's stock on the date the Restructuring is implemented. If the Company is insolvent at such time, then, to the extent of the insolvency, none of the cancellation of indebtedness income will be included in its gross income. In any event, based upon current valuations, it is likely that any such cancellation of indebtedness income included in income will be fully offset by the Company's NOL's, assuming that the Company makes the election provided under Code Section 382 to "close its books" as of the closing date of the Restructuring. As a result of the Restructuring, the Company will undergo an "ownership change" for Federal income tax purposes and will be limited in its ability to use its NOLs and certain tax credit carryforwards to offset future taxable income. See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS: STOCKHOLDERS." Shareholder Rights Plan.......The Rights Plan provides for a dividend distribution of one right (collectively, the "Rights") for each share of Old Common Stock to holders of record of the Old Common Stock at the close of business on December 23, 1997. With certain exceptions, the Rights will become exercisable only in the event that an acquiring party accumulates 20% or more of the Company's voting stock, or if a party announces an offer to acquire 30% or more of such voting stock. In order to effectuate the terms of the Restructuring, on [__________], 1998, the Rights Plan was amended to provide that the Rights expire immediately prior to the consummation of the Restructuring. See "DESCRIPTION OF RIGHTS PLAN." Market and Trading Information: Senior Notes..................The Senior Notes are traded in the over-the-counter market by certain dealers who from time to time are willing to make a market in such securities. Trading of the Senior Notes is, however, limited, and prices and trading volumes are not reported and are difficult to monitor. See "MARKET PRICES OF THE SENIOR NOTES." Old Common Stock..............The Old Common Stock is currently traded on the NYSE and is quoted on the NYSE under the symbol "SLT." See "MARKET PRICES FOR OLD COMMON STOCK AND RELATED STOCKHOLDER MATTERS." New Common Stock..............The NYSE requires approval of the Issuance of the New Common Stock. The Company has fallen below the continued listing criteria of the NYSE for net tangible assets available to common stock togehter with average net income after taxes for the past three years. However, the NYSE has reviewed the terms and conditions of the Restructuring set forth herein and has informed the Company that it will continue to list the Company's common stock during the period prior to consummation of the Restructuring and intends to list the Company's common stock from and after the Restructuring Date. However, the NYSE has advised the Company that after consummation of the Restructuring, the NYSE intends to monitor the performance of the Company based upon the Projections set forth herein to ensure compliance with the NYSE's original listing standards in respect of the New Common Stock. The Company believes that as a result of the consummation of the Restructuring, following the Restructuring Date, the Company will be able to return to compliance with the original listing standards in respect of hte New Common Stock and the Warrants and that the New Common Stock and the Warrants will continue to be listed for trading on the NYSE. However, the NYSE has advised the Company that the Company's failure to meet the Projections following the Restructuring could result in the suspension from trading and subsequent delisting of the New Common Stock. "DISCUSSION OF RISK FACTORS -- Lack of Trading Market for Warrants and New Common Stock; Volatility; Potential De-Listing of the New Common Stock." Warrants and Warrant Shares...The NYSE requires approval of the Issuance of the Warrants and the Warrant Shares. As discussed above, application will be made to list the Warrants and the Warrant Shares for trading on the NYSE. There can be no assurance that such application will be approved or that an active market for the Warrants or the Warrant Shares will develop or as to the prices at which they might be traded. If the Company is unable to have the Warrants or the Warrant Shares listed for trading on the NYSE upon consummation of the Restructuring, the Company will use its best efforts to cause the Warrants and/or the Warrant Shares to be quoted on the National Market System of NASDAQ or to be listed on another national securities exchange. However, there is no assurance that the Company would be successful in such efforts. See "DISCUSSION OF RISK FACTORS -- Lack of Trading Market for Warrants and New Common Stock; Volatility; Potential De-Listing of the New Common Stock." Post-Restructuring Board......Each of the existing members of the Board has delivered to the Company a resignation letter resigning from the Board effective as of the Exchange Restructuring Date. In accordance with the Company's Certificate of Incorporation, by resolution of the Board, the number of directors has been fixed at [___________] effective as of the Exchange Restructuring Date. As provided for in the Letter Agreement, the new Board will consist of: (i) Mr. Jerald Politzer, the Chairman of the Board; (ii) [_________] members to be nominated by Magten, subject to consultation with the Company and other Noteholders who may come forward prior to the commencement of the Solicitation; and (iii) one member designated by the current Board. As described above, as contemplated by the Letter Agreement, it is expected that Magten will provide the Company with its Board nominees prior to the commencement of the Solicitation. In addition, the current Board has designated Marvin Schiller to be the current Board's nominee to the new Board. See "INFORMATION REGARDING NOMINEES." Depositary/Warrant Agent.........................[ ] has been appointed as Depositary with respect to the Old Common Stock for the Exchange Restructuring (the "Depositary") for the purpose of receiving the New Common Stock from the Company and transmitting such New Common Stock to Stockholders, and as Warrant Agent with respect to transmitting the Warrants to Stockholders. Questions and requests for assistance may be directed to the Depositary at one of its addresses and telephone numbers set forth on the back cover of this Proxy Statement/Prospectus. See "ADVISORS AND REPRESENTATIVES." Information Agent/Voting Agent.........................[ ] is serving as Information Agent in connection with the Stockholders' Meeting and the solicitation of acceptances of the Prepackaged Plan (the "Information Agent"), and as voting agent with respect to votes on the Prepackaged Plan. Any questions regarding how to vote at the Stockholders' Meeting and on the Prepackaged Plan, and any requests for additional copies of the Proxy Statement/Prospectus, Letters of Transmittal, Proxies, Ballots or Master Ballots should be directed to the Information Agent at its address and telephone number set forth on the back cover of this Proxy Statement/Prospectus. See "ADVISORS AND REPRESENTATIVES." SUMMARY OF THE PREPACKAGED PLAN The table below provides a summary of the classification and treatment of, and distributions in respect of Claims and Interests in each Class under the Prepackaged Plan. For a more precise explanation, see "DESCRIPTION OF THE PREPACKAGED PLAN" and the Prepackaged Plan itself, a copy of which is attached hereto as Annex II. - ------------------------------------------------------------------------------- TYPE OF CLAIM CLASS OR EQUITY INTEREST DISTRIBUTION - ------------------------------------------------------------------------------- - -- Administrative Expenses Allowed Administrative Expenses are to be paid in full, in cash, on the later of (i) the Effective Date and (ii) the date on which the Bankruptcy Court enters an order allowing such Administrative Expense; provided, however, that allowed Administrative Expenses representing obligations incurred in the ordinary course of business, consistent with past practice, or assumed by the Company shall be paid in full or performed by the Company in the ordinary course of business, consistent with past practice; provided, further, however that allowed Administrative Expenses incurred by the Company after the Confirmation Date, including (without limitation) claims for professionals' fees and expenses, shall not be subject to application and may be paid by the Company in the ordinary course of business without further Bankruptcy Court approval. - -- Priority Tax Claims With respect to each Allowed Priority Tax Claim, at the sole option of the Company, the Holder of an Allowed Priority Tax Claim will be entitled to receive from the Company on account of such claim: (a) Cash payments made in equal installments beginning on or before the first anniversary following the Effective Date with the final installment being payable no later than the sixth anniversary of the date of the assessment of such Allowed Priority Tax Claim, together with interest on the unpaid balance of such Allowed Priority Tax Claim from the Effective Date calculated at the Market Rate; or (b) such other treatment agreed to by the Holder of such Allowed Priority Tax Claim and the Company. 1 Priority Claims On the latest of (i) the Effective (Unimpaired) Date, (ii) the date on which such Priority Claim becomes an Allowed Claim, or (iii) the date on which the Company and the Holder of such Allowed Priority Claim otherwise agree, each Holder of an Allowed Priority Claim will be entitled to receive Cash in an amount sufficient to render such Allowed Priority Claim Unimpaired under Section 1124 of the Bankruptcy Code. 2 CIT Claim (Unimpaired) At the election of the Company prior to the Effective Date, on the Effective Date or as soon as practicable thereafter, CIT will be entitled to receive on account of the Allowed CIT Claim one of the following treatments: (i) a distribution in Cash equal to 100% of its Allowed CIT Claim, (ii) the Allowed CIT Claim will be otherwise rendered Unimpaired in accordance with Section 1124 of the Bankruptcy Code, or (iii) such other treatment as mutually agreed to by the Company and CIT. 3 Senior Note Claims On the Effective Date or as soon as (Impaired) practicable thereafter, each Holder of an Allowed Senior Note Claim will be entitled to receive on account of such Holder's Allowed Senior Note Claim such Holder's pro rata share of 18,456,350 shares of New Common Stock (or 175.977555 shares of New Common Stock for each $1,000 principal face amount of Senior Notes held by such Holder). 4 Miscellaneous Secured At the election of the Company prior Claims (Unimpaired) to the Effective Date, on the Effective Date or as soon as practicable thereafter, each Holder of an Allowed Miscellaneous Secured Claim will be entitled to receive on account of such Holder's Allowed Miscellaneous Secured Claim one of the following treatments: (i) the legal, equitable and contractual rights to which such Allowed Miscellaneous Secured Claim entitles such Holder shall remain unaltered, (ii) such Holder's Allowed Miscellaneous Secured Claim shall be reinstated and rendered Unimpaired in accordance with section 1124 of the Bankruptcy Code, or (iii) such other treatment as mutually agreed to by the Company and such Holder. 5 General Unsecured Claims At the election of the Company prior (Unimpaired) to the Effective Date, on the Effective Date or as soon as practicable thereafter, each Holder of an Allowed General Unsecured Claim that has not been fully paid or satisfied prior to the Effective Date will be entitled to receive on account of such Holder's Allowed General Unsecured Claim one of the following treatments: (i) the legal, equitable and contractual rights to which such Allowed General Unsecured Claim entitles such Holder shall remain unaltered, (ii) such Holder's Allowed General Unsecured Claim will be reinstated and rendered Unimpaired under section 1124 of the Bankruptcy Code, or (iii) such other treatment as mutually agreed to by the Company and such Holder. 6 Old Common Stock On the Effective Date or as soon as Interests (Impaired) practicable thereafter, each Holder of an Allowed Old Common Stock Interest will be entitled to receive on account of such Holder's Allowed Old Common Stock Interest such Holder's pro rata share of (i) 1,496,461 shares of New Common Stock, and (ii) the Warrants. 7 Other Interests (Impaired) On the Effective Date, Other Interests will be extinguished and no distributions will be made in respect of such Other Interests. NOTICE TO HOLDERS OF CLAIMS AND INTERESTS WHEN CONFIRMED BY THE BANKRUPTCY COURT, THE PREPACKAGED PLAN WILL BIND ALL HOLDERS OF CLAIMS AGAINST AND INTERESTS IN THE COMPANY, WHETHER OR NOT THEY ARE ENTITLED TO VOTE OR DID VOTE ON THE PREPACKAGED PLAN AND WHETHER OR NOT THEY RECEIVE OR RETAIN ANY DISTRIBUTIONS OR PROPERTY UNDER THE PREPACKAGED PLAN. THUS, ALL STOCKHOLDERS ARE ENCOURAGED TO READ THIS PROXY STATEMENT/PROSPECTUS AND ITS ANNEXES CAREFULLY AND IN THEIR ENTIRETY BEFORE VOTING TO ACCEPT OR TO REJECT THE PREPACKAGED PLAN. THIS PROXY STATEMENT/PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE PREPACKAGED PLAN, CONSIDERATIONS PERTINENT TO ACCEPTANCE OR REJECTION OF THE PREPACKAGED PLAN, AND DEVELOPMENTS CONCERNING THE CHAPTER 11 CASE. CERTAIN OF THE INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IS BY ITS NATURE FORWARD LOOKING AND CONTAINS ESTIMATES, ASSUMPTIONS, AND PROJECTIONS THAT MAY BE MATERIALLY DIFFERENT FROM ACTUAL FUTURE RESULTS. Except with respect to the projections referenced in "PROJECTED CONSOLIDATED FINANCIAL INFORMATION" (the "Projections") and except as otherwise specifically and expressly stated herein, this Proxy Statement/Prospectus does not reflect any events that may occur subsequent to the date hereof. Such events may have a material impact on the information contained in this Proxy Statement/Prospectus. Neither the Company nor Reorganized Salant intend to update the Projections. Thus, the Projections will not reflect the impact of any subsequent events not already accounted for in the assumptions underlying the Projections. Further, the Company does not anticipate that any amendments or supplements to this Proxy Statement/Prospectus will be distributed to reflect such occurrences. Accordingly, the delivery of this Proxy Statement/Prospectus shall not under any circumstance imply that the information herein is correct or complete as of any time subsequent to the date hereof. EXCEPT WHERE SPECIFICALLY NOTED, THE FINANCIAL INFORMATION CONTAINED HEREIN HAS NOT BEEN AUDITED BY A CERTIFIED PUBLIC ACCOUNTANT AND HAS NOT BEEN PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. If you did not receive a Ballot in your package of Solicitation Materials and believe that you should have, please contact the Information Agent named below at the address or telephone number set forth in "VOTING AND CONFIRMATION OF THE PREPACKAGED PLAN--Information Agent." COMPARISON OF EXCHANGE RESTRUCTURING AND PREPACKAGED RESTRUCTURING The following is a comparison of certain of the elements of, and differences between, the Exchange Restructuring and the Prepackaged Restructuring. PREPACKAGED EXCHANGE RESTRUCTURING RESTRUCTURING ------------------------ ----------------------- APPROVAL REQUIRED........ 100% of the aggregate Acceptances must be principal amount of the received from holders of Senior Notes must be at least two-thirds in tendered and not dollar amount and more withdrawn and a majority than one-half in number of the voting power of of Senior Notes, the outstanding Old counting only holders Common Stock must approve who vote. each of the Restructuring Proposals. EFFECT ON NOTEHOLDERS WHO DO NOT PARTICIPATE... Not applicable, as the Upon receipt of the Exchange Restructuring is requisite acceptances conditioned upon, among and consummation of the other things, 100% of the Prepackaged aggregate principal Restructuring, all amount of the Senior Senior Notes would be Notes being tendered and canceled and Noteholders not withdrawn. The would receive the same Company currently does consideration as the not intend to waive or holders who voted in seek the waiver of the favor of the Prepackaged Minimum Tender Restructuring. Condition. Pursuant to the Letter Agreement, Magten's prior written consent is required for the Company to waive the Minimum Tender Condition. ANNUAL MEETING OF STOCKHOLDERS AND IMPLEMENTATION OF PROPOSALS................ At the Stockholders' If the Prepackaged Meeting, Stockholders Restructuring is pursued will be asked to consider and a petition is filed and vote upon the Charter under the Bankruptcy Amendment, the Issuance, Code, the Company the Stock Award and expects that each of the Incentive Plan and the Restructuring Proposals Election of the New will be implemented Board. The Stockholder pursuant to the votes with respect to the Prepackaged Issuance and the Election Restructuring. Pursuant of the New Board will not to the Prepackaged Plan, be effective unless and all Old Options will be until the Charter terminated upon Amendment is approved at consummation thereof. the Stockholders' Meeting The Stock Award and and filed with the Incentive Plan will Secretary of State of remain in effect after Delaware and the Exchange the consummation of the Offer has been Prepackaged Plan; consummated. Each of the provided, that, if the Restructuring Proposals Stock Award and is conditioned upon Incentive Plan has not approval by the been approved by the Stockholders of each of Stockholders prior to the other Restructuring the commencement of the Proposals. If any or all Chapter 11 Case, any of the Restructuring awards granted Proposals are not thereunder shall be approved by the subject to the Stockholders at the subsequent approval of Stockholders' Meeting, the Stockholders of the then none of the Company. Restructuring Proposals will become effective. If the Stockholders approve the Stock Award and Incentive Plan, the Stock Award and Incentive Plan will become effective of whether the Exchange Restructuring is implemented or any of the Restructuring Proposals are approved. However, approval of the Stock Award and Incentive Plan is not a condition to the consummation of the Restructuring. MECHANICS OF PARTICIPATION............ Noteholders who desire to Impaired creditors and participate in the equity interest holders Exchange Offer must who desire to vote, and properly complete a are entitled to vote, on Letter of Transmittal and the Prepackaged Plan deliver it, together with must properly complete a the Senior Notes and any Ballot or Master Ballot, other required documents, as the case may be, and to the Depositary. Only deliver it in accordance a registered Noteholder, with the voting or persons who have instructions. Only obtained a properly beneficial owners of completed note power from Claims or Interests or, a registered Noteholder, if applicable, nominees may tender in the who are voting at the Exchange Offer. instruction of the beneficial owners and make a certification with respect thereto, who are entitled to vote on the Prepackaged Plan may vote thereon. PREFERRED STOCK VOTING RIGHTS............ There is currently no The Charter Amendment preferred stock of the will provide that any Company outstanding, but preferred stock to be any subsequently issued issued will have certain shares of preferred stock specified minimum voting may or may not have rights, as required by voting rights after the Bankruptcy Code. consummation of the Exchange Restructuring. POST RESTRUCTURING STOCK OPTION GRANTS...... All of the Old Options Pursuant to the will not be terminated Prepackaged Plan, all and will continue to Old Options outstanding remain outstanding, as of the commencement subject to adjustment of the Chapter 11 Case intended to reflect the granted under the Old effect of the Reverse Plans will be terminated Split on the Old and of no further force Options. In addition, or effect as of the under the Stock Award and consummation of the Incentive Plan, Prepackaged Plan. In directors, officers and addition, each of the employees of the Company Old Plans shall be will become eligible to terminated and of no receive additional further force or effect options to purchase as of the consummation shares of New Common of the Prepackaged Stock as determined by Plan. The Stock Award the new Board after the and Incentive Plan will Restructuring Date, remain in effect after subject to the approval the consummation of the by the stockholders of Prepackaged Plan; the Company. provided, that, if the Stock Award and Incentive Plan has not been approved by the Stockholders prior to the commencement of the Chapter 11 Case, any awards granted thereunder shall be subject to the subsequent approval of the stockholders of the Company. It is the Company's intention that certain directors, officers and employees of the Company will be granted new options to purchase shares of New Common Stock under the Stock Award and Incentive Plan. The persons to receive such grants, the number of shares of New Common Stock subject to such grants, and such other terms and conditions applicable to such grants, shall be determined by the Board of Reorganized Salant in its sole discretion, except for automatic stock option grants to certain non-employee directors of the Company. STOCKHOLDERS WHO COMPLETE A PROXY WITH RESPECT TO THE STOCKHOLDERS' MEETING SHOULD ALSO DULY COMPLETE AND SIGN A BALLOT IN ORDER TO VOTE ON THE PREPACKAGED PLAN. PURPOSE OF THE RESTRUCTURING The purpose of the Restructuring is to help ensure the long-term viability and to contribute to the success of the Company by deleveraging the Company's capital structure. Specifically, in accordance with the Three-Year Business Plan developed by the Company, the Restructuring is designed to recapitalize the Company by converting all of the Company's long-term debt obligations under the Senior Notes (which, as of February 28, 1998, was $110.379 million, consisting of $104.879 million principal amount of, and $5.5 million of accrued interest on, the Senior Notes) into New Common Stock. Interest charges for the Company will be reduced by $11 million per year and stockholders' equity should be substantially increased as a result of the Restructuring. The Company's consolidated debt at the completion of the Restructuring will include approximately $28 million in revolver debt plus $15 million from the term loan portion of its working capital facility. This significantly lower debt-to-equity ratio should help the Company to achieve the objectives as described in the Three-Year Business Plan and make the Company more attractive to investors. The Company believes that by reducing the uncertainty surrounding its ability to pay or retire the Senior Notes which are due in their entirety on December 31, 1998, the Restructuring should maximize liquidity for the Company's business operations and thereby provide a platform for future growth and enhance the Company's total enterprise value. The Company further believes that by providing the Company with a deleveraged capital structure, the company that results from the Restructuring should be positioned favorably to withstand the normal market fluctuations in the highly volatile apparel industry. In contemplation of the Restructuring, the Company elected not to pay the interest payment of approximately $5.5 million that was due and payable under the Senior Notes on March 2, 1998, subject to a 30 day grace period. Because the Company elected not to pay the interest due on the Senior Notes by the expiration of the applicable grace period, an event of default has occurred with respect to the Senior Notes entitling the Noteholders to accelerate the maturity thereof. Holders of at least 25% in the aggregate principal face amount of the Senior Notes may accelerate all outstanding indebtedness under the Senior Notes pursuant to the terms of the Indenture. If such holders accelerate the indebtedness under the Senior Notes, the Company may be required to commence a proceeding under Federal bankruptcy law without having solicited acceptances for the Prepackaged Plan prior to the commencement of such proceeding. Pursuant to the Letter Agreement, Magten has, in accordance with Section 6.5 of the Indenture, caused a written direction to be provided to the Trustee to forbear during the term of the Letter Agreement from taking any action under the Indenture in connection with the failure by the Company to make the interest payment on the Senior Notes that was due and payable on March 2, 1998. On April 8, 1998, the Trustee issued a Notice of Default stating that as a result of the Company's failure to make the interest payment due on the Senior Notes, an event of default under the Indenture had occurred on April 1, 1998. In addition, the Company's working capital lender, CIT, agreed to forbear until November 30, 1998, subject to certain conditions, from exercising any of its rights or remedies under the Credit Agreement, arising by virtue of the Company's failure to pay such interest on the Senior Notes. Under the Thirteenth Amendment, such agreement to forbear by CIT will terminate on November 30, 1998 or earlier upon the happening of (a) the occurrence of any Event of Default (as defined in the Credit Agreement) other than by virtue of the Company's failure to make the March 2, 1998 or August 31, 1998 interest payment on the Senior Notes or the commencement or continuation of a chapter 11 case to effectuate the Restructuring; or (b) the exercise of any right or remedy with respect to any of the Collateral by any holder of the Senior Notes or by the Trustee under the Indenture; or (c) the payment of any interest on the Senior Notes in respect of the Company's non-payment of the interest that was payable on March 2, 1998 or that will be payable on August 31, 1998 or otherwise; or (d) the occurrence of an Agreement Termination Event (as defined in the Letter Agreement) except under certain circumstances. See "BACKGROUND TO THE RESTRUCTURING -- Waiver and Forbearance Agreement and Commitment for New Credit Agreement." Failure to consummate the Restructuring could result in the acceleration of all of the indebtedness under the Senior Notes and/or the Credit Agreement. ABSENT THE RESTRUCTURING, THE COMPANY DOES NOT BELIEVE IT WILL BE ABLE TO SATISFY ITS OBLIGATIONS UNDER THE SENIOR NOTES WITHOUT A REFINANCING OF THE COMPANY'S INDEBTEDNESS UNDER THE CREDIT AGREEMENT AND/OR THE SENIOR NOTES OR AN ADDITIONAL CAPITAL INFUSION, AND IT IS UNLIKELY THAT THE COMPANY WILL BE ABLE TO OBTAIN SUCH REFINANCING OR ADDITIONAL CAPITAL INFUSION. IF THE COMPANY DETERMINES THAT IT IS OR WILL BE UNABLE TO COMPLETE THE RESTRUCTURING, THE COMPANY WILL CONSIDER ALL OTHER AVAILABLE FINANCIAL ALTERNATIVES, INCLUDING THE SALE OF ALL OR A PART OF THE COMPANY'S BUSINESSES, THE IMPLEMENTATION OF AN ALTERNATIVE RESTRUCTURING ARRANGEMENT OUTSIDE OF BANKRUPTCY, OR THE COMMENCEMENT OF A CHAPTER 11 CASE WITHOUT A PRE-BANKRUPTCY ACCEPTED PLAN OF REORGANIZATION. THERE CAN BE NO ASSURANCE, HOWEVER, THAT ANY ALTERNATIVE WOULD BE ON TERMS AS FAVORABLE TO NOTEHOLDERS AND STOCKHOLDERS AS THE RESTRUCTURING. For additional information on the effects of the Restructuring, see "CONSEQUENCES OF THE RESTRUCTURING." STOCKHOLDERS' MEETING Date, Time and Place of Stockholders' Meeting.........The Stockholders' Meeting will be held at Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York 10004 on ________, 1998 at ____ __.m., New York City time. Record Date; Stockholders Entitled to Vote; Quorum......Holders of record of Old Common Stock at the close of business on the Record Date will be entitled to vote at the Stockholders' Meeting. Stockholders will be entitled to one vote per share with respect to each of the Proposals. On the Record Date there were 14,964,608 shares of Old Common Stock outstanding, of which there were [__] holders of record. The presence, either in person or by properly executed proxy, of the holders of a majority of the shares of Old Common Stock outstanding and entitled to vote is necessary to constitute a quorum at the Stockholders' Meeting. Purpose of Stockholders' Meeting.......................The purpose of the Stockholders' Meeting is for the Stockholders to consider and to vote on various Proposals to implement the Restructuring, including Proposals (i) to approve the Charter Amendment, (ii) to approve the Issuance, (iii) to approve the Plan Proposal, (iv) to elect new directors pursuant to the Election of the New Board; (v) to ratify the appointment of Deloitte & Touche as independent auditors to the Company, and (vi) such other business as may properly come before the Stockholders' Meeting or any adjournments or postponements thereof. See "STOCKHOLDER'S MEETING, VOTING RIGHTS AND PROXIES." The Board has unanimously adopted a resolution proposing that the Company's Certificate of Incorporation be amended pursuant to the Charter Amendment to effect (i) a ten-to-one reverse stock split of the Company's outstanding shares of Old Common Stock, (ii) an increase in the number of shares of New Common Stock authorized. The Charter Amendment is necessary to permit the Company to consummate the Exchange Restructuring on the terms contemplated by the Exchange Offer. In addition, assuming the aggregate market capitalization of the Company remains constant, the Reverse Split as implemented pursuant to the Charter Amendment should have the effect of increasing the trading price of the common stock of the Company from where it would otherwise trade in the absence of the Reverse Split. However, there can be no assurance that such an increase in the trading price will occur. The approval of the Stock Award and Incentive Plan by the Stockholders is necessary to provide appropriate incentives for those eligible to participate thereunder. The Board has also unanimously adopted resolutions approving the Issuance, the Stock Award and Incentive Plan and the election of the New Board. In connection with its consideration of the Restructuring, the Board received the E&Y Fairness Opinion. See "RESTRUCTURING FINANCIAL CONSIDERATIONS -- Fairness Opinion." The approval of the Issuance and the Stock Award and Incentive Plan by the Stockholders is required by the applicable rules of the NYSE. Each of the Restructuring Proposals is conditioned upon the approval by the Stockholders of each of the other Restructuring Proposals. The Stockholder votes with respect to the Issuance and the Election of the New Board will not be effective unless and until the Charter Amendment is approved at the Stockholders' Meeting and filed with the Secretary of State of Delaware and the Exchange Restructuring has been consummated. If the Stockholders approve the Stock Award and Incentive Plan, the Stock Award and Incentive Plan will be effective regardless of whether the Exchange Restructuring is implemented or any of the Restructuring Proposals are approved. However, approval of the Stock Award and Incentive Plan is not a condition to the consummation of the Restructuring. If the Prepackaged Restructuring is required and a petition is filed under the Bankruptcy Code, the Company expects that the Restructuring Proposals will be implemented pursuant to the Prepackaged Plan. See "DISCUSSION OF THE PROPOSALS." Votes Required................Under the Delaware General Corporation Law (the "DGCL") and the Company's Certificate of Incorporation, the Issuance, the Charter Amendment and the Plan Proposal must be approved by the affirmative vote of the holders of a majority of the voting power of the Old Common Stock represented at the Stockholders' Meeting. If the Restructuring is effected by means of the Exchange Restructuring, the new members of the Board to be elected at the Stockholders' Meeting must be elected by the affirmative vote of the holders of a plurality of the voting power of the Old Common Stock represented at the Stockholders' Meeting. Apollo, the beneficial owner of 5,924,352 shares, representing approximately 39.6% of the issued and outstanding shares of Old Common Stock, has entered into a Voting Agreement with the Company, dated August __, 1998, wherein Apollo has agreed to vote all of its shares of Old Common Stock in favor of the Charter Amendment, the Issuance, the Plan Proposal and the Election of the New Board. See "BACKGROUND OF RESTRUCTURING -- The Voting Agreement." In accordance with the terms of the Letter Agreement, the Company also requested that DDJ Capital Management, LLC ("DDJ"), the beneficial holder of approximately 12.1% of the issued and outstanding shares of Old Common Stock, as of March 10, 1998, enter into a voting agreement with the Company similar to the Voting Agreement entered into with Apollo. DDJ, however, informed the Company that it did not wish to enter into such a voting agreement. In addition, on or about March 3, 1998, DDJ requested that the Company terminate the restrictions on DDJ's ability to buy or sell shares of Old Common Stock set forth in a confidentiality agreement between DDJ and the Company (the "DDJ Confidentiality Agreement"). On March 4, 1998, the Company granted this request by DDJ. As of the date of this Proxy Statement/Prospectus, DDJ is the beneficial owner of approximately _________ shares of Old Common Stock, representing approximately __% of the issued and outstanding shares of Old Common Stock. As of __________, 1998, the Company's executive officers and directors, as a group, beneficially owned approximately 492,721 shares of the outstanding Old Common Stock (exclusive of the Apollo Shares) representing 3.3% of the issued and outstanding shares of Old Common Stock. Such officers and directors have advised the Company that they intend to vote in favor of each of the Proposals. The Stockholder votes with respect to the Issuance and the Election of the New Board will not become effective unless and until the Charter Amendment is approved at the Stockholders' Meeting and filed with the Secretary of State of Delaware and the Exchange Restructuring has been consummated. If the Stockholders approve the Stock Award and Incentive Plan, the Stock Award and Incentive Plan will become effective regardless of whether the Exchange Restructuring is implemented or any of the Restructuring Proposals are approved. Even if each of the Restructuring Proposals is approved by the Stockholders, the Board has reserved the right to abandon the Charter Amendment and each other Restructuring Proposal in the event that any other condition to the Restructuring is not satisfied or waived, including, but not limited to, the Minimum Tender Condition. However, the Board intends to file the Charter Amendment with the Secretary of State of Delaware if the Exchange Restructuring is consummated. Fairness Opinion..............On April 21, 1998, at the request of the Board, E&Y delivered to the Board a written opinion (the "E&Y Fairness Opinion") addressed to the Board that, as of that date and based upon and subject to the factors and assumptions set forth therein, the consideration to be received by public Stockholders pursuant to the Restructuring is fair to public Stockholders from a financial point of view. E&Y subsequently delivered to the Board their written opinion addressed to the Board that, as of the date of this Proxy Statement/Prospectus and based upon and subject to the factors and assumptions set forth therein, the consideration to be received by public Stockholders pursuant to the Restructuring is fair to public Stockholders from a financial point of view. See "RESTRUCTURING FINANCIAL CONSIDERATIONS -- Fairness Opinion." A copy of the E&Y Fairness Opinion is attached hereto as Annex I. Dissenters' Rights............Stockholders will not be entitled to dissenters' rights or rights of appraisal in connection with the Charter Amendment, the Issuance, the Plan Proposal or the Election of the New Board. Dilution......................Assuming 100% acceptance of the Exchange Offer and approval by the Stockholders of each Restructuring Proposal, the Company expects to issue 18,456,350 shares of New Common Stock directly to exchanging Noteholders, 1,496,461 shares of New Common Stock directly to existing Stockholders, and Warrants to purchase 2,216,979 additional shares of New Common Stock (subject to adjustment) to existing Stockholders. Based on the number of shares of outstanding Old Common Stock as of the Record Date, the 18,456,350 shares issued directly to Noteholders will represent 92.5% of the total outstanding shares of New Common Stock immediately following consummation of the Exchange Restructuring, but subject to dilution for shares of New Common Stock issued under the Stock Award and Incentive Plan, the Warrant Shares, and in the case of the Exchange Restructuring only, shares of New Common Stock issued under the Old Plans. The Stockholders currently own 100% of the common equity of the Company in the form of the Old Common Stock. As of March 16, 1998, there were 14,964,608 of Old Common Stock issued and outstanding. Assuming all of the conditions to the Exchange Restructuring are fulfilled, the Exchange Restructuring will result in the Stockholders receiving, in exchange for their shares of Old Common Stock, after giving effect to the Reverse Split, an aggregate of 1,496,461 shares of New Common Stock, constituting 7.5% of the New Common Stock issued and outstanding immediately following consummation of the Exchange Restructuring (subject to dilution for shares of New Common Stock issued under the Stock Award and Incentive Plan, the Warrant Shares). As a result, upon consummation of the Exchange Restructuring, the equity interests of the Stockholders represented by the Old Common Stock, as a percentage of the total number of outstanding shares of the common stock of the Company, will be significantly diluted from 100% of the Old Common Stock to 7.5% of the New Common Stock (subject to further dilution as a result of the issuance of Shares of New Common Stock under the Stock Award and Incentive Plan, the Warrant Shares, and in the case of the Exchange Restructuring only, shares of New Common Stock issued under the Old Plans). Consummating the Prepackaged Plan will have the same dilutive effect. See "PURPOSE OF THE RESTRUCTURING" and "DISCUSSION OF RISK FACTORS." Summary of Warrants The following is a brief description of certain provisions of the Warrants. The Warrants will be issued to holders of Old Common Stock under the Warrant Agreement, to be dated the Restructuring Date, between the Company and the Warrant Agent. The following description of such provisions does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the detailed provisions of the Warrant Agreement, a copy of which is attached to the Company's Registration Statement as Exhibit 10.52. Stockholders may request a copy of the Warrant Agreement by contacting Todd Kahn, General Counsel and Executive Vice President of the Company, at (212) 221-7500. Issue.........................Upon consummation of the Exchange Restructuring, up to 2,216,979 Warrants will be issued to Stockholders which, after giving effect to the Reverse Split, will represent the right to purchase 10% of the issued and outstanding shares of New Common Stock (on a fully diluted basis). Each Warrant will be exercisable for a period of seven years from the Restructuring Date and shall be exercisable for one share of New Common Stock, subject to adjustment. Exercise Price................Each Warrant will be exercisable at the Exercise Price of $6.2648 per share of New Common Stock. The Exercise Price and the number of shares of New Common Stock purchasable upon exercise of the Warrants are both subject to adjustment in certain cases referred to below. Stockholders will receive, for each share of Old Common Stock, .14814815 Warrants exercisable, in the aggregate and based upon the number of shares of Old Common Stock issued and outstanding as of the Record Date, for 2,216,979 shares of New Common Stock, constituting 10% of the issued and outstanding shares of New Common Stock immediately after giving effect to the Exchange Restructuring (on a fully diluted basis). No Rights Generally as Stockholders................No holder of Warrants will be entitled to any rights generally as a Stockholder of the Company unless and until such holder has obtained shares of New Common Stock upon the exercise of the Warrants for New Common Stock. Stockholders will not be entitled to receive Warrants unless and until they exchange their Old Common Stock for New Common Stock. Adjustment of Exercise Price and Number of Shares of New Common Stock Obtainable Upon Exercise...............The number of shares of New Common Stock obtainable upon exercise of each Warrant, and correspondingly the Exercise Price, will be proportionately adjusted pursuant to standard antidilution provisions at any time the Company pays stock dividends, subdivides, combines or reclassifies its New Common Stock; distributes evidences of indebtedness or assets of the Company, or rights for such assets; issues New Common Stock for less than market value; issues options, warrants or other securities convertible for New Common Stock for less than market value; or effects similar dilutive transactions. SUMMARY OF NEW CIT CREDIT AGREEMENT The Company intends to enter into a New Credit Agreement, effective as of the Restructuring Date, which will replace the Company's current working capital facility under the Credit Agreement. From the beginning of Fiscal 1998, the Company received and reviewed various proposals for a New Credit Agreement which were submitted by CIT as well as various other prospective lenders. After reviewing the proposals for a New Credit Agreement received from the various lenders, and conducting extensive negotiations with certain of the lenders who submitted proposals, the Company determined that the proposal submitted by CIT contained the most advantageous terms and conditions. As a result, the Company entered into the CIT Commitment Letter, which sets forth the principal terms and conditions of an agreement for the New CIT Credit Agreement for a $140 million secured credit facility that the Company intends to enter into on the Restructuring Date. Pursuant to the CIT Commitment Letter, the New CIT Credit Agreement will provide for a general working capital facility, in the form of direct borrowings and letters of credit, up to $125,000,000, subject to an asset-based borrowing formula. The New CIT Credit Agreement will also provide for a $15,000,000 term loan facility. As collateral for borrowings under the New CIT Credit Agreement, the Company will grant to CIT a security interest in substantially all of the assets of the Company. The New CIT Credit Agreement will have an initial term commencing on the Restructuring Date and continuing through and including December 31, 2001. The New CIT Credit Agreement will also provide, among other things, that (i) the Company will be charged an interest rate on direct borrowings of .25% in excess of the prime rate of The Chase Manhattan Bank, N.A. or 2.25% in excess of the London Late Eurodollar Rate; and (ii) CIT may, in its sole discretion, make loans to the Company in excess of the borrowing formula. Pursuant to the CIT Commitment Letter, the New CIT Credit Agreement will also provide that the $15 million term loan portion of the facility shall be repaid based upon a five year amortization schedule in consecutive monthly installments, commencing on the first day of the month immediately following the date six months after the closing of the New CIT Credit Agreement and continuing thereafter with the final installment in the amount of the then remaining balance of the term loan, together with all unpaid and accrued interest thereon, due and payable on December 31, 2001. The CIT Commitment Letter provides that the New CIT Credit Agreement will contain financial covenants ("Maintenance Covenants") as to (i) minimum tangible net worth, (ii) maximum net loss, (iii) minimum interest coverage ratio, and (iv) maximum capital expenditures. Pursuant to the CIT Commitment Letter, there will be no other Maintenance Covenants contained in the New CIT Credit Agreement. The Company believes that the New CIT Credit Agreement will also contain restrictive covenants and events of default similar to those that are in the existing Credit Agreement. For a description of those restrictive covenants and events of default, see "DESCRIPTION OF CERTAIN EXISTING INDEBTEDNESS OF THE COMPANY--Revolving Credit Agreement." Pursuant to the CIT Commitment Letter and in accordance with the Twelfth Amendment, no closing or facility fees will be charged to the Company by CIT in consideration of the execution and delivery of the New CIT Credit Agreement. The Company believes that the terms and conditions of the New CIT Credit Agreement set forth in the CIT Commitment Letter are significantly more favorable than those currently existing under the Credit Agreement with CIT. Moreover, the Company also believes that the New CIT Credit Agreement will be adequate to permit the Company to operate its business in accordance with the Three-Year Business Plan. The execution of the New CIT Credit Agreement is subject to various conditions, including, but not limited to, consummation of the Restructuring by no later than November 30, 1998. There is no assurance that such conditions will be satisfied or that the New CIT Credit Agreement will be executed. In addition, under the Letter Agreement, the New CIT Credit Agreement must be on terms and conditions reasonably satisfactory to Magten, Apollo and the Company. SUMMARY OF REGISTRATION RIGHTS AGREEMENT In connection with the Restructuring, the Company will also enter into, on the Exchange Restructuring Date, a registration rights agreement (the "Registration Rights Agreement"). The following description of such provisions does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the detailed provisions of the Registration Rights Agreement, a copy of which is attached to the Company's Registration Statement as Exhibit 10.51. Stockholders may request a copy of the Registration Rights Agreement by contacting Todd Kahn, General Counsel and Executive Vice President of the Company, at (212) 221-7500. Under the terms and conditions of the Registration Rights Agreement, the Company must use commercially reasonable efforts to register the New Common Stock pursuant to a "shelf-registration" and to keep such shelf registration continuously effective for three years (subject to a two-year extension of such period to the extent that a registration statement on Form S-3 is available to the Company at the end of such initial three year period), subject to the right to suspend the use of the prospectus constituting part of such registration statement for designated corporate purposes. Thereafter, holders who did not resell New Common Stock during the three-year period, but whose resales would have been covered by the registration statement, will be entitled to exercise, over a two-year period, up to three demand registrations and will be entitled to piggyback registration rights as well during such period. In the event that the shelf registration does not become effective within one hundred days after the date that the registration statement is filed, holders whose resales would have been covered by the registration statement will be entitled to exercise, over a two-year period, up to four demand registrations and will be entitled to piggyback registration rights as well during such period. See "DESCRIPTION OF REGISTRATION RIGHTS AGREEMENT." SUMMARY OF RIGHTS PLAN The Company is a party to a shareholder rights plan, dated December 8, 1987, as amended on December 10, 1997 (the "Rights Plan"), which provides for a dividend distribution of one right (collectively, the "Rights") for each share of Old Common Stock to holders of record of the Old Common Stock at the close of business on December 23, 1997. With certain exceptions, the Rights will become exercisable only in the event that an acquiring party accumulates 20 percent or more of the Company's voting stock, or if a party announces an offer to acquire 30 percent or more of such voting stock. Each Right, when exercisable, will entitle the holder to buy one-hundredth of a share of the Company's Series A Preferred Stock at a price of $30 per right or, upon the occurrence of certain events, to purchase either common stock of the Company or shares in an Acquiring Entity (as defined in the Rights Plan) at half the market value thereof. The Company will generally be entitled to redeem the Rights at a redemption price of $0.03 per Right at any time until the 10th day following the acquisition of a 20 percent position in its shares of Old Common Stock. In July 1993, the Rights Plan was amended to provide that an acquisition or offer by Apollo, or any of Apollo's Subsidiaries (as defined in the Rights Plan), will not cause the Rights to become exercisable. Pursuant to the December 10, 1997 amendment to the Rights Plan, the expiration date of the Rights was extended to December 23, 2002. On [__________], 1998, in connection with the Restructuring and consistent with the terms of the Letter Agreement, the Company amended the Rights Plan to provide, among other things, that the Rights will expire under the Rights Plan immediately prior to consummation of the Restructuring. See "DESCRIPTION OF RIGHTS PLAN." TAX OPINION The Company has received an opinion from Fried, Frank, Harris, Shriver and Jacobson to the effect that, subject to the assumptions and limitations set forth therein, the discussions under the sections entitled "Certain Federal Income Tax Considerations: Stockholders" in the Proxy Statement/Prospectus and "Certain Federal Income Tax Considerations: Noteholders" in the Exchange Restructuring Prospectus describe to Noteholders and Stockholders, respectively, the material federal income tax consequences of implementing the Restructuring by means of the Exchange Restructuring or the Prepackaged Restructuring. Under both the Exchange Restructuring and the Prepackaged Restructuring, except with respect to cash received in lieu of fractional shares, if any, (i) Stockholders should not recognize any gain or loss in the transaction, and (ii) Noteholders should also recognize no gain or loss, except to the extent New Common Stock received is attributable to accrued but unpaid interest on the Senior Notes. The Company will not recognize any cancellation of indebtedness income under the Prepackaged Restructuring, while it may recognize some cancellation of indebtedness income under the Exchange Restructuring. The Company will undergo an ownership change under Section 382 of the Code under both the Exchange Restructuring and the Prepackaged Restructuring and, as a result, will be limited in its use of NOLs on a going forward basis, as is discussed in greater detail herein. A copy of the tax opinion is attached to the Company's Registration Statement as Exhibit 8.1 SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION Set forth below are summary consolidated historical financial data of the Company. The summary financial data for each of the years in the five year period ended January 3, 1998 have been derived from the audited Consolidated Financial Statements of the Company. The summary financial data for the six month periods ended July 4, 1998 and June 28, 1997 have been derived from the unaudited financial statements of the Company and include all adjustments of a normal recurring nature which are necessary to present fairly such financial statements. The data presented below is qualified by, and should be read in conjunction with, the Consolidated Financial Statements and related notes thereto, and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The Company's fiscal year ends on the Saturday closest to December 31.
(Amounts in thousands except share, per share and ratio data) For the Six Months Ended For the Fiscal Year Ended ------------------------ ------------------------- July 4, June 28, Jan. 03, Dec. 28, Dec. 30, Dec. 31, Jan. 1, 1998 1997 1998 1996 1995 1994 1994 (52 Weeks) (52 Weeks) (52 Weeks) (52 Weeks) (52 Weeks) --------------- --------------- ----------- ----------- ------------ ----------- ---------- Continuing Operations: Net sales $159,343 $169,601 $396,832 $417,711 $485,825 $398,990 $ 379,012 Reversal of /(Provision for) Restructuring costs (a) 160 1,164 (2,066) (11,730) (3,550) - (5,500) Income/(loss) from continuing operations (6,835) (9,540) (10,722) (8,958) (362) 3,398 7,865 Discontinued Operations: (e) - Loss from operations, net of income taxes - (8,136) (8,136) (365) (136) (9,639) (638) Estimated loss on disposal, net of income taxes - (580) (1,330) - - (1,796) - Reversal of estimated loss on disposal, net of income taxes - - - - - - 11,772 Extraordinary gain (b) - 600 2,100 - 1,000 63 24,707 Net income/(loss)(a) (6,835) (17,656) (18,088) (9,323) 502 (7,865) 43,706 Basic earnings/(loss per share: Earnings/(loss) per share from continuing operations before extraordinary gain $ (.45) $ (.68) $ (0.71) $ (0.60) $ (0.02) $ (0.23) $ 1.18 Earnings/(loss) per share from discontinued operations - (.58) (0.62) (0.02) (0.01) (0.76) 1.68 Earnings per share from extraordinary gain - .04 0.14 - 0.06 - 3.72 Basic earnings/(loss) per share (a) (.45) (1.17) (1.19) (0.62) 0.03 (0.53) 6.58 Diluted earnings/(loss) per share: Earnings/(loss) per share from continuing operations before extraordinary gain $ (.45) $ (.68) $ (0.71) $ (0.60) $ (0.02) $ 0.23 $ 1.10 Earnings/(loss) per share from discontinued operations - (.58) (0.62) (0.02) (0.01) (0.76) 1.57 Earnings per share from extraordinary gain - .04 0.14 - 0.06 - 3.48 Diluted earnings/(loss) per share (a) (.45) (1.17) (1.19) (0.62) 0.03 (0.53) 6.15 Cash dividends per share - - - - - - - Weighted Average Shares: Shares used in computing basic earnings per share 15,170 15,108 15,139 15,078 15,008 14,954 6,638 Add - Common stock equivalents (d) (d) (d) (d) 110 (d) 465 Shares used in computing diluted earnings per share 15,170 15,108 15,139 15,078 15,118 14,954 7,103 At End of Period: Current assets $ 158,808 $ 168,929 $148,899 $150,986 $163,799 $172,234 $ 161,375 Total assets 242,289 256,635 233,377 235,251 253,970 266,157 251,946 Current liabilities (c) 201,481 100,190 185,692 59,566 61,704 71,104 44,427 Long-term debt (c) - 104,879 - 106,231 110,040 109,908 111,851 Deferred liabilities 5,340 8,453 5,382 8,863 11,373 13,479 16,766 Working capital/(deficiency) (42,673) 68,739 (36,793) 91,420 102,095 101,130 116,948 Current ratio 0.8:1 1.7:1 0.8:1 2.5:1 2.7:1 2.4:1 3.61:1 Shareholders' equity $ 35,468 $ 43,113 $ 42,303 $ 60,591 $ 70,853 $ 71,666 $ 78,902 Book value per share $ 2.34 $ 2.85 $ 2.79 $ 4.01 $ 4.71 $ 4.78 $ 5.34 Number of shares outstanding 15,170 15,108 15,170 15,094 15,041 15,008 14,781 (a) Includes, for the six month periods ended July 4, 1998 and June 28, 1997, a reversal of a previously recorded restructuring provision of $160 and $1,164, respectively, related to the excess portion of net liabilities set up for the closure of all retail outlet stores other than Perry Ellis outlet stores and the closure of the J.J. Farmer sportswear product line, respectively; for the year ended January 3, 1998, a provision of $2,066 (14 cents per share; tax benefit not available) for restructuring costs principally related to (i) $3,530 related to the decision in the fourth quarter to close all retail outlet stores other than Perry Ellis outlet stores and (ii) the reversal of previously recorded restructuring provisions of $1,464, primarily resulting from the settlement of liabilities for less than the carrying amount, resulting in the reversal of the excess portion of the provision; for the year ended December 28, 1996, a provision of $11,730 (78 cents per share; tax benefit not available) for restructuring costs principally related to (i) the write-off of goodwill and the write-down of other assets for a product line which has been put up for sale, (ii) the write-off of certain assets and accrual for future royalties for a licensed product line and (iii) employee costs related to closing certain facilities; for the year ended December 30, 1995, a provision of $3,550 (24 cents per share; tax benefit not available) for restructuring costs principally related to (i) fixed asset write-downs at locations to be closed and (ii) inventory markdowns for discontinued product lines; and for the year ended January 1, 1994, a provision of $5,500 (Basis loss per share of 83 cents; tax benefit not available) for restructuring costs principally related to the costs incurred in connection with the closure of certain unprofitable operations, including (i) inventory markdowns associated with those product lines and (ii) fixed asset write-downs at closed locations. (b) Includes, for the six months period ended June 28, 1997 a gain of $600 for the reversal of excess liabilities previously provided for the anticipated settlement of claims arising from the prior chapter 11 proceedings; for the year ended January 3, 1998, a gain of $2,100 (14 cents per share) related to the reversal of excess liabilities previously provided for the anticipated settlement of claims arising from the Chapter 11 proceeding; for the year ended December 30, 1995, a gain of $1,000 (6 cents per share) related to the reversal of excess liabilities previously provided for the anticipated settlement of claims arising from the Chapter 11 proceeding; for the year ended December 31, 1994, a gain of $63 (no per share effect) related to the purchase and retirement of a portion of the Senior Notes at a price below the principal amount thereof; and for the year ended January 1, 1994, a gain of $24,707 (basic earnings per share of $3.72) related to the settlement and anticipated settlement of claims arising from the Chapter 11 proceeding. (c) At July 4, 1998 and January 3, 1998, long-term debt of $104,879 had been classified as a current liability. See Note 1 to the Consolidated Financial Statements at page F-6 and page F-26 of the Company's Registration Statement of which this Proxy Statement/Prospectus is a part. (d) Common stock equivalents have not been included in these periods as their inclusion would be anti-dilutive to the calculation. (e) 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 in 1997 was $8,136, which included a charge of $4,459 for the write-off of goodwill. Net sales of the division were $2,822, $20,408 and $15,696 in 1997, 1996 and 1995, respectively. Additionally, in 1997, the Company recorded a charge of $1,330 to accrue for expected operating losses during the phase-out period through March 1998. No income tax benefits have been allocated to the division's 1997, 1996 and 1995 losses. In February 1995, the Company discontinued the operations of the Vera Scarf division, which imported and marketed women's scarves. The loss from operations of the division in 1994 was $9,639, which included a fourth quarter charge of $9,004 for the write-off of goodwill and other intangible assets. Net sales of the division were $1,673 and $5,087 in 1995 and 1994, respectively. Additionally, in 1994 the Company recorded a fourth quarter charge of $1,796 to accrue for expected operating losses during the phase-out period through June 1995. No income tax benefits have been allocated to the division's 1994 loss.
CAPITALIZATION SUMMARY The following table sets forth the unaudited historical capitalization of the Company as of April 4, 1998 and the unaudited pro forma consolidated capitalization of the Company after giving effect to the Exchange Restructuring as if the Exchange Restructuring had occurred on July 4, 1998. The Exchange Restructuring transactions reflect (i) the issuance of 18,456,350 shares, after giving effect to the Reverse Split, of New Common Stock to Noteholders, (ii) the issuance of 1,517,100 shares of New Common Stock to Stockholders, after giving effect to the Reverse Split, which includes 1,496,461 shares of New Common Stock to be issued upon consummation of the Restructuring and 20,639 shares of New Common Stock which are issuable to settle claims asserted in the 1990 Chapter 11 Case, and (iii) the issuance of Warrants representing the right to purchase up to 2,216,979 shares, after giving effect to the Reverse Split, of New Common Stock to Stockholders. The Unaudited Pro Forma Consolidated Balance Sheet as of July 4, 1998 includes pro forma adjustments as if the Exchange Restructuring had been completed on that date. This table should be read in conjunction with the "Summary Historical Consolidated Financial Information," "Unaudited Pro Forma Financial Statements," the unaudited condensed consolidated interim financial statements for the six months ended July 4, 1998 and the Consolidated Financial Statements for the year ended January 3, 1998 and the notes thereto included elsewhere in this Proxy Statement/Prospectus. (Unaudited) July 4, 1998 --------------------- Actual Pro Forma -------- ----------- ($ in thousands) Cash and cash equivalents................................$ 1,160 $ 1,160 Long-term debt, including current portion: Senior Notes...........................................$104,879 $ -- -------- -------- Total long-term debt................................ 104,879 -- Stockholder's equity: Common stock (15,405 actual shares outstanding (inclusive of treasury stock and shares issuable to settle claims); 19,973 pro forma shares outstanding)... 15,405 19,973 Additional paid-in capital............................. 107,249 206,860 Deficit................................................ (82,100) (79,283) Accumulated other comprehensive income................. (3,472) (3,472) Less-treasury stock, at cost-234 shares................ (1,614) -- --------- -------- Total stockholder's equity.......................... 35,468 144,078 --------- -------- Total capitalization............................. $140,347 $144,078 ======== ======== SUMMARY OF RISK FACTORS Under the Restructuring, the Stockholders would give up their shares of Old Common Stock in exchange for New Common Stock and Warrants. There are certain risks associated with the holding of New Common Stock and Warrants. Prior to deciding whether to (a) vote on the Restructuring Proposals and/or (b) vote on the Prepackaged Plan, each Stockholder should carefully consider all of the information contained in this Proxy Statement/Prospectus, especially the factors outlined and described below. RISK FACTORS RELATING TO THE EXCHANGE RESTRUCTURING AND THE PREPACKAGED RESTRUCTURING Stockholders should consider that (a) in the event that, for any reason, the Restructuring is not consummated, the Noteholders may accelerate the outstanding indebtedness under the Senior Notes, (b) upon completion of the Restructuring, the issuance of the New Common Stock will result in significant dilution of the existing equity interests of the Stockholders represented by the Old Common Stock, (c) there can be no assurances that an active market for the Warrants or the New Common Stock will develop, continue to exist, or the price of the Warrants or the New Common Stock will not be volatile, (d) the Company is currently highly leveraged and, once the Restructuring is consummated, the Company will have long-term indebtedness outstanding under the term loan portion of the Company's working capital facility, (e) economic, market or other conditions (including, but not limited to, the volatility of the men's apparel industry) have affected the Company's historical performance and may adversely affect cash flow, sales and profits in the future and there can be no assurance that such conditions will not adversely affect the Company's ability to meet its financial projections developed from the Three-Year Business Plan, (f) market forces, such as interest rates, affect the value of securities and are influenced by conditions beyond the Company's control, (g) the Company's capital expenditure levels assumed in preparation of the projected financial data contained herein may be inadequate to maintain the Company's long-term competitive position; (h) the Company is restricted in its ability, among other restrictions under the Credit Agreement, to declare and pay cash dividends on its common equity, and those and other restrictions should continue after consummation of the Exchange Restructuring under the New Credit Agreement, (i) if certain of the major suppliers, licensors, manufacturers and vendors that the Company currently deals with were to change the terms or credit limits or product availability that it currently extends to the Company, it could have a significant negative impact on the Company's sales, cash position and liquidity, (j) the Company is subject to the risk of increased competition, which could affect its sales volume, pricing and margins, (k) there are certain Federal income tax considerations with respect to the Restructuring, including the Company's net operating loss carryovers being reduced or subject to limitations on use, although such reduction or limitation would be greater under the Exchange Restructuring than under the Prepackaged Restructuring (see "DISCUSSION OF RISK FACTORS -- Limitation on Use of Net Operating Losses"), and (l) the Company is not in compliance with the continuing listing requirements of the NYSE, and de-listing from the NYSE could adversely affect the liquidity of the market for their shares of New Common Stock and the Warrants. ADDITIONAL RISK FACTORS RELATING TO THE PREPACKAGED RESTRUCTURING Stockholders should consider that (a) commencement of bankruptcy proceedings, even if only to confirm the Prepackaged Plan, could adversely affect the relationship between the Company and its subsidiaries, licensors, licensees, employees, customers and suppliers which, in turn, could adversely affect the Company's ability to complete the Prepackaged Restructuring or obtain confirmation of the Prepackaged Plan, (b) the Prepackaged Plan might not be confirmed by the Bankruptcy Court, even if all classes of impaired creditors and equity interest holders accept the Prepackaged Plan, and (c) there can be no assurance that the Bankruptcy Court will decide that the Proxy Statement/Prospectus meets the disclosure requirements of the Bankruptcy Code. For a discussion of certain risk factors that should be considered in connection with voting on the Restructuring Proposals and the Prepackaged Plan, see "DISCUSSION OF RISK FACTORS." DISCUSSION OF RISK FACTORS Investment in the New Common Stock and Warrants involves a high degree of risk. Prior to deciding whether to (a) vote on the Restructuring Proposals and/or (b) vote to accept the Prepackaged Plan, each Stockholder should carefully consider all of the information contained in this Proxy Statement/Prospectus, especially the following risk factors. RISK OF NONCONSUMMATION OF THE RESTRUCTURING If holders of at least 25% in aggregate principal face amount of the Senior Notes accelerate all outstanding indebtedness under the Senior Notes pursuant to the terms of the Indenture, such an acceleration of the outstanding indebtedness under the Senior Notes could result in the Company becoming subject to a proceeding under the Federal bankruptcy laws. As contemplated by the terms of the Letter Agreement, Magten has, in accordance with Section 6.5 of the Indenture, caused a written direction to be provided to the Trustee to forbear during the term of the Letter Agreement from taking any action under the Indenture in connection with the failure by the Company to make the interest payment on the Senior Notes that was due and payable on March 2, 1998. However, there is no assurance that the holders of 25% or more in principal amount of the Senior Notes will not decide to accelerate the outstanding indebtedness under the Senior Notes prior to consummation of the Restructuring or if the Stockholders fail to approve the Restructuring. COMPANY RESULTS OF OPERATIONS SUBJECT TO VARIABLE INFLUENCES; INTENSE COMPETITION The Company's business is sensitive to changes in consumer spending patterns, consumer preferences and overall economic conditions. The Company is also subject to fashion trends affecting the desirability of its merchandise. 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 significantly greater financial resources than the Company. The Company also competes for private label programs with the internal sourcing organizations of its own customers. The Company's future performance will be subject to such factors, most of which are beyond its control, and there can be no assurance that such factors would not have a material adverse effect on the Company's results of operations and financial condition. DILUTION Upon completion of the Restructuring, the Company will issue 18,456,350 shares of New Common Stock directly to exchanging Noteholders and 1,496,461 shares of New Common Stock to Stockholders, and will reserve 2,216,979 shares of New Common Stock for issuance upon exercise of the Warrants. The issuance of 18,456,350 shares to Noteholders under the Issuance will result in a significant dilution of the existing equity interests of the Stockholders (as a percentage of outstanding shares of common stock) which could adversely affect the market price and the value of the New Common Stock. Immediately following the consummation of the Exchange Restructuring or the Prepackaged Restructuring, as applicable, (i) the 18,456,350 shares of New Common Stock issued directly to Noteholders will, after giving effect to the Restructuring, represent 92.5% of the total outstanding shares of New Common Stock (excluding the Warrant Shares) and (ii) the 1,496,461 shares of New Common Stock issued directly to Stockholders will, after giving effect to the Restructuring, represent 7.5% of the total outstanding shares of New Common Stock (excluding the Warrant Shares), each based on the number of shares of Old Common Stock outstanding as of the Record Date. Upon consummation of the Restructuring, holders of Old Common Stock will also receive, for each share of Old Common Stock held, .14814815 Warrants with an exercise price of $6.2648 per share (subject to adjustment). Based upon the current market price of the Old Common Stock (after giving effect to the Reverse Split), the Warrants may be "out of the money" immediately following the Restructuring, and no assurance can be made that the Warrants will ever be "in the money." If all Warrants are exercised, the percentage of New Common Stock held by exchanging Noteholders would be reduced from 92.5% to 83.25%, and the percentage of New Common Stock held by exchanging Stockholders would be reduced from 7.5% to 6.75% (assuming that none of the Warrants are held by the Stockholders at the time the Warrants are exercised). See "PURPOSE OF THE RESTRUCTURING." In addition, there can be no assurance that the Company will not need to issue additional Common Stock in the future in order to achieve its business plan or if it does not achieve its projected results, which could lead to further dilution to holders of the Company's Common Stock. LIMITATION ON USE OF NET OPERATING LOSSES As a result of the receipt by Noteholders of New Common Stock in exchange for the Senior Notes pursuant to the Restructuring, the Company will undergo an "ownership change" for Federal income tax purposes. Accordingly, the Company will be limited in its ability to use its net operating loss carryovers and certain tax credit carryforwards to offset future taxable income. Under the Exchange Restructuring, the limitation imposed upon the Company's use of its net operating loss carryovers would be more restrictive than under the Prepackaged Restructuring. See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS: STOCKHOLDERS." In general, under the Exchange Restructuring the Company will be subject to an annual limitation on the use of its NOL's generated prior to the ownership change. This annual limitation is determined by multiplying the value of the Company immediately before the ownership change by the adjusted federal long-term tax exempt interest rate published periodically by the federal government. Based on an estimated market capitalization of $10,000,000 and a federal long term interest rate of 5%, the annual limitation to which the Company's NOL's would be subject is approximately $500,000 under the Exchange Restructuring. Since there is a 15 year carryover period applicable to these NOL's, the maximum amount of NOL that the Company could use is $7,500,000. Under the Prepackaged Restructuring, the Company would be able to compute the annual limitation by using the value of the Company after considering the increase in value attributable to the retirement of the Senior Notes resulting from the transaction. The appropriate post-ownership change value which may be used in computing the annual limitation will not be known until the Prepackaged Restructuring is complete. Assuming the value of the Company increases to $120,000,000 as a result of the cancellation of creditors' claims, the annual limitation to which the Company's NOL's would be subject is approximately $6,000,000 under the Prepackaged Restructuring. Accordingly, the Company would be able to utilize $90,000,000 of NOL over the applicable 15 year carryover period. Currently, after considering the impact of an ownership change occurring in 1993, the Company has approximately $130,000,000 of NOL's that may be used to offset future taxable income. If the Exchange Restructuring occurs, the Company would be able to offset future taxable income with at most approximately $7,500,000 of NOL's, resulting in a loss of approximately $122,500,000 of NOL's. If, on the other hand, the Prepackaged Restructuring occurs, the Company would be able to offset future taxable income with, at most, approximately $90,000,000 of NOL's, resulting in a loss of approximately $40,000,000 of NOL's. LACK OF TRADING MARKET FOR WARRANTS AND NEW COMMON STOCK; VOLATILITY; POTENTIAL DE-LISTING OF THE NEW COMMON STOCK There can be no assurance that an active market for the Warrants and/or the New Common Stock will develop or, if any such market does develop, that it will continue to exist. Further, the degree of price volatility in any such market that does develop may be significant. Accordingly, no assurance can be given as to the liquidity of the market for any of the Warrants and/or the New Common Stock or the price at which any sales may occur. The Company has fallen below the continued listing criteria of the NYSE for net tangible assets available to common stock together with average net income after taxes for the past three years. However, the NYSE has reviewed the terms and conditions of the Restructuring set forth herein and has informed the Company that it will continue to list the Company's common stock during the period prior to consummation of the Restructuring and intends to list the Company's common stock from and after the Restructuring Date. However, the NYSE has advised the Company that after consummation of the Restructuring, the NYSE intends to monitor the performance of the Company based upon the Projections set forth herein to ensure compliance with the NYSE's original listing standards in respect of the New Common Stock. The Company believes that as a result of the consummation of the Restructuring, following the Restructuring Date, the Company will be able to return to compliance with the original listing standards in respect of the New Common Stock and the Warrants and that the New Common Stock and the Warrants will continue to be listed for trading on the NYSE. However, the NYSE has advised the Company that the Company's failure to meet the Projections following the Restructuring could result in the suspension from trading and subsequent delisting of the New Common Stock. If the common stock of the Company were de-listed, there could be an adverse effect on the liquidity of the market for such common stock. Should the Restructuring be consummated, the Company expects to be able to return to full compliance with all of the NYSE's requirements for continued listing on the NYSE. See "UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS." Moreover, the NYSE has advised the Company that if the Company seeks to consummate the Restructuring by means of the Prepackaged Restructuring but is unable to do so, the Old Common Stock is subject to being delisted. POSSIBLE VOLATILITY OF STOCK PRICE; EFFECT OF RESTRUCTURING ON STOCK PRICE Since March 3, 1998, the market price of the Old Common Stock has experienced some degree of volatility. There can be no assurance that such volatility will not continue for the New Common Stock or become more pronounced. In addition, the stock market has recently experienced, and is likely to experience in the future, significant price and volume fluctuations which could materially adversely effect the market price of the New Common Stock without regard to the operating performance of the Company. The Company believes that factors such as the Restructuring, quarterly fluctuations in the financial results of the Company or its competitors and general conditions in the industry, the overall economy, the financial markets and other risks described herein could cause the price of the New Common Stock to fluctuate substantially. Even though the Company expects the Reverse Split to "normalize" the post-restructuring trading of the New Common Stock, no assurances can be made that the Reverse Split will "normalize" post-restructuring trading of the New Common Stock. If post-restructuring trading is not "normalized," the New Common Stock may experience significant price and volume fluctuations which could materially adversely effect the market price of the New Common Stock. CONCENTRATED OWNERSHIP OF NEW COMMON STOCK Following consummation of the Restructuring, the ownership of the New Common Stock will likely be significantly more concentrated than was the ownership of the Old Common Stock. Assuming that the current holders of the Senior Notes do not significantly change prior to the consummation of the Restructuring, the Company will be controlled by a few stockholders who are the current holders of the Senior Notes. These holders of New Common Stock may seek to influence the direction of the Company. For instance, following consummation of the Restructuring, Magten will own in excess of 65% of the issued and outstanding shares of New Common Stock, subject to dilution for the Warrant Shares. As a result, Magten may have the ability to control the Company's management, policies and financing decisions, to elect a majority of the members of the Company's Board and to control the vote on all matters coming before the stockholders of the Company. Pursuant to the Letter Agreement, the Company has agreed that three to five out of seven to nine members of the initial new Board members will be nominated by Magten, subject to consultation with the Company and other Noteholders who may come forward, for election to the Board following the Restructuring. See "INFORMATION REGARDING NOMINEES." The Company does not have complete information regarding the beneficial ownership of the Senior Notes and is not aware of any stated intention by Magten or any agreement among Noteholders generally to seek to influence the direction of the Company or to otherwise act in concert following the Restructuring. There can be no assurance, however, that no such agreements exist. ABSENCE OF AND/OR RESTRICTIONS ON DIVIDENDS The Company did not pay any dividends on the Old Common Stock in 1995, 1996 or 1997 and does not anticipate paying dividends on the New Common Stock at any time in the foreseeable future. Moreover, the Credit Agreement places restrictions on the Company's ability to declare or pay cash dividends on the Old Common Stock and the Company believes that the New Credit Agreement will similarly restrict the payment of dividends on the New Common Stock. For a description of the limitations contained in the Credit Agreement, see "DESCRIPTION OF CERTAIN EXISTING INDEBTEDNESS OF THE COMPANY." HISTORY OF LOSSES; EFFECT OF TRANSACTION Although the Company was profitable for the fiscal year ended December 30, 1995, for the fiscal years ended December 31, 1994, December 28, 1996 and January 3, 1998, the Company reported net losses of $7,865,000, $9,323,000 and $18,088,000, respectively. The net losses were primarily attributable to the write-off of goodwill, the write-down of other assets, facility shut-downs and the closure of certain unprofitable operations. There can be no assurance that the Company will regain its profitability, or have earnings or cash flow sufficient to cover its fixed charges. See "SALANT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS" at F-2. CASH FLOW FROM OPERATIONS During the fiscal years ended December 28, 1996 and January 3, 1998, the Company had positive cash flow from operating activities of $17.1 million and negative cash flow from operating activities of $9.8 million, respectively. The fiscal 1996 figure reflects a $17.5 million reduction in inventories due to improved inventory management, and the effects of the implementation of a strategic business plan for the men's apparel group. The lower inventory balance was partially offset by an increase in accounts receivable, due to changes in the Company's factoring arrangements with CIT which reduced the amount of accounts receivable sold to CIT and the related factoring costs. The Fiscal 1997 figure reflects an operating loss of $10.7 million and an increase in accounts receivable of $5.7 million, offset by non-cash charges, such as depreciation and amortization, of $8.9 million. 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 should be adequate to meet the financing requirements it anticipates during the next twelve months provided that the Company consummates the Restructuring and closes a New Credit Agreement. See "DESCRIPTION OF NEW CIT CREDIT AGREEMENT." There can be no assurance, however, (i) that the Company will consummate the Restructuring, (ii) that the Company will be able to close a New Credit Agreement on favorable terms, or (iii) that future developments and general economic trends will not adversely affect the Company's operations and, hence, its anticipated cash flow. The Company's capital expenditure levels assumed in preparation of the projected financial data contained herein (see "PROJECTED CONSOLIDATED FINANCIAL INFORMATION") may be inadequate to maintain the Company's long-term competitive position depending on the demand for the Company's goods and as a result of competitive, regulatory and technological developments (including new market developments and new opportunities) in the Company's industry. DECLINES IN NET SALES AND GROSS PROFITS Sales of men's apparel decreased by $18.9 million, or 5.5%, in Fiscal 1997. This decrease resulted from (a) a $12.4 million reduction in sales of men's slacks, of which $8.4 million reflected the elimination of unprofitable programs and the balance was primarily due to operational difficulties experienced in the first quarter of Fiscal 1997 related to the move of manufacturing and distribution out of the Company's facilities in Thomson, Georgia, (b) a $5.7 million reduction in sales of men's sportswear, which included a $16.7 million reduction for the elimination of the company's J.J. Farmer and Manhattan sportswear lines, as offset by an $11.0 million increase in sales of Perry Ellis sportswear product, (c) a $5.1 million decrease in sales of men's accessories, primarily due to the slow-down of the novelty neckwear business and (d) a $4.7 million reduction in sales of certain dress shirt lines, which reflected the elimination of unprofitable businesses. The total sales reduction attributable to the elimination of unprofitable programs was $29.8 million. These sales decreases were partially offset by a $9.5 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, underwear and sportswear increased by $3.4 million, or 7.5%, in Fiscal 1997. This increase was primarily a result of the continuing expansion of the Joe Boxer children's product lines. Sales of the retail outlet stores division decreased by $5.4 million, or 19.8%, in Fiscal 1997. This decrease was due to (i) a decrease in the number of stores in the first 10 months of Fiscal 1997 and (ii) the decision in November 1997 to close all non-Perry Ellis outlet stores. The Company ceased to operate the non-Perry Ellis outlet stores in November 1997. The gross profit margin of the children's sleepwear and underwear segment declined as a result of (i) slowdown in sales of certain licensed products, requiring a greater percentage of off-price sales, as well as an increase in discounts and allowances, (ii) an increase in reserves for remaining inventory and (iii) higher distribution and product handling costs. The gross profit of the retail outlet stores decreased primarily as a result of inventory markdowns of $1.6 million (7.3% of net sales) related to the closing of the non-Perry Ellis stores. Excluding these inventory markdowns, the gross profit margin increased 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. RETAIL ENVIRONMENT The retail industry has experienced significant consolidation and other ownership changes resulting in a decrease in the number of retailers. In addition, 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 protection under the federal bankruptcy laws. In the future, other retailers in the United States and in foreign markets may consolidate, undergo restructurings or reorganizations, or realign their affiliations, any of which could decrease the number of stores that carry the Company's products or increase the ownership concentration within the retail industry. There can be no assurance that such changes would not have a material adverse effect on the Company's results of operations and financial condition. APPAREL INDUSTRY CYCLES AND OTHER ECONOMIC FACTORS The apparel industry historically has been subject to substantial cyclical variations, 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. SEASONALITY 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. In addition, the Company experiences seasonal fluctuations in its net sales and net income, with a disproportional amount of the Company's net sales and a majority of its net income typically realized during the fourth quarter. Net sales and net income are generally weakest during the first quarter. The Company's quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the Company's ability to source, manufacture and distribute its products. DEPENDENCE ON CERTAIN CUSTOMERS AND LICENSEES; EFFECT OF RESTRUCTURING ON LICENSES Certain of the Company's customers, including some under common ownership, have accounted for significant portions of the Company's gross revenues. In Fiscal 1997, approximately 17% of the Company's net sales were made to Sears, Roebuck & Co. ("Sears"), approximately 11% of the Company's net sales were made to Federated Department Stores, Inc. ("Federated") and approximately 10% of the Company's net sales were made to TJX Corporation ("TJX"). In 1996, approximately 13% of the Company's net sales were made to Sears. In 1996 and 1995, net sales to Federated represented approximately 11% and 12% of the Company's net sales, respectively. In 1995, approximately 11% of the Company's net sales were made to TJX. In 1995, approximately 13% of the Company's Children's Group's net sales were made to Dayton Hudson Corporation. No other customers accounted for more than 10% of the net sales of the Company or any of its business segments during 1995, 1996, or 1997. A decision by the controlling owner of a group of stores or any substantial customer, whether motivated by fashion concerns, financial difficulties, or otherwise, to decrease the amount of merchandise purchased from the Company or to cease carrying the Company's products could materially adversely affect the Company. In Fiscal 1997, approximately 44% of the Company's net sales was attributable to products sold under the Perry Ellis Portfolio by Perry Ellis and Perry Ellis America trademarks which are licensed to the Company under a series of license agreements with Perry Ellis International, Inc. ("PEI"). The license agreements contain renewal options which, subject to compliance with certain conditions contained therein, permit the Company to extend the terms of such license agreements. Assuming the exercise by the Company of all available renewal options, the license agreements covering men's apparel and accessories will expire on December 31, 2015. If the Company were unable to exercise its right to renew the agreements or the agreements were terminated by their terms, the resulting inability to sell products bearing a Perry Ellis trademark would have a material adverse affect on the Company. The Company has four material licenses with PEI. The earliest possible expiration of three of such licenses (i.e., the PEI dress shirt license, neckwear license and belt and suspender license) is December 31, 2000 (assuming that such date is not accelerated under the terms of the licenses); however, each of these licenses is renewable in the sole discretion of the Company until the year 2015. The Company is also the licensee under eleven license agreements with The Walt Disney Company ("Disney"). While the Disney licenses, in the aggregate, are material, no single Disney license is material to the Company's businesses. Certain of the Disney licenses expire as early as December 31, 1998. The Company's licensing agreements with PEI contain a "change of control" provision that provides PEI with certain rights upon the occurrence of a "change of control." Those rights include, among others, the right to terminate any or all of the licenses within two years after the occurrence of the change of control. The Company intends to seek confirmation from PEI that consummation of the Restructuring will not give rise to any rights of PEI under such change of control provision. The Company believes that if such confirmation is not obtained prior to the Restructuring Date, the Restructuring can, in any event, be consummated on the same terms and conditions without giving rise to any rights of PEI under such provision. In addition to the license agreements with PEI and Disney, the Company is also a party to several other license agreements. Certain of these other license agreements contain "change of control" provisions which may be triggered by the Restructuring, or otherwise contain provisions that enable the licensor to terminate the license or exercise other remedies thereunder as a result of the Restructuring. The Company intends to seek a waiver of any such provisions from the applicable licensors. However, there can be no assurance that any such waivers will be obtained, or to the extent such waivers are obtained, on what terms they would be granted. FOREIGN OPERATIONS AND SOURCING; IMPORT RESTRICTIONS During Fiscal 1997, approximately 12% of the products produced by the Company (measured in units) were manufactured in the United States, with the balance manufactured in foreign countries. Facilities operated by the Company accounted for approximately 75% of its domestic-made products and 37% of its foreign-made products; the balance in each case was attributable to unaffiliated contract manufacturers. In Fiscal 1997, approximately 47% of the Company's foreign production was manufactured in Mexico, approximately 18% was manufactured in Guatemala and approximately 12% was manufactured in the Dominican Republic. 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. As a result, the Company's operations would be significantly adversely affected by political instability resulting in the disruption of trade from the countries in which the Company's contractors or suppliers are located, the imposition of additional regulations relating to imports, the imposition of additional duties, taxes, and other charges on imports, decreases in quota levels or available quota allocations, significant fluctuations of the value of the dollar against foreign currencies (although predominately all of the Company's contracts are designated in U.S. dollars) or restrictions on the transfer of funds. The inability of a contractor to ship orders of the Company's products in a timely manner could cause the Company to miss the delivery date requirements of its customers for those items, which could result in cancellation of orders, refusal to accept deliveries, or a reduction in sales prices. Further, since the Company is generally unable to return merchandise to its suppliers, it could be faced with a significant amount of unsold merchandise, which could have a material adverse effect on the Company. There can be no assurance that such factors would not have a material adverse effect on the Company's results of operations. DEPENDENCE ON CONTRACT MANUFACTURING In Fiscal 1997, the Company produced 59% of all of its products (in units) through arrangements with independent contract manufacturers. The use of such contractors and the resulting lack of direct control could subject the Company to difficulty in obtaining timely delivery of products of acceptable quality. In addition, as is customary in the industry, the Company does not have any long-term contracts with its fabric suppliers or product manufacturers. While the Company is not dependent on one particular product manufacturer or raw materials 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. INFORMATION SYSTEMS AND CONTROL PROCEDURES 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 the Company's overall operations. The Company's current software systems, without modification, will be adversely affected by the inability of the systems to appropriately interpret date information after 1999. As part of the process of (i) improving the Company's IS to provide and enhance support to all operating areas and (ii) resolving year 2000 issues, the Company entered into a working agreement (the "EDS Agreement") with Electronic Data Systems Corporation ("EDS"). The EDS Agreement which constituted the initial phase of a long-term project to outsource the Company's IS and to remedy year 2000 issues. As part of this initial phase, the Company and EDS identified the ability of one of the two major enterprise systems in the Company to be modified to make such systems Year 2000 compliant and to migrate the operations of the Company to one enterprise system (the "System Conversion"). As a result of the ability to implement the System Conversion and after receiving the cost of outsourcing the IS function to EDS, the Company has determined not to outsource the IS functions to EDS. Instead, the Company will use internal resources for the System Conversion and other consultants for implementation of new software. The Company anticipates that the System Conversion, as well as the implementation of new software, will be completed by the first quarter of 1999. The Company anticipates that the cost of the System Conversion and new software will be approximately $10 million, to be incurred during 1998 and 1999. If the Company fails to complete such conversion in a timely manner, such failure will have a material adverse effect on the business, financial condition and results of operations of the Company. While the Company believes its current IS is generally adequate to support the Company's business operations, certain deficiencies relating to the age and design of the systems, including, without limitation, difficulties in planning, forecasting, allocating and measuring performance through an integrated financial system, may adversely affect the business operations of the Company in the near and long-term. There can be no assurance that the Company's efforts to improve upon and enhance its present IS will resolve or eliminate any such existing or potential deficiencies. As noted above, the Company has implemented a program designed to ensure that all the Company's software will manage and manipulate data involving the transition of dates from 1999 to 2000 without functional or data abnormality and without inaccurate results to such dates. Any failure on the part of the Company to ensure that any such software complies with year 2000 requirements could have a material adverse effect on the business, financial condition, and results of operations of the Company. Likewise, any failure on the part of suppliers or customers of the Company to implement a year 2000 compliance program could have a material adverse effect on the business, financial condition and results of operations of the Company if such lack of compliance interrupts the Company's daily business interactions and relationships with such suppliers or customers. LEVERAGE AND DEBT SERVICE As of July 4, 1998, the Company had outstanding total interest bearing indebtedness of approximately $157.1 million. The amount of indebtedness of the Company will be reduced by the principal amount of Senior Notes as a result of the Restructuring. The Company will continue to have annual fixed debt service requirements under the term loan portion of the New Credit Agreement. The Company expects that the New Credit Agreement will have a term loan component in the maximum principal amount of $15 million. See "DESCRIPTION OF NEW CIT CREDIT AGREEMENT." The ability of the Company to make principal and interest payments under the Company's working capital facility, including the term loan component, will be dependent upon the Company's future performance, which is subject to financial, economic and other factors affecting the Company, some of which are beyond its control. There can be no assurance that the Company will be able to meet its fixed charges as such charges become due. RESTRICTIVE COVENANTS The Credit Agreement contains certain restrictive covenants which impose prohibitions or limitations on the Company with respect to, among other things, (i) the incurrence of indebtedness, (ii) capital expenditures, (iii) the creation or incurrence of liens, (iv) the declaration or payment of dividends or other distributions on, or the acquisition, redemption or retirement of, any shares of capital stock of the Company, and (v) mergers, consolidations and sales or purchases of substantial assets. The Credit Agreement also requires that the Company, under certain circumstances, satisfy a maximum net loss test. Failure to comply with such covenants could result in a default under the Credit Agreement which could have a material adverse effect on the financial condition and results of operations of the Company. The Company currently anticipates that the New Credit Agreement will also contain certain restrictive covenants. See "DESCRIPTION OF NEW CIT CREDIT AGREEMENT." NEED FOR SUSTAINED TRADE SUPPORT The Company's ability to achieve sales growth and profitability includes significant reliance on continued support from its vendors. If the Company's major vendors reduce their credit lines or product availability to the Company, it could have a material adverse effect on the Company's sales, cash position and liquidity. IN ADDITION, IN CONNECTION WITH VOTING ON THE PREPACKAGED PLAN, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED BY THE STOCKHOLDERS: DISRUPTION OF OPERATIONS RELATING TO BANKRUPTCY FILING The Company's solicitation of acceptances of the Prepackaged Plan, or any subsequent commencement of the Chapter 11 Case, even in connection with the Prepackaged Plan, 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. Weakened operating results could adversely affect the Company's ability to obtain confirmation of the Prepackaged Plan or to avoid financial difficulties after consummation of the Prepackaged Plan. 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 Prepackaged Plan. PRIOR CHAPTER 11 FILINGS The Company has been a debtor in bankruptcy on two prior occasions. See "BUSINESS AND PROPERTIES OF THE COMPANY -- Bankruptcy Court Cases." The Company's first chapter 11 case was commenced on February 22, 1985. The plan of reorganization with respect to the first chapter 11 case was confirmed by the Bankruptcy Court on May 19, 1987 and was consummated on June 2, 1987. The Company's second chapter 11 case was commenced on June 27, 1990. The plan of reorganization with respect to the second chapter 11 case was confirmed by the Bankruptcy Court on July 30, 1993 and was consummated on September 20, 1993. As a result of the Company's two prior bankruptcies, the risks inherent in a subsequent chapter 11 case may be further exacerbated if the Company pursues the Restructuring by means of the Prepackaged Plan. CERTAIN RISKS OF NON-CONFIRMATION Even if the requisite acceptances are received, there can be no assurance that the Bankruptcy Court will confirm the Prepackaged Plan. A creditor or an interest holder might challenge the adequacy of the disclosure or the balloting procedures and results as not being in compliance with the Bankruptcy Code. Even if the Bankruptcy Court were to determine that the disclosure and the balloting procedures and results were appropriate, the Bankruptcy Court could still decline to confirm the Prepackaged Plan if it were to find that any statutory conditions to confirmation had not been met. Section 1129 of the Bankruptcy Code sets forth the requirements for confirmation and requires, among other things, a finding by the Bankruptcy Court that the confirmation of the Prepackaged Plan is not likely to be followed by a liquidation or a need for further financial reorganization and that the value of distributions to non-accepting creditors and interest holders will not be less than the value of distributions such creditors and interest holders would receive if the debtor were liquidated under Chapter 7 of the Bankruptcy Code. See "FEASIBILITY OF THE PREPACKAGED PLAN AND THE BEST INTERESTS OF THE CREDITORS TEST." There can be no assurance that the Bankruptcy Court will conclude that these requirements have been met, but the Company believes that the Bankruptcy Court should be able to find that the Prepackaged Plan will not be followed by a need for further financial reorganization and that non-accepting creditors and Interest Holders will receive distributions at least as great as would be received following a liquidation pursuant to Chapter 7 of the Bankruptcy Code. See "VOTING AND CONFIRMATION OF THE PREPACKAGED PLAN." Additionally, even if the required acceptances of each of Class 3 (i.e., Noteholders) and Class 6 (i.e., Stockholders) are received, the Bankruptcy Court might find that the Solicitation of votes or the Prepackaged Plan did not comply with the solicitation requirements made applicable by subsection 1126(b) of the Bankruptcy Code and Bankruptcy Rule 3018(b). In such an event, the Company may seek to resolicit acceptances, but confirmation of the Prepackaged Plan could be substantially delayed and possibly jeopardized. The Company believes that its Solicitation of acceptances of the Prepackaged Plan complies with the requirements of subsection 1126(b) of the Bankruptcy Code and Bankruptcy Rule 3018(b), that duly executed Ballots and Master Ballots will be in compliance with applicable provisions of the Bankruptcy Code and the Bankruptcy Rules, and that, if sufficient acceptances are received, the Prepackaged Plan should be confirmed by the Bankruptcy Court. The Company, however, expressly reserves the right not to file the Prepackaged Plan and to pursue other alternatives. Should the Bankruptcy Court fail to confirm the Prepackaged Plan after the Chapter 11 Case has been filed, the Company would then consider all financial alternatives available to it at the time, which may include an effort to sell in the Chapter 11 Case all or a part of the Company's business or an equity interest in the Company and the negotiation and filing of an alternative reorganization plan. Pursuit of any such alternative could result in a protracted and non-orderly reorganization with all the attendant risk of adverse consequences to its and its subsidiaries businesses, operations, employees, customers and supplier relations and their ultimate ability to function effectively and competitively. Even if the Prepackaged Plan is confirmed by the Bankruptcy Court, 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. The confirmation and consummation of the Prepackaged Plan are also subject to certain conditions. See "DESCRIPTION OF THE PREPACKAGED PLAN -- Conditions Precedent to Confirmation Order and Effective Date." If the Prepackaged Plan, or a plan determined by the Bankruptcy Court not to require resolicitation of acceptances by Classes, were not to be confirmed, it is unclear whether a reorganization could be implemented and what Holders of Claims and Interests would ultimately receive with respect to their Claims and Interests. If an alternative reorganization could not be agreed to, it is possible that the Company would have to liquidate its assets, in which case Holders of Claims and Interests could receive less than they would have received pursuant to the Prepackaged Plan. CERTAIN OTHER BANKRUPTCY CONSIDERATIONS TREATMENT OF THE WARRANTS In the event of a subsequent bankruptcy case involving the Company, the Warrants, which will be received by Holders of Old Common Stock in partial consideration for dilution of their ownership interest in the Company, would be treated as equity securities. Moreover, the Warrants may receive less favorable treatment than the New Common Stock in a subsequent bankruptcy case, because the equity interests in Reorganized Salant represented by the Warrants would not be so direct as the equity interests in Reorganized Salant represented by the New Common Stock. FAILURE TO FILE THE PREPACKAGED PLAN Absent the Restructuring, the Company does not believe it will be able to satisfy its debt obligations under the Senior Notes without a refinancing of its indebtedness under the Credit Agreement and/or the Senior Notes or an additional capital infusion and it is unlikely that the Company will be able to obtain such refinancing or capital infusion. If the Company determines that it is or will be unable to complete the Restructuring, the Company will consider all other available financial alternatives, including the sale of all or a part of the Company's business, the implementation of an alternative restructuring arrangement outside of bankruptcy, or the commencement of a Chapter 11 case without a preapproved plan of reorganization. There can be no assurance, however, that any alternative would be on terms as favorable to Holders of Senior Notes, Old Common Stock or General Unsecured Claims as the Restructuring. If the Exchange Restructuring is not consummated, but Ballots and Master Ballots containing votes to accept the Prepackaged Plan are received in sufficient amounts and numbers, in the Company's judgment, to confirm the Prepackaged Plan, the Company expects to (but expressly reserves the right not to) file a prepackaged Chapter 11 case and use such Ballots and Master Ballots to confirm the Prepackaged Plan. The Company believes that obtaining sufficient acceptances before commencing a bankruptcy case would be preferable from the point of view of its creditors, Stockholders and other constituents because such acceptances can reduce disputes during such a case concerning the reorganization of the Company and should, therefore, substantially reduce the time and costs of such a case, result in a larger distribution to the Company's creditors and Stockholders than would be available under a non-prepackaged reorganization under Chapter 11 of the Bankruptcy Code or a liquidation under Chapter 7 of the Bankruptcy Code (in the absence of other alternatives) and afford the Company the best opportunity to accomplish the Restructuring in a bankruptcy case. If the Exchange Restructuring is not consummated and the Company does not have the necessary acceptances from Holders of Interests to confirm the Prepackaged Plan, the Company might nevertheless file a petition for relief under Chapter 11 of the Bankruptcy Code and seek confirmation of the Prepackaged Plan notwithstanding the dissent of certain Holders of Interests. See "FEASIBILITY OF THE PREPACKAGED PLAN AND THE BEST INTERESTS OF CREDITORS TEST - Nonconsensual Confirmation." In such event, the Company would seek to satisfy the Bankruptcy Code standards for confirmation by means of a "cramdown" against such Holders of Interests. Alternatively, the Company may seek to accomplish an alternative restructuring of its capitalization and its obligations to its Stockholders and creditors and obtain their consent to any such restructuring plan with or without a pre-approved plan of reorganization or otherwise. See "ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PREPACKAGED PLAN." However, there can be no assurance that any alternative restructuring arrangement or plan would result in a reorganization of the Company other than a liquidation, or that any such reorganization would be on terms as favorable to the Holders of Claims and Holders of Interests as the terms of the Prepackaged Plan. There is a risk that distributions to Holders of Claims and Interests under a liquidation or under a protracted and non-orderly reorganization would be substantially delayed and diminished. For purposes of comparison with the anticipated distributions under the Prepackaged Plan, the Company has prepared an analysis of estimated recoveries in a liquidation under Chapter 7 of the Bankruptcy Code. See "RESTRUCTURING FINANCIAL CONSIDERATIONS -- Liquidation Analysis." A description of procedures followed and the assumptions and qualifications in connection with this Liquidation Analysis is set forth in the notes thereto. EFFECT ON OPERATIONS The Company believes that the Solicitation and any subsequent commencement of a Chapter 11 case in connection with the Prepackaged Plan should not materially adversely affect the Company's and its subsidiaries' relationships with customers, employees and suppliers, provided that the Company can demonstrate sufficient liquidity to continue to operate the business and a likelihood of success for the Prepackaged Restructuring in a reasonably short time frame. The Company believes that the Solicitation offers the most expeditious means to achieve the Prepackaged Restructuring. It is possible that despite the belief and intent of the Company, the Solicitation or any subsequent commencement of a Chapter 11 case could adversely affect the relationships between the Company, its subsidiaries and their employees, customers and suppliers. There is a risk that, due to uncertainty about the Company's future, (i) employees may be distracted from performance of their duties or more easily attracted to other career opportunities, (ii) customers may seek alternative sources of supply or require financial assurances of future performance and (iii) suppliers may restrict ordinary credit terms or require financial assurances of performance. This risk is exacerbated by the fact that the Company has been a debtor in bankruptcy on two prior occasions. If such relationships were adversely affected, the Company and its subsidiaries' financial performance and working capital position could materially deteriorate. This deterioration could adversely affect the Company's ability to complete the Solicitation or, if such Solicitation is successfully completed, to obtain confirmation of the Prepackaged Plan. NONCONSENSUAL CONFIRMATION The Company will request that the Bankruptcy Court confirm the Prepackaged Plan under Bankruptcy Code Section 1129(b). Section 1129(b) permits confirmation of the Prepackaged Plan despite rejection by one or more impaired classes if the Bankruptcy Court finds that the Prepackaged Plan "does not discriminate unfairly" and is "fair and equitable" as to the non-accepting class or classes. Because Class 7 (i.e., Other Interests) is deemed not to have accepted the Prepackaged Plan, the Company will request that the Bankruptcy Court find that the Prepackaged Plan is fair and equitable and does not discriminate unfairly as to Class 7 (and any other class that fails to accept the Prepackaged Plan). For a more detailed description of the requirements for acceptance of the Prepackaged Plan and of the criteria for confirmation notwithstanding rejection by certain classes, see "FEASIBILITY OF THE PREPACKAGED PLAN AND THE BEST INTERESTS OF CREDITORS TEST - Nonconsensual Confirmation." The Company, however, will not seek confirmation of the Prepackaged Plan unless it is accepted by Class 3 (i.e., the Noteholders). BACKGROUND OF RESTRUCTURING The following summary of the background of the Restructuring, including the principal terms of the Letter Agreement, the Letter Agreement Amendments, the Twelfth Amendment, the Thirteenth Amendment, the Voting Agreement and the CIT Commitment Letter, does not purport to be complete and is qualified in its entirety by reference to those documents, including the definitions of certain terms contained therein. Copies of the Letter Agreement, the Letter Agreement Amendment, the Twelfth Amendment, the Thirteenth Amendment, and the CIT Commitment Letter are filed as Exhibit 10.42, Exhibit 10.55, Exhibit 10.43, Exhibit 10.53 and Exhibit 10.54, respectively, to the Company's Registration Statement. The form of Voting Agreement is attached to the Company's Registration Statement as Exhibit 9.1. Copies of any or all of these documents can be obtained by contacting Todd Kahn, General Counsel and Executive Vice President of the Company, at (212) 221-7500. Whenever particular provisions of such documents are referred to herein, such provisions are incorporated herein by reference, and the statements are qualified in their entirety by such reference. BACKGROUND OF THE RESTRUCTURING On February 22, 1985, Salant Corporation, a New York corporation ("Salant NY") and its two largest subsidiaries, Thomson Company, Inc. ("Thomson") and Obion Company, Inc. ("Obion"), filed with the Bankruptcy Court separate voluntary petitions for relief under Chapter 11 of title 11 of the Bankruptcy Code (Case Nos. 85-B-10229 (PBA) through 85-B-10231 (PBA), inclusive). Salant NY's other United States, Canada and Mexico subsidiaries did not seek relief under the Bankruptcy Code or other foreign insolvency laws, respectively. On May 19, 1987, the Bankruptcy Court issued an order confirming the Joint Chapter 11 Plan of Salant NY, Thomson and Obion (the "1987 Chapter 11 Plan"). The 1987 Chapter 11 Plan was consummated on June 2, 1987. On June 2, 1987, pursuant to the provisions of the 1987 Chapter 11 Plan, the assets and liabilities of Salant NY, Thomson and Obion were substantively consolidated, and Salant NY, Thomson and Obion and the inactive subsidiaries of Salant NY merged with a wholly-owned subsidiary of Salant NY. The Company is the surviving corporation of such merger. On June 27, 1990, the Company and its wholly-owned subsidiary, Denton Mills, Inc. ("Denton Mills"), each filed with the Bankruptcy Court a separate voluntary petition for relief under Chapter 11 of the Bankruptcy Code (Case Nos. 90-B-12037(CB) and 90-B-12038(CB)) (the "1990 Chapter 11 Case"). On July 30, 1993, the Bankruptcy Court issued an order confirming the Third Amended Joint Plan of Reorganization of the Company and Denton Mills (the "1993 Chapter 11 Plan"). The 1993 Chapter 11 Plan was consummated on September 20, 1993. Pursuant to the 1993 Chapter 11 Plan, on September 20, 1993, the Company issued the Senior Notes. While issuance of the Senior Notes facilitated the Company's emergence from Chapter 11, the Company, as a result, was capitalized with a significant amount of long-term debt. In connection with the formulation of the 1993 Chapter 11 Plan, management of the Company believed that, based upon projected operating results, the Company would be able to refinance the Senior Notes prior to their final maturity. The entire aggregate principal amount of the Senior Notes (which is currently in the aggregate amount of $104.879 million) becomes due on December 31, 1998. Since emerging from bankruptcy in September 1993, the Company has from time to time explored various strategies regarding its overall business operations and, in particular, various possible transactions that would result in a refinancing of its long-term debt obligations. In this connection, during the period from the beginning of Fiscal 1997 through the date of this Proxy Statement/Prospectus, including since the announcement of the proposed Restructuring on March 3, 1998, the Company has from time to time received indications of interest from various third parties to purchase all or a portion of the Company's businesses or assets. See "Alternative Transactions" below. During this period, the Company's refinancing efforts have been significantly hampered by its inconsistent operating results and the fact that investors in the marketplace generally do not look favorably upon investing in highly-leveraged apparel companies. In the latter half of Fiscal 1997, the Company, working with the Company's various investment banking firms, the Board and management analyzed and assessed its financial situation and explored with the Board and management the availability of capital in both the private and public debt and equity markets for the purpose of recapitalizing the Company. The investment banking firms advised the Company that they did not believe that the Company could recapitalize by use of the capital markets, in light of the Company's past inconsistent operating performance, together with the reluctance of investors to invest in apparel companies suffering from high debt-to-equity ratios. The Company's unfavorable operating results continued throughout the fourth quarter of Fiscal 1997. Net sales for the fourth quarter of Fiscal 1997 were $116.4 million, a 1.1% increase from the comparable quarter in 1996, however, the Company's net losses amounted to $5.6 million (as compared to a net income of $6.1 million in 1996) and the loss from continuing operations before interest, income taxes and extraordinary gain was $2.4 million (as compared to $10.6 million of income from continuing operations before interest and income taxes for the same quarter of 1996). These results heightened the Company's concern that, absent a restructuring or other extraordinary transaction, it would be difficult for the Company to make the principal payment under its Senior Notes due on December 31, 1998 of $104.879 million. Moreover, during the fourth quarter of Fiscal 1997, the Company closed 42 of its retail outlets (representing all retail outlets other than the Perry Ellis outlet stores), determined to close one of its distribution centers and changed the sourcing of a portion of its Perry Ellis product line. While these changes were essential to streamline the Company by eliminating non-core businesses and correcting certain operational issues, these actions had a detrimental affect on the Company's earnings and profitability in Fiscal 1997. As a result, heading into fiscal year 1998, the Company was concerned that, in light of its inconsistent operating performance and the Company's inability to access the capital markets in order to refinance or retire its indebtedness under the Senior Notes, the Company's ability to maintain the support and confidence of its trade vendors was at risk. In that connection, the Company, in consultation with its financial advisors, decided that it needed to immediately address the Company's high level of indebtedness in order to avoid any permanent adverse effects on its business operations, future productivity and growth potential. In addition, as a result of the Company's performance during Fiscal 1997, as of January 3, 1998, the Company had failed to meet certain of the financial covenants contained in the Credit Agreement (the "CIT Financial Covenants"). In this connection, the Company reviewed the advisability of making the $5.5 million interest payment on the Senior Notes due and payable on March 2, 1998 with a view towards maximizing liquidity in order to appropriately fund operations during the pendency of the restructuring transactions. Commencing in December 1997, the Company began discussions with CIT regarding a possible restructuring of the Company's indebtedness under the Senior Notes (including various issues relating to the Company's failure to meet the CIT Financial Covenants and the then upcoming March 1998 interest payment on the Senior Notes). The Company believed that, given the potential instability that is associated with any restructuring process, it would be most productive to adopt a strategy to maximize liquidity and thereby protect the total enterprise value of the Company. The Company also concluded that the Noteholders and the Stockholders would best be served by converting the Senior Notes into equity of the Company, thus allowing the Company to eliminate a significant portion of its debt and substantially improve its balance sheet. THE LETTER AGREEMENT In furtherance of the Company's continuing efforts to deleverage, the Company approached Magten Asset Management Corp., the beneficial owner of, or the investment manager on behalf of the beneficial owners of, approximately $74 million in aggregate principal face amount of Senior Notes (the "Magten Notes"), representing approximately 71% of the aggregate principal amount of all Senior Notes, to discuss the possible terms and conditions of a restructuring of the indebtedness under the Senior Notes, including the Magten Notes. In addition, in connection with the Company's efforts to restructure, the Company developed the Three-Year Business Plan. See "RESTRUCTURING FINANCIAL CONSIDERATIONS -- The Three-Year Business Plan." During the months of January and February 1998 the Company continued to actively discuss a restructuring of the Company with Magten and Apollo, the beneficial owner of 5,924,352 shares (the "Apollo Shares") of Old Common Stock, representing approximately 39.6% of the issued and outstanding shares. During this period, the Company continued its negotiations with CIT to ensure its support of the Restructuring. These efforts culminated in the Letter Agreement. The substance of the Company's negotiations with Magten and Apollo primarily centered upon each party's evaluation of, and opinion concerning, the enterprise value of the Company (discussed in more detail below) and the Company's Three-Year-Business Plan. The Company believed that it was most productive to engage in discussions with Magten, Apollo and CIT because, as noted above, Magten is the beneficial owner of approximately 71% of the Senior Notes, Apollo is the beneficial owner of approximately 39.6% of the Old Common Stock and CIT is the Company's working capital lender. The Board fully participated in the negotiation of the terms of the Restructuring. Although the terms of the Restructuring were not negotiated with any non-affiliated Stockholders or any minority Noteholders, the Trustee under the Indenture was provided with, and commented upon, preliminary drafts of the Company's Registration Statement, including drafts of the Exchange Restructuring Prospectus, Proxy Statement/Prospectus, and Prepackaged Plan, prior to the filing of the Registration Statement with the Commission. In connection with the discussions concerning the Restructuring by the parties, and in order to determine the allocation of the equity of the Company among the Stockholders and Noteholders upon the consummation of the Restructuring, the Company, Magten and Apollo determined that it was necessary to assume a total enterprise value for the Company. After a review of the Company's Three-Year Business Plan, as well as any other factor deemed relevant by each party, each of the Company, Magten and Apollo developed its own view as to the total enterprise value of the Company. After significant discussion, solely for purposes of allocating the equity of the Company post-Restructuring, the parties assumed a total enterprise value for the Company of $185 million. The parties also assumed that the average outstanding balance under the Company's working capital facility for the post-restructured Company would be $60 million. Thus, the total net equity value of the Company, after giving effect to the Restructuring, was assumed to be $125 million. Neither the Company, Magten nor Apollo has expressed any opinion as to the accuracy of any of the foregoing assumptions, including, without limitation, the total enterprise value of the Company. Such assumptions were made solely for purposes of allocating the equity of the Company post-Restructuring among the Noteholders and Stockholders pursuant to the Restructuring. As a result of the foregoing assumptions and calculations, the parties agreed in the Letter Agreement that they would each support the Restructuring (subject to certain conditions described below on pages __ to __), pursuant to which (i) Noteholders would receive 92.5% of the New Common Stock, which equates to a distribution of equity to Noteholders with an implied value of $110 million after giving effect to the conversion of the Senior Notes and after taking into consideration the value of the Warrants as determined below (which amount approximates the aggregate outstanding amount under the Senior Notes as of the date the Letter Agreement was entered into - i.e., $104.879 million in aggregate principal amount and $5.5 million in accrued and unpaid interest as of February 28, 1998); and (ii) Stockholders would receive (a) 7.5% of the New Common Stock, which equates to a distribution of equity to Stockholders with an implied value of $8.9 million after taking into consideration the value of the Warrants as determined below, and (b) seven year Warrants representing the right to purchase 10% of the New Common Stock (on a fully diluted basis). Using the Black-Scholes option pricing formula which incorporates such factors as the relationship of the underlying stock's price to the strike price of the Warrants and the time remaining until the Warrants expire, a value of $6.1 million is implied for the Warrants. On March 2, 1998, Magten, Apollo and the Company entered into the Letter Agreement setting forth the basic terms and conditions of the Restructuring. Pursuant to the Letter Agreement, the parties agreed, among other things, to support the Restructuring on the following terms: (i) the entire long-term debt (which, as of February 28, 1998, was $110.379 million, consisting of $104.879 million of principal amount, and $5.5 million of accrued interest on, the Senior Notes) would be converted into 92.5% of the Company's issued and outstanding New Common Stock, immediately following consummation of the Restructuring, subject to dilution for shares of New Common Stock issued under the Stock Award and Incentive Plan and the Warrant Shares and, in the case of the Exchange Restructuring only, the shares of New Common Stock issued under the Old Plans and (ii) the Old Common Stock would be converted into 7.5% of the Company's issued and outstanding New Common Stock, immediately following consummation of the Exchange Restructuring subject to dilution for shares of New Common Stock issued under the Stock Award and Incentive Plan and the Warrant Shares and, in the case of the Exchange Restructuring only, the shares of New Common Stock issued under the Old Plans, plus Stockholders would receive seven year Warrants to purchase up to 10% of the Company's New Common Stock, on a fully diluted basis. In addition, pursuant to the Letter Agreement and in order to effect the Restructuring, the Company agreed to (a) effectuate the Reverse Split in order to "normalize" the post-restructuring trading of the New Common Stock by reducing the number of outstanding shares and, thus, increasing the per share stock price; (b) elect a new Board, consisting of between five and seven members comprised of Mr. Jerald Politzer, as Chairman, between three and five members nominated by Magten, subject to consultation with the Company and other Noteholders who may come forward, and one member nominated by the current Board; (c) enter into a registration rights agreement for the benefit of Noteholders who will hold 10% or more of the New Common Stock immediately after occurrence of the Restructuring Date, on terms and conditions reasonably acceptable to Magten and the Company; (d) enter into a New Credit Agreement to replace the Company's existing working capital facility under the Credit Agreement on terms reasonably satisfactory to Magten and Apollo; (e) adjust all existing stock options and other equity based plans to reflect the Restructuring and/or adopt the Stock Award and Incentive Plan; and (f) amend the Company's existing Rights Plan to permit the Restructuring to be consummated without causing any rights thereunder to become exercisable as a result. Pursuant to the Letter Agreement, Magten agreed, among other things, to tender (or with respect to managed accounts, use its reasonable best efforts to cause to be tendered) all of the Magten Notes in acceptance of the Exchange Offer, provided that certain conditions are satisfied, including that (i) all applicable federal and state securities laws are complied with, and (ii) the terms of the Exchange Offer and the remaining components of the Restructuring are consistent with the terms of the Exchange Offer and Restructuring as described in the Letter Agreement. As contemplated by the Letter Agreement, Magten has, in accordance with Section 6.5 of the Indenture, caused a written direction to be provided to the Trustee to forbear during the term of the Letter Agreement from taking any action under the Indenture in connection with the failure by the Company to make the interest payment on the Senior Notes that was due and payable on March 2, 1998. Subsequent to the execution of the Letter Agreement, the Company, Magten and Apollo entered into two letter agreements, dated June 1, 1998 and July 8, 1998 (the "Letter Agreement Amendments"), amending the Letter Agreement. The Letter Agreement Amendments, among other things, extend the dates for certain Magten Agreement Termination Events and Apollo Agreement Termination Events upon which Magten and/or Apollo may terminate the Letter Agreement as follows (and as described in more detail below): (i) the Company must have obtained the requisite Stockholders' consent of the Restructuring by November 30, 1998; (ii) the Exchange Offer must have been commenced by August 31, 1998; and (iii) the Restructuring must have been consummated by November 30, 1998. References herein to the "Letter Agreement" shall, when appropriate, refer to the Letter Agreement as amended by the Letter Agreement Amendments. Each of the existing members of the Board has delivered to the Company a resignation letter resigning from the Board effective as of the Exchange Restructuring Date. In accordance with the Company's Certificate of Incorporation, by resolution of the Board, the number of directors has been fixed at [_________] effective as of the Exchange Restructuring Date. As provided for in the Letter Agreement, the new Board will consist of: (i) Mr. Jerald Politzer, as the Chairman of the Board; (ii) [______________] members to be nominated by Magten, subject to consultation with the Company and other Noteholders who may come forward prior to the commencement of the Solicitation, and (iii) one member designated by the current Board. As described above, as contemplated by the Letter Agreement, it is expected that Magten will provide the Company with its Board nominees prior to the commencement of the Solicitation. In addition, the current Board has designated Marvin Schiller to be the current Board's nominee to the new Board. If any nominee should be unavailable for election at the Stockholders' Meeting, the proxies will be voted for the election of such other person as may be recommended by the Board. See "INFORMATION REGARDING NOMINEES." Magten's obligations under the Letter Agreement will (subject to the proviso in clause (g) below) terminate upon the occurrence of any of the following events (a "Magten Agreement Termination Event") unless waived in writing by Magten: (a) the Company has not obtained the requisite shareholder approval for the Restructuring Proposals at the Stockholders' Meeting on or before November 30, 1998; (b) the Exchange Offer shall not have commenced on or before August 31, 1998; (c) the Restructuring Date shall not have occurred on or before November 30, 1998; (d) the Company or Apollo shall have disclaimed publicly in writing (or in a writing sent to Magten) its intention to pursue the Restructuring; (e) there occurs any material change in the terms or the feasibility of the Restructuring that materially affects the Noteholders, not previously consented to by Magten; (f) the Company shall be the subject of a voluntary or involuntary petition under the Bankruptcy Code prior to the occurrence of the Restructuring Date, other than a voluntary petition filed in connection with a prepackaged or prenegotiated chapter 11 case to effectuate the Restructuring, provided, however, that the filing of an involuntary petition will only be deemed to constitute a Magten Agreement Termination Event when and if such involuntary petition for relief has continued undismissed for 60 days or an order or decree approving the involuntary petition has continued unstayed and in effect for 60 days; and (g) to the extent the right of Magten to vote or direct the disposition of the Magten Notes results from an arrangement in existence on March 2, 1998 under which Magten has been engaged to perform investment management services on behalf of a beneficial owner of the Magten Notes, (i) such engagement will be terminated by such beneficial owner or as a result of any statutory, regulatory or bona fide business requirement or condition not related to the subject matter of the Letter Agreement, or (ii) such beneficial owner on its own (without any direct or indirect influence from Magten) directs Magten to dispose of some or all of the Magten Notes beneficially owned by such beneficial owner; provided, that, in any case, the Magten Agreement Termination Event arising pursuant to this clause (g) shall apply only to and shall result in the termination of Magten's obligations under the Letter Agreement solely with respect to, those Senior Notes as to which Magten's engagement has been terminated or as to which such a disposal direction has been issued and further provided, that such Magten Agreement Termination Event shall have no effect whatsoever on any of Magten's other obligations under the Letter Agreement. Apollo's obligations under the Letter Agreement will terminate upon the occurrence of any of the following events (an "Apollo Agreement Termination Event") unless waived in writing by Apollo: (a) the Restructuring Date shall not have occurred on or before November 30, 1998; (b) there occurs any material change in the terms or the feasibility of the Restructuring that materially and adversely affects the Stockholders, not previously consented to by Apollo; and (c) the Company shall be the subject of a voluntary or involuntarily petition under the Bankruptcy Code prior to the occurrence of the Restructuring Date, other than a voluntary petition filed in connection with a prepackaged or prenegotiated chapter 11 case to effectuate the Restructuring, provided, however, that the filing of an involuntary petition will only be deemed to constitute an Apollo Agreement Termination Event when and if such involuntary petition for relief has continued undismissed for 60 days or an order or decree approving the involuntary petition has continued unstayed and in effect for 60 days. In addition, the respective obligations of Magten, Apollo and the Company to consummate each of the transactions contemplated by the Restructuring are also subject to the satisfaction of each of the following conditions: (a) neither Magten, the Company nor Apollo has failed to comply with any of its obligations set forth in the Letter Agreement; (b) the negotiation, preparation and execution of mutually satisfactory definitive transaction agreements and other documents incorporating the terms and conditions of each of the transactions contemplated by the Restructuring set forth in the Letter Agreement and such other terms and conditions as the parties may reasonably require; (c) all authorizations, consents and regulatory approvals required, if any, in connection with the consummation of the transactions contemplated by the Restructuring and the continuation of the Company's businesses as currently constituted shall have been obtained; and (d) the holders of 100% (or such lesser percentage as agreed upon by Magten) of the Senior Notes shall have tendered their Senior Notes in connection with the Exchange Offer. In the event that less than 100% of the aggregate principal amount of the Senior Notes are tendered in the Exchange Offer but at least two-thirds in principal amount and a majority in number of the Noteholders voting have voted in favor of the Prepackaged Plan, the Company intends to file the Prepackaged Plan under Chapter 11 of the Bankruptcy Code. Pursuant to the Letter Agreement, Magten has agreed to tender (or with respect to managed accounts, use its reasonable best efforts to cause to be tendered), subject to certain conditions, all of the Magten Notes pursuant to the Exchange Offer and, in the event the Prepackaged Plan is pursued, to vote all of the Magten Notes in favor of the Prepackaged Plan. Even though the Company expects the Reverse Split to "normalize" the post-restructuring trading of the New Common Stock, no assurances can be made that the Reverse Split will "normalize" post-restructuring trading of the New Common Stock. If post-restructuring trading is not "normalized," the New Common Stock may experience significant price and volume fluctuations which could materially adversely effect the market price of the New Common Stock. THE VOTING AGREEMENT In accordance with the terms of the Letter Agreement, on August __, 1998, Apollo and the Company entered into the Voting Agreement. A form of the Voting Agreement is filed as Exhibit 9.1 to the Company's Registration Statement. For a copy of the form of the Voting Agreement, Stockholders may contact Todd Kahn, General Counsel and Executive Vice President of the Company, at (212) 221-7500, to request a copy. Pursuant to the Voting Agreement, Apollo agreed that, subject to Apollo's receipt of proxy or other solicitation materials in respect of the Restructuring that are consistent with the terms of the Letter Agreement, (A) at any meeting of the Stockholders, however called, and in any action by consent of the Stockholders, Apollo will vote all of the Apollo Shares in favor of each of the transactions contemplated by the Restructuring with respect to which a vote of the Stockholders is called, including, without limitation, each of the Restructuring Proposals; (B) Apollo will vote all of the Apollo Shares in favor of any plan of reorganization for which votes to accept or reject such plan of reorganization have been solicited; provided, that, such plan of reorganization is consistent with the terms of the Restructuring set forth in the Letter Agreement; (C) so long as it is the beneficial owner of the Apollo Shares, Apollo will not at any time prior to the termination of the Letter Agreement, support or encourage, directly or indirectly, any financial restructuring concerning the Company other than the Restructuring or any transaction or other action that is inconsistent with the terms of the Restructuring; and (D) Apollo will not sell, transfer or assign any of the Apollo Shares or any voting interest therein during the term of the Letter Agreement except to a purchaser who agrees in writing prior to such acquisition to be bound by the terms of this Agreement and by all the terms of the Letter Agreement with respect to the Apollo Shares being acquired by such purchaser. In addition, pursuant to the Voting Agreement, Apollo also agreed that if it fails to comply with the provisions of the Letter Agreement, as determined by the Company in its sole discretion, such failure will result, without any further action by Apollo, in the irrevocable appointment of the Company, until termination of the Voting Agreement, as Apollo's attorney and proxy pursuant to the provisions of Section 212(c) of the DGCL, with full power of substitution, to vote, and otherwise act (by written consent or otherwise) with respect to the Apollo Shares which Apollo is entitled to vote at any meeting of Stockholders (whether annual or special and whether or not an adjourned or postponed meeting) or consent in lieu of any such meeting or otherwise, on the matters and in the manner specified in the Voting Agreement. The Company's refinancing efforts during Fiscal 1997 included discussions with DDJ Capital Management, LLC ("DDJ") regarding a possible refinancing transaction. As of March 10, 1998, DDJ was the beneficial owner of 1,809,100 shares of Old Common Stock, which represents approximately 12.1% of the issued and outstanding shares of Old Common Stock. In connection with these discussions, DDJ entered into a confidentiality agreement (the "DDJ Confidentiality Agreement") with the Company relating to DDJ's review of various materials relative to such proposed refinancing. The DDJ Confidentiality Agreement contained certain restrictions on the ability of DDJ to buy or sell shares of Old Common Stock. In accordance with the terms of the Letter Agreement, the Company requested that DDJ enter into a voting agreement with the Company similar to the Voting Agreement entered into with Apollo. DDJ, however, informed the Company that it did not wish to enter into such a voting agreement. In discussions between the Company and DDJ, DDJ stated that it was "disappointed" that the Company was not pursuing a refinancing. However, DDJ has not expressed opposition to the Restructuring. In addition, on or about March 3, 1998, DDJ requested that the Company terminate the restrictions on DDJ's ability to buy or sell shares of Old Common Stock set forth in the DDJ Confidentiality Agreement. On March 4, 1998, the Company granted this request by DDJ. As of the date of this Proxy Statement/Prospectus, DDJ is the beneficial owner of approximately __ shares of Old Common Stock, representing approximately __% of the issued and outstanding shares of Old Common Stock. THE WAIVER AND FORBEARANCE UNDER THE CREDIT AGREEMENT AND COMMITMENT FOR NEW CREDIT AGREEMENT CIT agreed to support the Company's restructuring efforts under the Letter Agreement and, on March 2, 1998, the Company entered into the Twelfth Amendment with CIT, wherein CIT (i) waived certain existing financial covenant defaults under the Credit Agreement as of January 3, 1998; (ii) agreed to forbear (subject to certain conditions) from exercising any of its rights or remedies arising under the Credit Agreement arising from the Company's failure to make the interest payment on the Senior Notes due and payable on March 2, 1998: (iii) agreed to continue making loans, advances and other financial accommodations to the Company; and (iv) agreed to amend certain provisions of the Credit Agreement, including an increase in the advance rate for revolving loans made pursuant to the Credit Agreement. Under the Twelfth Amendment, such agreement to forbear by CIT will terminate on July 1, 1998 or earlier upon the happening of (a) the occurrence of any Event of Default (as defined in the Credit Agreement) other than a Payment Default (as defined in the Twelfth Amendment) or (b) the failure of the Company to execute and deliver to CIT before June 1, 1998, (i) a commitment letter executed by CIT providing for the agreement between CIT and the Company to enter into a new $135 million syndicated credit facility (in replacement of the financing and factoring arrangements provided by CIT pursuant to the Credit Agreement) on terms and conditions satisfactory to CIT or (ii) a copy of a commitment letter executed between another lender and the Company providing for a credit facility to the Company which by its terms provides for closing and funding thereof on or before July 1, 1998, and enabling the Company upon such closing and funding to simultaneously terminate the Credit Agreement and all other Financing Agreements (as defined in the Credit Agreement) and to satisfy in full all of its then existing Obligations (as defined in the Credit Agreement) to CIT; or (c) the exercise of any right or remedy with respect to any of the Collateral (as defined in the Credit Agreement) by any holder of any Senior Notes or by the Trustee under the Indenture; or (d) the payment of any interest on the Senior Notes in respect of the Company's failure to make the March 2, 1998 interest payment or otherwise. In consideration for CIT's agreement to enter into the Twelfth Amendment, pursuant thereto, the Company agreed to pay CIT a forbearance and waiver fee in the amount of $150,000. In addition, in consideration of a New Credit Agreement proposed by CIT, the Company agreed to pay CIT a non-refundable and fully earned fee of $1,050,000, payable in three equal installments of $350,000 each on April 1, May 1 and June 1, 1998. This fee is non-refundable in whole or in part, provided, however, that notwithstanding the foregoing, (a) if the Company does execute a New Credit Agreement with CIT, such fee will be applied to satisfy any and all closing fees and facility fees under such New Credit Agreement, or (b) if CIT does not extend a New Credit Agreement to the Company because CIT's Executive Credit Committee fails to give credit approval for such facility, then $600,000 of such fee shall be refunded to the Company. In the event that CIT becomes the lender under the New Credit Agreement or under a debtor-in-possession working capital facility, if the Prepackaged Restructuring is pursued, the Twelfth Amendment provides that no other closing fee or facility fee shall be due and payable in connection with any such replacement credit facility provided by CIT. Relative to the June 1, 1998 deadline contained in the Twelfth Amendment by which the Company was required to obtain a commitment for a New Credit Agreement, since the beginning of Fiscal 1998, the Company received and reviewed various proposals for a New Credit Agreement which were submitted by CIT as well as various other prospective lenders. After reviewing the proposals for a New Credit Agreement received from the various lenders, and conducting extensive negotiations with certain of the lenders who submitted proposals, the Company determined that the proposal submitted by CIT contains the most advantageous terms and conditions. As a result, the Company entered into a commitment letter with CIT (the "CIT Commitment Letter"), which sets forth the principal terms and conditions of an agreement for a new $140 million secured credit facility with CIT (the "New CIT Credit Agreement") that the Company intends to enter into on the Restructuring Date. The execution of the New CIT Credit Agreement is subject to various conditions, including, but not limited to, the consummation of the Restructuring. For a more detailed description of the new working capital facility to be provided by CIT pursuant to the CIT Commitment Letter, see "DESCRIPTION OF NEW CIT CREDIT AGREEMENT." Pursuant to the CIT Commitment Letter and in accordance with the Twelfth Amendment, no closing or facility fees will be charged to the Company by CIT in consideration of the execution and delivery of the New CIT Credit Agreement. In conjunction with obtaining the financing commitment under the CIT Commitment Letter, CIT has agreed to further support the Restructuring by entering into the Thirteenth Amendment and Forbearance Agreement, dated as of June 1, 1998 (the "Thirteenth Amendment"), wherein CIT agreed (i) to continue to forbear (subject to certain conditions) from exercising any of its rights or remedies under the Credit Agreement arising from the Company's failure to make the interest payment on the Senior Notes due and payable on March 2, 1998 or by virtue of an event of default arising from the failure of the Company to make the interest payment on the Senior Notes due and payable on August 31, 1998; (ii) to continue to make loans, advances and other financial accommodations to the Company through the earlier of the Restructuring Date and November 30, 1998, subject to the terms and conditions of the Thirteenth Amendment; and (iii) to amend certain provisions of the Credit Agreement, including a reduction of the rate of interest charged on the revolving credit loans, an increase in the advance rate for revolving credit loans made under the Credit Agreement and the elimination of any and all provisions providing for the factoring of the Company's accounts receivable. Under the Thirteenth Amendment, such agreement to forbear by CIT will terminate on November 30, 1998 or earlier upon the happening of (a) the occurrence of any Event of Default (as defined in the Credit Agreement), other than by virtue of the Company's failure to make the March 2, 1998 or August 31, 1998 interest payment on the Senior Notes or the commencement or continuation of a chapter 11 case to effectuate the Restructuring; or (b) the exercise of any right or remedy with respect to any of the Collateral by any holder of the Senior Notes or by the Trustee under the Indenture; or (c) the payment of any interest on the Senior Notes in respect of the Company's non-payment of the interest that was payable on March 2, 1998 or that will be payable on August 31, 1998 or otherwise; or (d) the occurrence of an Agreement Termination Event (as defined in the Letter Agreement), except under certain circumstances. Moreover, the Thirteenth Amendment provides that in the event that the Company seeks to consummate the Restructuring by filing a chapter 11 case, (i) the Credit Agreement will remain in full force and effect (subject to certain conditions) and (ii) immediately upon commencement of the chapter 11 case, the Company and CIT will seek Bankruptcy Court approval and authority for CIT to extend post-petition financing to the Company on the same terms and conditions as set forth in the Credit Agreement. In accordance with the Twelfth Amendment, no additional closing fees, facility fees or amendment fees were charged to the Company by CIT in consideration of the execution and delivery of the Thirteenth Amendment. While the Company expects that the Restructuring will be consummated prior to November 30, 1998, if the Restructuring is not consummated by such date, the Company intends to request an extension of the forbearance period referred to above from CIT. However, there is no assurance that such an extension would be granted. ALTERNATIVE TRANSACTIONS Subsequent to the date that the Company announced the proposed Restructuring on March 3, 1998, the Company has continued to review all options which might be available to the Company, including several indications of interest received from various third parties to purchase all or part of the Company's businesses or assets. In order to identify and solicit indications of interest with respect to alternative transactions, the Company has engaged in detailed discussions with certain of such third parties in order to explore the possibility of an acquisition transaction or business combination involving the Company. In that connection, the Company has entered into confidentiality agreements with such potential third party purchasers. While certain of these third parties demonstrated varied levels of interest in further discussions, as of the date hereof, the Company has not entered into any agreement concerning any such proposed transaction. Discussions regarding alternative transactions are ongoing. PURPOSE OF THE RESTRUCTURING The purpose of the Restructuring is to help ensure the long-term viability and to contribute to the success of the Company by deleveraging the Company's capital structure. Specifically, in accordance with the Three-Year Business Plan developed by the Company, the Restructuring is designed to recapitalize the Company by converting all of the Company's long-term debt obligations under the Senior Notes (which, as of February 28, 1998, was $110.379 million, consisting of $104.879 million principal amount of, and $5.5 million of accrued interest on, the Senior Notes) into New Common Stock. Interest charges for the Company will be reduced by $11 million per year and stockholders' equity should be substantially increased as a result of the Restructuring. The Company's consolidated debt at the completion of the Restructuring will include approximately $28 million in revolver debt plus $15 million from the term loan portion of its working capital facility. This significantly lower debt-to-equity ratio should help the Company to achieve the objectives as described in the Three-Year Business Plan and make the Company more attractive to investors. The Company believes that by reducing the uncertainty surrounding its ability to pay or retire the Senior Notes which are due in their entirety, on December 31, 1998, the Restructuring should maximize liquidity for the Company's business operations and thereby provide a platform for future growth and enhance the Company's total enterprise value. The Company further believes that by providing the Company with a deleveraged capital structure, the company that results from the Restructuring should be positioned favorably to withstand the normal market fluctuations in the highly volatile apparel industry. In contemplation of the Restructuring, the Company elected not to pay the interest payment of approximately $5.5 million that was due and payable under the Senior Notes on March 2, 1998, subject to a 30 day grace period. Because the Company elected not to pay the interest due on the Senior Notes by the expiration of the applicable grace period, an event of default has occurred with respect to the Senior Notes entitling the Noteholders to accelerate the maturity thereof. Pursuant to the Letter Agreement, Magten has, in accordance with Section 6.5 of the Indenture, caused a written direction to be provided to the Trustee to forbear during the term of the Letter Agreement from taking any action under the Indenture in connection with the failure by the Company to make the interest payment on the Senior Notes that was due and payable on March 2, 1998. On April 8, 1998, the Trustee issued a Notice of Default stating that as a result of the Company's failure to make the interest payment on the Senior Notes, an event of default under the Indenture had occurred on April 1, 1998. Holders of at least 25% in the aggregate principal face amount of the Senior Notes may accelerate all outstanding indebtedness under the Senior Notes pursuant to the terms of the Indenture. If such holders accelerate the indebtedness under the Senior Notes, the Company may be required to commence a proceeding under the Federal bankruptcy laws without having solicited acceptances for the Prepackaged Plan prior to the commencement of such proceeding. In addition, the Company's working capital lender, CIT, agreed to forbear until November 30, 1998, subject to certain conditions, from exercising any of its rights or remedies under the Credit Agreement, arising by virtue of the Company's failure to pay such interest on the Senior Notes. Failure to consummate the Restructuring could result in the acceleration of all of the indebtedness under the Senior Notes and/or the Credit Agreement. ABSENT THE RESTRUCTURING, THE COMPANY DOES NOT BELIEVE IT WILL BE ABLE TO SATISFY ITS OBLIGATIONS UNDER THE SENIOR NOTES WITHOUT A REFINANCING OF THE COMPANY'S INDEBTEDNESS UNDER THE CREDIT AGREEMENT AND/OR THE SENIOR NOTES OR AN ADDITIONAL CAPITAL INFUSION, AND IT IS UNLIKELY THAT THE COMPANY WILL BE ABLE TO OBTAIN SUCH REFINANCING OR ADDITIONAL CAPITAL INFUSION. IF THE COMPANY DETERMINES THAT IT IS OR WILL BE UNABLE TO COMPLETE THE RESTRUCTURING, THE COMPANY WILL CONSIDER ALL OTHER AVAILABLE FINANCIAL ALTERNATIVES, INCLUDING THE SALE OF ALL OR A PART OF THE COMPANY'S BUSINESSES, THE IMPLEMENTATION OF AN ALTERNATIVE RESTRUCTURING ARRANGEMENT OUTSIDE OF BANKRUPTCY, OR THE COMMENCEMENT OF A CHAPTER 11 CASE WITHOUT A PRE-BANKRUPTCY ACCEPTED PLAN OF REORGANIZATION. THERE CAN BE NO ASSURANCE, HOWEVER, THAT ANY ALTERNATIVE WOULD BE ON TERMS AS FAVORABLE TO NOTEHOLDERS AND STOCKHOLDERS AS THE RESTRUCTURING. If any of the Restructuring Proposals are not approved by the Stockholders and/or the Minimum Tender Condition is not satisfied or waived, but the Company receives sufficient acceptances of the Prepackaged Plan to obtain confirmation thereof by the Bankruptcy Court, then the Company intends to pursue confirmation of the Prepackaged Plan under Chapter 11 of the Bankruptcy Code and to attempt to use such acceptances to obtain confirmation of the Prepackaged Plan. If the Company determines that it is or will be unable to complete the Restructuring, the Company will consider all financial alternatives available to it at such time, which may include the sale of all or part of the Company's business, the implementation of an alternative restructuring arrangement outside of bankruptcy, or the commencement of a Chapter 11 case with or without a preapproved plan of reorganization. There can be no assurance, however, that any alternative restructuring would result in a reorganization of the Company rather than a liquidation, or that any such reorganization would be on terms as favorable to the Noteholders and Stockholders as the terms of the Restructuring. If a liquidation or a protracted and non-orderly reorganization were to occur, there is a risk that the ability of the Noteholders and Stockholders to recover their investments would be even more impaired than under the Restructuring and would be substantially delayed. A non-consensual restructuring would likely have a material adverse impact on the Company and its employees, suppliers and customers. RESTRUCTURING FINANCIAL CONSIDERATIONS BACKGROUND OF THE RESTRUCTURING FINANCIAL ANALYSIS The Restructuring was designed to enable the Company to achieve the Three-Year Business Plan by attempting to maximize liquidity for the Company's business operations which should thereby provide a platform for future growth and enhance the Company's total enterprise value. The Board reviewed the Three-Year Business Plan and projections and the various factors influencing the apparel industry which historically had affected the Company's operations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." FAIRNESS OPINION Pursuant to an agreement effective as of December 18, 1997, between E&Y and the Company (the "E&Y Agreement"), the Company engaged E&Y to act as its financial advisor in connection with the Restructuring. In addition, E&Y performed certain valuation services at the request of the Company under the E&Y Agreement. For a more detailed description of the arrangements pursuant to the E&Y Agreement, including the fees and expenses payable to E&Y by the Company, see the description contained herein under the heading "ADVISORS AND REPRESENTATIVES." On March 25, 1998, the Company retained E&Y to render its opinion as to whether or not the consideration to be received by public Stockholders pursuant to the Restructuring is fair to the public Stockholders from a financial point of view. On April 21, 1998, at the request of the Board, E&Y delivered to the Board the E&Y Fairness Opinion addressed to the Board stating its opinion that, as of that date and based upon and subject to the factors and assumptions set forth therein, the consideration to be received by public Stockholders pursuant to the Restructuring is fair to the public Stockholders from a financial point of view. E&Y subsequently delivered to the Board their written opinion addressed to the Board that, as of the date of this Proxy Statement/Prospectus and based upon and subject to the factors and assumptions set forth therein, the consideration to be received by public Stockholders pursuant to the Restructuring is fair to the public Stockholders from a financial point of view. THE FULL TEXT OF THE E&Y FAIRNESS OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED, AND QUALIFICATIONS AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY E&Y, IS ATTACHED AS ANNEX I TO THIS PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. STOCKHOLDERS OF THE COMPANY ARE URGED TO READ SUCH OPINION IN ITS ENTIRETY. THE E&Y FAIRNESS OPINION WAS PROVIDED TO THE BOARD FOR ITS USE AND BENEFIT AND IS DIRECTED ONLY TO THE FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE CONSIDERATION TO BE RECEIVED BY PUBLIC STOCKHOLDERS PURSUANT TO THE RESTRUCTURING AND DOES NOT ADDRESS THE MERITS OF THE UNDERLYING DECISION BY THE COMPANY TO ENGAGE IN THE RESTRUCTURING NOR DOES IT CONSTITUTE A RECOMMENDATION TO THE COMPANY'S STOCKHOLDERS AS TO HOW SUCH STOCKHOLDERS SHOULD VOTE ON THE PROPOSED RESTRUCTURING. THE SUMMARY OF THE E&Y FAIRNESS OPINION SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. In arriving at the E&Y Fairness Opinion, E&Y, among other things: (i) reviewed the terms of the Restructuring, as set forth in the Letter Agreement included in the Company's Form 8-K filing dated March 4, 1998, the Company's Annual Report, Form 10-K and related audited financial information for the fiscal year ended January 3, 1998 and the Company's Forms 10-Q and the related unaudited financial information for the quarterly periods ending September 27, 1997 and June 28, 1997, unaudited financial information for the two month period ending March 7, 1998 and a draft copy of the Company's Registration Statement on Form S-4, dated April 17, 1998, to be filed in conjunction with the Restructuring; (ii) reviewed and discussed with the Company's management certain information, including financial forecasts (specifically the Three-Year Business Plan), relating to the business, earnings, cash flow, assets, liabilities and prospects of the Company, furnished to E&Y; (iii) conducted discussions with members of senior management of the Company concerning their respective businesses and prospects, before and after giving effect to the Restructuring; (iv) reviewed the historical market prices and valuation multiples for the Old Common Stock and considered the reasonableness of this information as it related to fair market valuation of the Old Common Stock; (v) applied commonly-accepted valuation procedures in determining the fair market value of the Company's total invested capital ("TIC") on a going concern basis; (vi) reviewed the Three-Year Business Plan; and (vii) reviewed such other financial studies and analyses and took into account such other matters as E&Y deemed necessary, including its assessment of general economic, market and monetary conditions. In preparing its opinion, E&Y assumed and relied on the accuracy and completeness of all information supplied by the Company or others, information otherwise made available to E&Y, information discussed with or reviewed by or for E&Y, and any publicly available information. E&Y did not assume any responsibility for independently verifying such information and did not undertake an independent evaluation or appraisal of any of the assets or liabilities of the Company. In addition, E&Y did not assume any obligation to conduct, nor did E&Y conduct, any physical inspection of the properties or facilities of the Company. With respect to the financial forecast information furnished to or discussed with E&Y by the Company, E&Y assumed that they were reasonably prepared and reflect the best currently available estimates and judgments of the Company's management as to the expected future financial performance of the Company, as the case may be. E&Y also assumed that the final form of the Restructuring would be in the form of the Restructuring as set forth in the Company's Registration Statement filed with the Commission as of the date of the E&Y Fairness Opinion. The form of the Restructuring described in the Company's Registration Statement filed with the Commission as of the date of the E&Y Fairness Opinion is the same in all material respects as the form of the Restructuring described herein. The E&Y Fairness Opinion is necessarily based upon market, economic and other conditions as they existed and could be evaluated on, and on the information made available to E&Y as of, the date of such opinion. E&Y assumed that in the course of obtaining the necessary regulatory or other consents or approvals (contractual or otherwise) for the Restructuring, no restrictions, including any divestiture requirements or amendments or modifications, will be imposed that will have a material adverse effect on the contemplated benefits to Stockholders of the Restructuring. E&Y was not authorized by the Company or the Board to solicit, nor did it solicit, third-party indications of interest for the acquisition of all or any part of the Company. E&Y did participate in discussions and negotiations among representatives of the Company, Apollo and Magten, including each party's financial and legal advisors, and it provided advisory services to the Company in connection with the Restructuring including valuation and assessment of the terms of the Restructuring, however, E&Y did not determine the terms of the Restructuring. In addition, E&Y was not asked to consider, and the E&Y Fairness Opinion does not in any manner address, the price at which shares of the Company will trade following the announcement or consummation of the Restructuring. The following is a summary of the facts and circumstances observed by E&Y and the material financial and comparative analyses performed by E&Y in connection with the preparation of the E&Y Fairness Opinion. Review of the Process by Which the Terms of the Restructuring Were Determined. E&Y reviewed the facts and circumstances surrounding the Company leading to the Restructuring as well as the process by which the Restructuring was negotiated to identify issues relating to fairness to public Stockholders. The Company had advised E&Y that the following issues, among others, occurring prior to the Restructuring, are important to consider: (i) the severe financial distress of the Company caused by decreasing sales volume in Fiscal 1997, (ii) the inability of the Company to meet the CIT Financial Covenants as of January 3, 1998, (iii) anticipated difficulty in meeting a semi-annual coupon payment on the Senior Notes, (iv) anticipated difficulty in meeting funding requirements for critical capital expenditures required to maintain the Company's operations on a competitive footing, (v) anticipated difficulty in refinancing the Senior Notes upon maturity at December 31, 1998, and (vi) replacement of substantially all of the Company's senior management in 1997 including the Chief Executive Officer, Chief Financial Officer and other members of senior management. With regard to the facts and circumstances surrounding the negotiation process in which the terms of the Restructuring were determined, E&Y observed, among other things, that (i) the Company initiated negotiations with the largest holders of the Senior Notes and Old Common Stock, Magten and Apollo, respectively, (ii) under the current capital structure of the Company (the "Current Structure"), Magten controls approximately 67% of the Senior Notes, and Apollo controls approximately 40% of the Old Common Stock, (iii) at the time of the negotiations, DDJ, an entity unrelated to either the Company, Magten or Apollo, held approximately 12% of the Company's Old Common Stock and was not included in negotiations regarding the Restructuring, (iv) the Company proposed a restructuring plan under which holders of the Senior Notes would exchange their claims against the Company for a percentage of the Company's common stock, (v) in several negotiations taking place over the course of several weeks, the Company, Magten and Apollo agreed to the terms of the Restructuring, (vi) Magten and Apollo are unrelated entities and have no interests in the Company other than those represented by their respective claims against and interests in the Company, and (vii) based on publicly available information, as of the date of its opinion, Magten owns none of the Company's common equity, and Apollo owns none of the Company's Senior Notes. Fair Market Valuation of the Company's Total Invested Capital. In conducting financial analyses to determine the fairness of the Restructuring to the public Stockholders, E&Y employed commonly-accepted valuation approaches to determine the fair market value of the Company's total invested capital on a going concern basis. Such commonly accepted valuation approaches include, but are not limited to the guideline company approach, the comparable transaction approach and the discounted cash flow approach described herein. Guideline Company Approach. E&Y performed a guideline company analysis to identify the fair market value of the Company's TIC on a going concern basis pursuant to which it compared certain publicly available financial and operating data, projections of future financial performance and market statistics (based on closing stock prices on April 3, 1998) of nine companies with those for the Company assuming implementation of the Restructuring. These companies include Farah, Inc., Garan, Inc., Haggar Corp., Hampton Industries, Hartmarx Corp., Oxford Industries, Inc., Phillips-Van Heusen, Premiumwear, Inc. and Supreme International Corp. E&Y compared TIC as a multiple of, among other things, latest twelve months ("LTM") earnings before interest, taxes, depreciation and amortization ("EBITDA"), 1998 estimated EBITDA, LTM earnings before interest and taxes ("EBIT"), 1998 estimated EBIT, LTM sales and 1998 estimated sales. In each case, financial performance of the Company assumed implementation of the Restructuring. With respect to the nine guideline companies, E&Y's analysis indicated median TIC as a multiple of LTM EBITDA of 8.0x, 1998 estimated EBITDA of 5.7x, LTM EBIT of 10.5x , 1998 estimated EBIT of 9.6x , LTM sales of 0.48x, 1998 estimated sales of 0.46x. No company utilized in the guideline company approach analysis was identical to the Company. Accordingly, an analysis of the results of such a comparison is not purely mathematical; rather it involves complex considerations and judgments concerning differences in historical and projected financial and operating characteristics of the comparable companies and other factors that could affect the public trading value of the comparable companies or company to which they are being compared. Comparable Transaction Approach. E&Y reviewed certain publicly available information regarding six selected apparel industry acquisitions announced since February 1993 (the "Acquisition Comparables"), and for each transaction calculated transaction value (defined as offer value plus total debt) as a multiple of LTM EBITDA, LTM EBIT and LTM revenues. Such analysis indicated that the transaction value as a multiple of LTM EBITDA ranged from 6.2x to 7.9x, with a median of 7.6x, as a multiple of LTM EBIT ranged from 5.9x to 16.1x, with a median of 8.6x, and as a multiple of LTM revenues ranged from 0.44x to 0.92x, with a median of 0.76x. There were a limited number of transactions in the apparel industry which E&Y deemed to be relevant. No company utilized in the comparable apparel industry acquisitions analysis was identical to the Company. Accordingly, an analysis of the results of this comparison is not purely mathematical; rather it involves complex considerations and judgments concerning differences in historical and projected financial and operating characteristics of the comparable acquired companies and other factors that could affect the offer value of such companies and the Company. Discounted Cash Flow Analysis. Using projections for the Company prepared by its management for the fiscal years ending January 1, 1998 through December 30, 2000 (see "PROJECTED CONSOLIDATED FINANCIAL INFORMATION"), E&Y calculated ranges of implied TIC values for the Company based upon the sum of the discounted present value of the Company's three year stream of projected un-levered after-tax free cash flow (defined as tax-effected EBIT excluding extraordinary and non-recurring items, plus depreciation and amortization, minus capital expenditures, minus (plus) increases (decreases) in working capital) and the discounted net present value of a terminal value based on a range of multiples of its projected calendar year 2000 EBITDA. In performing this analysis, E&Y utilized discount rates reflecting a weighted average cost of capital. Comparison of Allocation of TIC on a Going Concern Basis to Existing Equity. E&Y reviewed the proportion of TIC value, as calculated on a going concern basis, that would be attributable to the current owners of the Old Common Stock both under the Current Structure as well as under the revised capital structure described in the Restructuring. Value allocable to the owners of the Old Common Stock under the Current Structure equals 100% of the Company's TIC value after satisfying the Credit Agreement and the Senior Notes. Value allocable to current owners of the Old Common Stock under the revised capital structure described in the Restructuring equals the value of the Warrants plus 7.5% of the Company's New Common Stock after satisfying the Credit Agreement. E&Y has identified value of the Warrants by, among other things, employing a Black-Scholes option pricing model. By allocating the fair market value of the Company's TIC, as calculated on a going concern basis, to holders of Senior Notes and Old Common Stock under the Current Structure, E&Y has not quantified potential decreases in the value of such securities due to the Company's current financial distress and associated additional risk. Consideration of Control Status and Marketability. E&Y has considered the issues of relative elements of control status and marketability faced by holders of Old Common Stock under the Current Structure and as anticipated under the revised structure as set forth in the Restructuring. Historical Stock Price Analysis. E&Y reviewed and analyzed the history of the trading price for the Company's common stock. Since emerging from bankruptcy in 1993, the Company's stock price declined steadily, losing approximately 85% of its value between the four-year high of $11.00 per share in June of 1994 and the $1.6875 value per share as of the March 2, 1998, which is the date immediately prior to the public announcement of the Restructuring. The price per share as of March 2, 1998 also represented over a 40% decline since announcement of the Company's third quarter results in early November of 1997. With the exception of an early December announcement of a charge to be taken by the Company in connection with closure of outlet stores, no information had been publicly disclosed prior to the March 3, 1998 public announcement with regard to the Company's failure to satisfy the covenants of its Credit Agreement nor on the Company's potential difficulty in meeting a March, 1998 semi-annual coupon payment due on the Senior Notes while also funding critical capital expenditures. Following the March filing, the stock price further declined from $1.69 as of February 27, 1998 to $0.63 as of March 13, 1998. The preparation of a fairness opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. Therefore, such an opinion is not readily susceptible to partial analysis or summary description. In arriving at its opinion, E&Y did not attribute any particular weight to any analysis or factor considered by it. Accordingly, E&Y's analyses must be considered as a whole and selecting portions of its analyses, without considering all of its analyses, would create an incomplete view of the process underlying the E&Y Fairness Opinion. In performing its analyses, numerous assumptions were made with respect to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of E&Y or the Company. Any estimates contained in the analyses performed by E&Y are not necessarily indicative of future results, which may be significantly more or less favorable than suggested by such analyses. Additionally, estimates of the value of businesses or securities do not purport to be appraisals or to reflect the prices at which such businesses or securities might actually be sold. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty. In addition, as described above, the E&Y Fairness Opinion was among several factors taken into consideration by the Board in making its determination to approve the Restructuring. Consequently, the E&Y analyses described herein should not be viewed as determinative of the decision of the Board or the Company's management with respect to the fairness of the Restructuring. E&Y's Financial Advisory Fee. In connection with the E&Y Fairness Opinion and pursuant to a letter agreement dated March 25, 1998 between the Company and E&Y, the Company agreed to pay E&Y (i) a fee of $75,000 payable in cash upon execution of the letter agreement and (ii) $75,000 payable in cash on the date that E&Y informed the Company that they were prepared to deliver the E&Y Fairness Opinion. Pursuant to such letter agreement the Company also agreed to reimburse E&Y for its reasonable out-of-pocket expenses and indemnify E&Y and certain related persons for certain liabilities related to or arising out of its engagement, including liabilities under Federal securities laws. To date, the Company has paid $150,000 to E&Y in respect of it services pursuant to such letter agreement. In addition to the letter agreement entered into in connection with the E&Y Fairness Opinion, E&Y and the Company entered into the E&Y Agreement effective as of December 18, 1997 pursuant to which the Company engaged E&Y to act as its financial advisor in connection with the Restructuring. Pursuant to the E&Y Agreement, the Company agreed to pay E&Y a monthly advisory fee in the amount of $125,000, consisting of two components (i) $95,000 per month, and (ii) $90,000 at the end of every three month period (representing $30,000 per month for the prior three months) and to reimburse E&Y for its reasonable out-of-pocket costs. To date, the Company has paid approximately $600,000 to E&Y in respect of its services under the E&Y Agreement. The E&Y Agreement may be terminated at any time. At the request of the Company, E&Y performed certain valuation services under the E&Y Agreement. In connection with those services, E&Y has been paid $100,000 by the Company. See "ADVISORS AND REPRESENTATIVES." E&Y is an internationally recognized financial services firm. E&Y, through its Financial Advisory Service practice, is continuously engaged in the valuation of businesses and securities in connection with restructurings, mergers and acquisitions and other purposes. E&Y has in the past provided financial advisory services to the Company, including having acted as advisor to the Company and providing valuation services in connection with the re-negotiation of its Credit Agreement and with consideration of the Restructuring, and may continue to do so and has received, and may receive, fees for the rendering of such services. Although E&Y did not determine the terms of the Restructuring, E&Y did provide financial advisory services to the Company including valuation advisory services pertaining to the terms of the Restructuring. THE THREE-YEAR BUSINESS PLAN The summary that follows is not intended to be complete and is qualified in its entirety by the actual terms of the Three-Year Business Plan. See "PROJECTED CONSOLIDATED FINANCIAL INFORMATION" for the projected financial information on which the Three-Year Business Plan is based. In the latter part of Fiscal 1997 and the beginning of 1998, the Company developed the Three-Year Business Plan. Under the Three-Year Business Plan, the Company intends to, among other things: (i) grow its currently profitable branded businesses with its existing labels such as Perry Ellis, John Henry and Manhattan; (ii) expand its branded menswear business with new licensed labels; (iii) expand its private brand programs such as Sear's Canyon River Blues denim and Khaki programs; (iv) develop strategies designed to return the Company's Children Group to historical levels of profitability; (v) implement procedures designed to improve operational efficiencies in distribution, manufacturing and information systems; and (vi) leverage the overhead structure of the Company. While the Three-Year Business Plan contemplates the Company maintaining each business segment and major line of business through the three year period, the Company will periodically review each such business segment and major line of business in order to determine whether each aspect of the Company's business is (i) performing as budgeted (ii) consistent with the Company's strategic goals, and (iii) conducive to creating operating profits in order to maximize shareholder value. As a result of such periodic reviews the Company may determine to refocus capital to different aspects of its business, sell assets and/or exit certain businesses. LIQUIDATION ANALYSIS The Company has prepared the following liquidation analysis with the assistance of its financial advisor, E&Y. The liquidation analysis estimates the gross value available for distribution in a liquidation under Chapter 7 of the Bankruptcy Code to be between $122,541,000 and $149,167,000 less (i) all indebtedness outstanding under the Credit Agreement with CIT estimated to be $58,562,000, and (ii) administrative expenses including trustee and professional fees estimated to be between $43,062,000 and $51,667,000. Accordingly, under such analysis the net proceeds available to Noteholders and Stockholders would be between $12,312,000 and $47,543,000. Based on the Noteholders' claim of $104,879,000 plus accrued and unpaid interest to the date of liquidation (which amounts are estimated to aggregate $114,067,000), the liquidation would net the Noteholders' between a 10.8% and a 41.7% recovery on their claims and leave existing Stockholders with no consideration, assuming a strict priority distribution. The following liquidation analysis is an estimate of the proceeds that may be generated as a result of a hypothetical Chapter 7 liquidation of the assets of the Company. The liquidation analysis makes numerous assumptions with respect to asset valuation, industry performance, business and economic conditions, and other matters, many of which are beyond the Company's control. Moreover, the methods and assumptions used in preparing the liquidation analysis involve significant elements of subjective judgment on the part of the Company and may or may not prove to be correct. The liquidation analysis does not purport to be a valuation of the Company's assets and is not necessarily indicative of the values that may be realized in an actual liquidation, which may be significantly more or less favorable than the estimates contained in the liquidation analysis. SALANT CORPORATION HYPOTHETICAL LIQUIDATION ANALYSIS ($ in thousands) Assets Estimated Available Estimated Liquidation Value for % Recovery (Unaudited) Liquidation ------------------ ------------------------- (Unaudited) Low High Low High Note ------------ ------- ------ ------ ------- ----- Assets To Be Liquidated Cash & Cash $ 3,922 100.0% 100.0% $ 3,922 $ 3,922 Equivalents Accounts Receivable 64,786 70.0% 80.0% 45,350 51,829 1 Inventory 95,231 84.4% 95.1% 53,353 61,083 2 Prepaid Expenses 3,590 45.0% 65.0% 1,616 2,334 3 Net Property & 25,215 5.0% 10.0% 4,500 7,000 4 Equipment Other Assets 57,240 24.1% 40.2% 13,800 23,000 5 -------- -------- -------- Total Assets $249,984 122,541 149,167 ======== Less: Administrative and Priority Claims Merchandise Receipts During Liquidation (21,500) (21,500) 2 Period Wind-down Expenses (13,802) (10,802) 6 Trustee Fees (3,676) (2,238) 7 Professional Fees (Estimate) (5,000) (3,000) Employee Severance and Related Costs (5,363) (4,197) 8 Prepetition Priority Tax Claim (326) (326) Subtotal (2,000) (1,000) -------- -------- (51,667) (43,062) -------- -------- Net Liquidation Proceeds Available for 70,874 106,105 Distribution Less: Secured Claims Pre-petition Lenders (58,562) (58,562) 9 -------- ------- Proceeds Available for Distribution to Senior Secured Noteholders 12,312 47,543 Senior Secured Noteholders (114,067) (114,067) 10 Recovery % Senior Secured Noteholders 10.8% 41.7% Proceeds Available for Distribution to General Unsecured Creditors 0 0 General Unsecured Creditors: Accounts Payable, Trade (34,331) (34,331) 11 Lease Rejection Claims (10,013) (7,510) 12 Purchase Order Cancellation Claims (8,500) (6,375) 3 Pension Termination Costs (7,900) (7,900) 13 Contingency for Unrecorded Claims (2,000) (1,000) -------- ------- Total Unsecured Claims $ (62,744) $(57,116) ========= ======= Recovery Percent - General Unsecured Creditors 0.0% 0.0% Recovery to Equity Holders $ 0 $ 0 ========= ======= General Assumptions a) The Liquidation Analysis reflects the Company's estimates of the proceeds that would be realized if the Company were to be liquidated in accordance with Chapter 7 of the Bankruptcy Code and is based on the Company's projected assets and liabilities as of July 1, 1998 (which for purposes of this Liquidation Analysis is assumed to be the date that a hypothetical Chapter 7 case would be commenced). Underlying the Liquidation Analysis are a number of estimates and assumptions that, although developed and considered reasonable by management, are inherently subject to uncertainties beyond the control of the Company and its management. b) The Liquidation Analysis assumes that the wind-down of the Company's estate would be completed within twelve months (the "Liquidation Period") and the sale of the assets would be completed during the first five months of the Liquidation Period. The Liquidation Period would allow the Company to sell its inventories, wind down operational activities, complete the claims reconciliation process and make distributions to parties-in-interest. c) The wind-down costs in the liquidation analysis include operating expenses and other costs considered likely to be incurred during the Liquidation Period. Significant liquidation activities would include the liquidation of inventories, collection of accounts receivable, negotiation for the sale of real estate and/or real estate leases, equipment located in the Company's manufacturing facilities and distribution centers, owned trademarks and other remaining assets. d) During the first three months of the Liquidation Period, staff reductions would take place for IS programmers, buying, selling, manufacturing and administrative staff, and certain management positions. During that period, certain IS, financial, legal and administration personal would be retained to manage the wind down and plan the inventory liquidation. e) All assets are assumed to be sold for cash or cash equivalents, and all distributions are assumed to be completed on or about June 30, 1999. f) The claim amounts reflected in the liquidation analysis are based on the Company's estimate of claims which are expected to be incurred as a result of the liquidation and the Company's estimate of claims which would exist as of July 1, 1998. Notes to Liquidation Analysis The following notes describe the significant assumptions that are reflected in the Liquidation Analysis. Note 1 - Accounts Receivable Accounts receivable balances primarily include amounts due from customers. The recovery of receivables is based on an estimate by the Company's management of collection, given such factors as the aging of the receivables and the time and effort to make inquires. For purposes of this Liquidation Analysis, the high estimate assumes 80% recovery on the accounts receivable balance and the low estimate assumes 70% recovery on the accounts receivable balance which includes a provision for chargebacks. Note 2 - Inventory It is assumed that, upon conversion of the case to a Chapter 7 liquidation, the Company would stop entering into new purchase commitments and would mitigate purchase order cancellation claims by receiving as many orders as is practical during the Liquidation Period. The cost of on order merchandise for which delivery was accepted by the Company during the Liquidation Period represents an administrative expense of the estate. It is assumed that claims arising from the cancellation of purchase orders would approximate 100% of the cost of the orders in the low recovery scenario and 75% in the high recovery scenario. It is assumed that the inventory would be liquidated in the Company's current channels of distribution over a five month period. The liquidation analysis reflects recoveries on inventory after adjustments for defective merchandise, shrink, markdowns and other allowances incurred during the Liquidation Period. Note 3 - Prepaid Expenses Prepaid expenses consist mostly of prepaid rent and other expenses. The low estimate assumes a 45% recovery in a liquidation. The high estimate assumes a possible recovery of 65% of the prepaid expense balance. Note 4 - Property and Equipment Recoveries for owned real estate is based upon an estimate by the Company's management of the current market for such properties assuming a forced liquidation sale. Machinery and equipment and lease hold improvements are assumed to have minimal value in liquidation. Note 5 - Other Assets Primarily relates to the value of owned trademarks and tradenames, which have been valued based upon a multiple of net royalty income. Note 6 - Wind-Down Costs The estimate for wind-down costs was based on expense levels of the Company in February 1998. The liquidation process was assumed to commence immediately upon the filing of these cases. Such expenses were forecast by department assuming the wind down of each department, as appropriate, during the Liquidation Period. Solely for purposes of Liquidation Analysis it was estimated that under the low recovery scenario, wind-down costs would be 110% of the estimated total expenses to allow for contingencies. The high recovery is assumed to be 90% of the estimated wind down expenses. Note 7 - Trustee Fees Section 326 of the U.S. Bankruptcy Code limits U.S. Trustee fees to 3.0% of gross liquidation proceeds. The low recovery estimate assumes 3.0% of the low value of the liquidation proceeds. The high recovery estimate assumes 1.5% of the high liquidation proceeds. Note 8 - Employee Severance and Related Costs Estimate includes the cost of severance in accordance with Company policy and includes an estimate for retention bonuses necessary in order to ensure an orderly liquidation. Estimate is based upon one month's salary at current headcount levels. High scenario assumes aggregate severance and retention bonuses at 90% of this amount and high scenario assumes 110%. Note 9 - Prepetition Bank Lenders Represents amounts due to CIT under the Credit Agreement. Such amounts are deemed to be fully secured for the purpose of this analysis. Note 10 - Senior Secured Notes The Senior Secured Notes are secured by a second lien on all of the assets of the Company (other than certain assets, including, without limitation, general intangibles of the Company, with respect to which the Senior Secured Notes are secured by a first lien thereon, subject to the right of CIT to receive, under certain circumstances, the first $15 million of proceeds from the sale of the Company's general intangibles). Accordingly this analysis assumes that all proceeds available for distribution would be used to satisfy the claims of the note holders before any distribution could be made to the general unsecured creditors. Claim amounts include accrued but unpaid interest through July 1, 1998. Note 11 - Accounts Payable and Accrued Expenses Postpetition accounts payable and accrued expenses reflects estimated vendor and expense payables outstanding estimated at July 1, 1998. Note 12 - Lease Rejection Claims The lease rejection claim is calculated under the guidelines as stipulated by the section 502(b) of the Bankruptcy Code which limits lease damages to the greater of one year's lease obligation, or 15% of the remaining lease terms, not to exceed 3 years. The high recovery scenario contemplates 25% mitigation of the claims relating to leases with below market rents. Note 13 - Pension Termination Costs Represents the cost actuarially determined to terminate the Company's various pension and retirement plans, as of January 3, 1998. DISTRIBUTION OF NET PROCEEDS ($ IN THOUSANDS) The following table sets forth an estimated distribution of the between $70,874 and $106,105 in net proceeds distributable to holders of secured claims, nonpriority unsecured claims and equity interests in a hypothetical Chapter 7 liquidation of the Company on the Effective Date and a comparison to estimated recoveries under the proposed Prepackaged Plan. The distribution in such liquidation gives effect to strict enforcement of all contractual subordination provisions. Chapter 7 Chapter 11 --------------------------------- --------------------------------- Claim or Claim or Equity Recovery Recovery Equity Recovery Recovery Class Interest ($) (%) Interest ($) (%) - ------------------------------------------------------------------------------- (dollars in thousands) 2 $58,562 $58,562 100% $58,562 $58,562 1 100% (CIT Claim) 3 $114,067 $12,312 10.8% to $114,067 $110,000 2 96.4% (Senior to $47,453 41.7% Note Claims) 4 $0 $0 -- $0 $0 -- (Misc. Secured Claims) 5 $57,116 $0 -- $35,331 $35,331 to 100% (General to $62,744 to $36,331 $36,331 3 Unsecured Claims) 6 Old $0 -- Old $15,000 4 -- Common Common Stock Stock Interests 7 Other $0 -- Other $0 -- Interests Interests As illustrated by the foregoing, the Company believes that under the Prepackaged Plan, each Holder of an Impaired Claim in Class 3 and each Holder of an Impaired Interest will receive on account of such Claim or Interest, property of a value, as of the Effective Date, that is not less than the value such Holder would receive if the Company were liquidated under Chapter 7 of the Bankruptcy Code on the Effective Date. Accordingly, the Company believes the Prepackaged Plan satisfies the requirements of the best interests test set forth in Section 1129(a)(7) of the Bankruptcy Code. - ------------------------ 1 Estimated aggregate amount due to CIT under the Credit Agreement as of July 1, 1998 (which date, for purposes of this Litigation Analysis, is assumed to be the date that a hypothetical Chapter 7 case would be commenced). See "Liquidation Analysis" above. 2 Estimated aggregate value attributable to shares of New Common Stock to be issued to Holders of Senior Note Claims. See "BACKGROUND OF RESTRUCTURING -- The Letter Agreement." 3 Estimated aggregate amount due to holders of General Unsecured Claims as of July 1, 1998. See "Liquidation Analysis" above. 4 Estimated aggregate value attributable to shares of New Common Stock and Warrants to be issued to Holders of Old Common Stock Interests. See "BACKGROUND OF RESTRUCTURING -- The Letter Agreement." UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The following Unaudited Pro Forma Consolidated Balance Sheet as of July 4, 1998 and the Unaudited Pro Forma Consolidated Statements of Operations for the six month period ended July 4, 1998 and for the year ended January 3, 1998 are based upon the historical financial position and results of operations as of and for the periods then ended. The following pro forma adjustments (based on the assumptions set forth below) give affect to the Exchange Restructuring transactions, including (i) the issuance of 18,456,350 shares, after giving affect to the Reverse Split, of New Common Stock to Noteholders, (ii) the issuance of 1,517,100 shares of New Common Stock to Stockholders, after giving effect to the Reverse Split, which includes 1,496,461 shares of New Common Stock to be issued upon consummation of the Restructuring and 20,639 shares of New Common Stock reserved for issuance in order to settle claim asserted in the 1990 Chapter 11 Case, and (iii) the issuance of Warrants representing the right to purchase up to 2,216,979 shares, after giving effect to the Reverse Split, of New Common Stock to Stockholders. The following Unaudited Pro Forma Consolidated Balance Sheet as of July 4, 1998 includes pro forma adjustments as if the Exchange Restructuring had been completed on that date. The following Unaudited Pro Forma Consolidated Statement of Operations for the six month period ended July 4, 1998 and the year ended January 3, 1998 includes pro forma adjustments as if the Exchange Restructuring had been completed at December 29, 1996. The pro forma adjustments are based on available information and upon certain assumptions that the Company believes are reasonable under the circumstances. The unaudited pro forma condensed consolidated financial statements and accompanying notes should be read in conjunction with the historical consolidated financial statements of the Company, including the notes thereto, and the other information pertaining to the Company appearing elsewhere in this Proxy Statement/Prospectus or incorporated herein. THESE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED TO BE INDICATIVE OF THE FINANCIAL CONDITIONS OR RESULTS OF OPERATIONS OF THE COMPANY HAD THE TRANSACTIONS DESCRIBED THEREIN BEEN CONSUMMATED ON THE RESPECTIVE DATES INDICATED AND ARE NOT INTENDED TO BE PREDICTIVE OF THE FINANCIAL CONDITION OR RESULTS OF OPERATIONS OF THE COMPANY AT ANY FUTURE DATE OR FOR ANY FUTURE PERIOD. SALANT CORPORATION UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (IN THOUSANDS) HISTORICAL PRO FORMA PRO FORMA JULY 4, 1998 ADJUSTMENTS JULY 4, 1998 ------------ ----------- ------------ ASSETS Current Assets: Cash and cash equivalents $ 1,160 $ $ 1,160 Accounts receivable, net 41,195 41,195 Inventories 107,143 107,143 Prepaid expenses and other current assets 9,310 (4,542)(c) 4,768 Total current assets 158,808 (4,542) 154,266 Property, plant & equipment, net 27,561 27,561 Other assets 55,920 55,920 ---------- ---------- ------------ $ 242,289 $ (4,542) $ 237,747 ========== ========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Loans payable $52,176 $52,176 Accounts payable 23,604 23,604 Reserve for business restructuring 869 869 Accrued salaries, wages and other liabilities 19,953 (9,318)(b) 11,680 1,045 (c) Current portion of long term debt 104,879 (104,879)(b) -- ---------- ---------- ----------- Total Current Liabilities 201,481 (113,152) 88,329 Deferred Liabilities 5,340 5,340 Shareholders' equity: Preferred stock -- -- Common stock 15,405 (234)(d) 19,973 (15,171)(e) 1,517 (e) 18,456 (b) Additional paid-in capital 107,249 15,171 (e) 206,860 (1,517)(e) 6,100 (b) 85,444 (b) (5,587)(c) Deficit (82,100) (1,380)(d) (79,283) 4,197 (b) Accumulated other comprehensive income (3,472) (3,472) Treasury stock (1,614) 1,614 (d) -- ---------- ---------- ------------ Total stockholders' equity 35,468 105,942 144,078 ---------- --------- ------------ $242,289 0 $237,747 ========== ========== ============ See notes to the Unaudited Pro Forma Consolidated Financial Statements. SALANT CORPORATION UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JULY 4, 1998 PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ---------------------------------------------- Net sales $ 159,343 $ $159,343 Costs of sales 125,926 125,926 --------- --------- -------- Gross profit 33,417 33,417 Selling, general and administrative expenses (34,333) (34,333) Royalty Income 2,676 2,676 Goodwill amortization (940) (940) Other income, net 160 160 Reversal of Division restructuring costs 171 171 --------- --------- -------- Income from continuing operations before interest, income taxes and extraordinary gain 1,151 --------- 1,151 Interest expense, net (8,042) 5,506(f) (2,536) -------- --------- -------- loss from continuing operations before income taxes (6,891) 5,506 (1,385) Income taxes (26) -(g) (26) --------- --------- -------- loss from continuing operations $ (6,865) $ 5,506 $ (1,359)(h) ======== ========= ======== Basic loss per share from continuing operations (0.45) $ (.07) ========= ======== Weighted average common stock outstanding 15,170 19.973(i) ========= ======== See notes to the Unaudited Pro Forma Consolidated Financial Statements. SALANT CORPORATION UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 3, 1998 PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ---------------------------------------------- Net sales $396,832 $ $396,832 Costs of sales 312,358 312,358 -------- --------- -------- Gross profit 84,474 84,474 Selling, general and administrative expenses (80,593) (80,593) Royalty Income 5,596 5,596 Goodwill amortization (1,881) (1,881) Other income, net 575 575 Division restructuring costs (2,066) (2,066) -------- --------- -------- Income from continuing operations before interest, income taxes and extraordinary gain 6,105 6,105 Interest expense, net (16,660) 11,226 (f) (5,434) -------- --------- -------- Income/(loss) from continuing operations before income taxes (10,555) 11,226 671 Income taxes 167 - (g) 167 -------- --------- --------- Income/(loss) from continuing operations (10,722) 11,226 504(h) ======== ========= ========= Basic earnings/(loss) per share from continuing operations $ (0.71) $ .03 ======== ========= Weighted average common stock outstanding 15,139 19,973(i) ======== ========= See notes to the Unaudited Pro Forma Consolidated Financial Statements. SALANT CORPORATION NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (a) Presentation: The Unaudited Pro Forma Consolidated Financial Statements assume that the transactions contemplated by the Exchange Restructuring occurred on July 4, 1998 for purposes of the Unaudited Pro Forma Consolidated Balance Sheet and December 29, 1996 for purposes of the Unaudited Pro Forma Consolidated Statement of Operations. (b) Represents (i) the Noteholders exchange of $104.879 million principal amount of Senior Notes and $6.65 million of accrued interest thereon for 18,456,350 shares, after giving affect to the ten-for-one Reverse Stock Split, of New Common Stock, and (ii) the issuance of Warrants, representing the right to purchase up to 2,216,979 shares, after giving affect to the ten-for-one Reverse Split, of New Common Stock, to Stockholders at a value of $6.1 million, using the Black-Scholes option pricing formula, which incorporates such factors as the relationship of the underlying stock's price to the strike price of the Warrants and the time remaining until the Warrants expire. (c) Represents expenses of $5,587 (of which $4,542 have been paid as of July 4, 1998) attributable to the restructuring activities of the Company which are offset against stockholders equity. (d) Represents the retirement of the Company's outstanding Treasury Stock at original cost. (e) Represents the retirement of 15,171,000 shares Old Common Stock, which includes 14,964,608 issued and outstanding shares and 206,392 shares of Old Common that have been reserved for issuance in order to settle claims asserted in the 1990 Chapter 11 Case, and the issuance of 1,517,100 shares of New Common Stock to Stockholders, thereby giving effect to the ten-for-one Reverse Split, which includes 1,496,461 shares of New Common Stock to be issued upon consummation of the Restructuring and 20,639 shares of New Common Stock to be reserved for issuance in order to settle claims asserted in the 1990 Chapter 11 Case. (f) Represents the elimination of interest expense relating to the Company's existing 10 1/2% Senior Notes. (g) No tax provision was reflected due to the utilization of approximately $500,000 of net operating loss carryforwards. (h) The Unaudited Pro Forma Consolidated Statements of Operations do not include an extraordinary (loss)/gain on early extinguishment of debt of approximately ($1.2) million and $4.2 million at January 4, 1998 and July 4, 1998, respectively. (i) The pro forma weighted average shares outstanding assumes all New Common Stock is outstanding for the entire period. PROJECTED CONSOLIDATED FINANCIAL INFORMATION The projected financial information set forth below (the "Projections") should be read in conjunction with the assumptions, qualifications, limitations and explanations set forth herein, the selected historical financial information and the other information set forth in "SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION" in this Proxy Statement/Prospectus and the other financial statements contained herein. GENERAL The Projections contained herein constitutes "forward-looking statements" within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. The Projections reflect numerous assumptions, including various assumptions with respect to the anticipated future performance of the Company after the Restructuring, industry performance, general business and economic conditions and other matters, some of which are beyond the control of the Company. In addition, unanticipated events and circumstances may affect the actual financial results of the Company in the future. THEREFORE, WHILE THE PROJECTIONS ARE NECESSARILY PRESENTED WITH NUMERICAL SPECIFICITY, THE ACTUAL RESULTS ACHIEVED THROUGHOUT THE YEARS 1998-2000 (the "PROJECTED PERIOD") MAY VARY FROM THE PROJECTED RESULTS. THESE VARIATIONS MAY BE MATERIAL. ACCORDINGLY, NO REPRESENTATION CAN BE MADE OR IS MADE WITH RESPECT TO THE ACCURACY OF THE PROJECTIONS OR THE ABILITY OF THE COMPANY TO ACHIEVE THE PROJECTED RESULTS. See "DISCUSSION OF RISK FACTORS" for a discussion of certain factors that may affect the future financial performance of the Company and of the various risks associated with the securities of the Company to be issued pursuant to the Restructuring. The Company does not, as a matter of course, make public projections of its anticipated financial position or results of operations. Accordingly, the Company does not anticipate that it will, and disclaims any obligation to, furnish updated projections in the event that actual industry performance or the general economic or business climate differs from that upon which the Projections have been based. Further, the Company does not anticipate that it will include such information in documents required to be filed with the Commission, or otherwise make such information public. The Projections have been prepared by the Company's management, and while it believes that the assumptions underlying the projections for the Projected Period, when considered on an overall basis, are reasonable in light of current circumstances, no assurance can be given or is given that the Projections will be realized. The Projections were not prepared in accordance with standards for projections promulgated by the American Institute of Certified Public Accountants or with a view to compliance with published guidelines of the Commission regarding projections or forecasts. The Projections have not been audited, reviewed or compiled by the Company's Independent Auditors. Neither the Company's independent auditors, nor any other independent accountants or financial advisors, have compiled, examined or performed any procedures with respect to the projected consolidated financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the projected financial information. PRINCIPAL ASSUMPTIONS The Projections are based upon forecasts of operating results during the Projected Period. The following is a listing of assumptions that were used to develop the Projections. 1) The Projections assume that the Restructuring will be consummated on November 30, 1998. 2) The Projections assume that the Company will continue to operate without significant changes to its current structure. 3) The Projections assume that the current economic environment continues throughout the Projected Period 4) The Projections assume that no unforeseen national or international events will occur during the Projected Period that would cause the retail industry to be adversely impacted. In addition to the aforementioned assumptions, the Projections are based on numerous detailed operating assumptions. The Projections also assume, among other things, the successful implementation of the Three-Year Business Plan. The table below summarizes the projected operating statistics that management believes are significant and upon which the financial results of the Company will depend during the Projected Period. ------------------------------------------------------------------------ Actual 1997 1998 1999 2000 ---- ---- ---- ---- Net Sales (Millions) $396.8 $374.3 $385.8 $425.0 Total Gross Margin as a % of Sales 21.3% 23.3% 24.7% 25.5% Total Operating Expenses as a % of Total Sales 20.3% 19.5% 19.5% 18.6% ------------------------------------------------------------------------ SALES During the Projected Period, sales are assumed to increase from $396.8 million in fiscal 1997 to $425.0 million in fiscal year 2000, a 2.3% compound annual growth rate. This increase in sales is expected to result from a combination of additional sales to existing customers and the development of new customers. In the Perry Ellis division, sales growth will be driven by the continued opening of in-store shops for the sportswear collection business, expansion of casual sportswear through the Perry Cottons line, re-establishment of the Perry Ellis Portfolio Pants line in at least three department stores, and new door expansion with existing customers in Canada. Sales growth in the Salant Menswear Group is expected to result from a strategy of aligning the dress shirt business with the accessories business by structuring the salesforce around retail customers rather than product line, by concentrating on private label growth in dress shirts, bottoms and accessories and by refocusing Perry Ellis accessories into department stores. In the Children's Group, sales growth is expected to result from enhanced brand management of the sleepwear business by price points and customer type. GROSS MARGIN The Gross Margin presented in the Projections includes cost of merchandise and certain design, manufacturing and distribution costs. The overall level of Gross Margin as a percentage of sales is expected to increase during the Projected Period primarily as the result of a change in the sales mix and an improvement related to certain manufacturing, sourcing and distribution processes. The expected changes in sales mix will reflect a higher proportion of regular price and incentive price sales and a lower proportion of off-price sales, in all divisions. This shift will occur as a result of the minimization of off-price programs, as well as improvements in the manufacturing process and product quality (i.e., fewer seconds). Improvements in gross margins will also result from better execution in sourcing and distribution, such as shifting production to more effective off-shore facilities. Management believes that the improvements in gross management are achievable based upon process improvements made to date and recent trends away from off-price sales, and the continued focus of recently hired Vice Presidents of Manufacturing and Distribution (two previously vacant positions). OPERATING EXPENSES Expenses are forecast based upon existing expense structures adjusted for increases in sales and changes relating to the implementation of a new management information system structure. In conjunction with the Three-Year Business Plan, management has introduced various initiatives that have streamlined its operations and reduced overhead costs. It is assumed that expenses will decrease in total dollar amount during the Projected Period from $80.6 million in fiscal year 1997 to $79.1 million in fiscal year 2000. Expenses as a percentage of sales ("Operating Expenses/Net Sales") is assumed to decrease during the Projected Period from 20.3% in fiscal year 1997 to 19.5% in fiscal year 2000. Management intends to implement several new initiatives which management believes will further benefit the Company's operations and will help reduce expenses to the assumed levels. Management's primary means of reducing operating expenses as a percentage of sales is to leverage operating expenses through increased sales, which is expected to result from the initiatives described above. Other expense reduction initiatives to be substantially completed by the end of 1998 include the consolidation of the Perry Ellis Bottoms and Dress Shirts divisions into one operational group focusing on Portfolio, sub-licensing of the Perry Ellis America line, consolidation of the Accessories division into Salant Menswear Group, the installation of a new electronic data processing system and the discontinuation of the Joe Boxer Sportswear line. However, the impact on operations from these expense reduction initiatives will be seen throughout the Projected Period. WORKING CAPITAL Working capital has been forecast based upon the Company's experience and expectations in the marketplace and are consistent with the trends that the Company is currently experiencing. CAPITAL EXPENDITURES The Projections assume a significant reinvestment of capital into the Company over the Projected Period. The main areas of focus are management information systems, manufacturing and distribution. Management believes that these expenditures will substantially enhance operating efficiency, provide a platform for continued growth and are necessary to achieve the levels of profitability in the Projections. INTEREST EXPENSE During the Projected Period, annual interest expense consists of interest on the average outstanding Revolver, interest on the average outstanding Term Loan, annual credit facility fees, and an annual fee related to average Letter of Credit usage. For the Projected Period, the assumed interest rate for both the Revolver and the Term Loan is .25 percent in excess of the Prime Rate or 8.75% (based on the Prime Rate as of August 26, 1998). For the Revolver, the assumed interest rate is multiplied by the average revolver borrowings as projected by management resulting from the operating projections in the business plan. The assumed credit facility fees for both the Revolver and the Term Loan are $100,000 for 1998 and $200,000 under the new credit facility for 1999 and 2000. The assumed annual fee on the average Letter of Credit usage was based on a rate of 1.75% for each year in the Projected Period, multiplied by the average Letters of Credit assumed to be outstanding. INCOME TAXES The Company believes that the transactions contemplated by the restructuring will cause a substantial limitation of the use of the NOLs pursuant to Section 382 of the Internal Revenue Code. A combined federal and state income tax rate of 40% has been assumed in calculating the income taxes to be paid for each of the projected years. THE THREE-YEAR BUSINESS PLAN In connection with the Company's efforts to restructure, the Company developed the Three-Year Business Plan. See "RESTRUCTURING FINANCIAL CONSIDERATIONS -- The Three-Year Business Plan." The Projections form a part of the Three-Year Business Plan. Projected income statement, balance sheet and cash flow statements for the Company are included for each of the fiscal years 1998, 1999 and 2000. Additional information relating to the principal assumptions used in preparing the projections is set forth below. See "DISCUSSION OF RISK FACTORS" for a discussion of various factors that could materially affect the Company's financial condition, results of operations, business, prospects and securities. PROJECTED CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (In thousands) Fiscal Year Ending Dec. 31, -------------------------------------- 1998 1999 2000 ------------ ----------- ----------- Net sales $ 374,346 $ 385,788 $ 424,953 Cost of goods sold 278,085 290,652 (316,747) --------- --------- --------- Gross profit 87,261 95,136 108,206 Selling, general and administrative (73,114) (75,181) (79,069) Royalty income 5,528 4,398 4,063 Goodwill amortization (1,881) (1,881) (1,881) --------- --------- --------- Income from continuing operations before interest and income taxes 17,794 22,472 31,319 Interest expense, net (3,991) (4,060) (3,205) --------- --------- --------- Income from continuing operations before income taxes 13,803 18,412 28,114 Income taxes (5,522) (7,365) (11,246) --------- --------- --------- Net income $ 8,281 $ 11,047 $ 16,806 ========= ========= ========= PROJECTED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) FISCAL YEAR ENDING DEC. 31, ---------------------------------- 1998 1999 2000 ---------- ---------- ---------- ASSETS CURRENT ASSETS: Cash $ 2,218 $ 2,218 $ 2,218 Accounts Receivable (Net) 59,713 58,738 62,488 Inventories (Net) 91,204 91,537 99,100 Prepaid Expenses 4,597 4,449 4,627 -------- -------- -------- TOTAL CURRENT ASSETS 157,732 156,942 168,433 Net Fixed Assets 30,943 31,184 31,833 Other Assets 55,035 51,854 48,573 -------- -------- -------- TOTAL ASSETS $243,710 $239,980 $248,839 ======== ======== ======== LIABILITIES AND EQUITY CURRENT LIABILITIES: Loan Payable $ 26,166 $ 12,932 $ 6,009 Current Portion of Long-Term Debt 1,750 3,00 10,250 Accounts Payable 28,522 29,086 30,568 Accrued Expenses 11,120 10,762 11,195 Other 2,906 2,906 2,906 Long-Term Debt 13,250 10,250 0 -------- -------- -------- TOTAL CURRENT LIABILITIES 70,463 58,686 60,927 Other (deferred liab) 5,579 5,579 5,579 -------- -------- -------- TOTAL LIABILITIES 89,292 74,515 66,506 TOTAL SHAREHOLDERS' EQUITY 154,418 165,465 182,333 -------- -------- -------- TOTAL LIABILITIES AND EQUITY $243,710 $239,980 $248,839 ======== ======== ========
PROJECTED STATEMENTS OF CONSOLIDATED CASH FLOWS (In thousands) FISCAL YEAR ENDING DEC. 31, ------------------------------------ 1998 1999 2000 ---------- ---------- ---------- OPERATING ACTIVITIES: Net Income $ 8,281 $ 11,047 $ 16,868 Adjustment to reconcile net income to net cash used in operating activities: Accretion of interest on senior secured notes 11,012 0 0 Amortization of intangibles 3,004 3,181 3,281 Depreciation 7,188 7,580 7,187 Changes in operating assets and liabilities Net accounts receivable (1,058) 975 (3,749) Inventory 5,434 (332) (7,563) Prepaids and other assets (380) 148 (179) Accounts payable 776 564 1,482 Accrued expenses (507) (358) 432 Other current liabilities (4,394) 0 0 -------- -------- -------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES 29,356 22,805 17,759 INVESTING ACTIVITIES: Purchase of fixed assets, net (11,692) (7,821) (7,836) -------- -------- -------- NET CASH USED IN INVESTING ACTIVITIES (11,692) (7,821) (7,836) FINANCING ACTIVITIES: (Repayments) increase of loan payable (20,064) (13,234) (6,932) (Decrease) increase to equity (restructuring charges) (5,423) 0 0 (Repayments) increase of long-term debt 15,000 (1,750) (3,000) -------- -------- -------- Net cash provided by (used in) financing activities (11,027) (14,984) (9,923) -------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 6,637 0 0 Cash and cash equivalents, beginning of year 2,218 8,855 8,855 -------- -------- -------- Cash and cash equivalents, end of year $ 8,855 $ 8,855 $ 8,855 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS: Conversion of debt to common stock $115,891
BUSINESS AND PROPERTIES OF THE COMPANY OVERVIEW Introduction The Company which was incorporated in Delaware in 1987, is the successor to a business founded in 1893 and incorporated in New York in 1919. The Company designs, manufactures, imports and markets to retailers throughout the United States brand name and private label apparel products primarily in three product categories: (i) menswear; (ii) children's sleepwear and underwear; and (iii) retail outlet stores, as described below. The Company sells its products to department and specialty stores, national chains, major discounters and mass volume retailers throughout the United States. (As used herein, the "Company" includes Salant and its subsidiaries, but excludes Salant's Made in the Shade and Vera Scarf divisions.) Men's Apparel The men's apparel business is comprised of the Perry Ellis division and Salant Menswear Group. The Perry Ellis division markets dress shirts, slacks and sportswear under the Perry Ellis, Portfolio By Perry Ellis and Perry Ellis America trademarks. Salant Menswear Group is comprised of the Accessories division, the Bottoms division and all dress shirt businesses other than those selling products bearing the Perry Ellis trademarks. The Accessories division markets neckwear, belts and suspenders under a number of different trademarks, including Portfolio By Perry Ellis, John Henry, Save The Children and Peanuts. The Bottoms division primarily manufactures men's and boys' jeans, principally under the Sears, Roebuck & Co. ("Sears") Canyon River Blues trademark, and men's casual slacks under Sears' Canyon River Blues Khakis trademark. The Salant Menswear Group also markets dress shirts, primarily under the John Henry and Manhattan trademarks. Children's Sleepwear and Underwear The children's sleepwear and underwear business is conducted by the Salant Children's Apparel Group (the "Children's Group"). The Children's Group markets blanket sleepers primarily using a number of well-known licensed cartoon characters created by, among others, Disney and Warner Bros. The Children's Group also markets pajamas under the OSHKOSH B'GOSH trademark, and sleepwear and underwear under the Joe Boxer trademark. At the end of the first quarter of 1998, the Company determined not to continue with its Joe Boxer sportswear line for Fall 1998. Instead, consistent with the approach that the Joe Boxer Corporation (Salant's licensor of the Joe Boxer trademark) has taken, the Company will focus on its core business of underwear and sleepwear. Retail Outlet Stores The retail outlet stores business of the Company consists of a chain of factory outlet stores (the "Stores division"), through which it sells products manufactured by the Company and other apparel manufacturers. In December 1997, the Company announced the restructuring of the Stores division, pursuant to which the Company closed all stores other than its Perry Ellis outlet stores. This resulted in the closing of 42 outlet stores. At the end of Fiscal 1997, the Company operated 17 Perry Ellis outlet stores. Commencing with the 1998 fiscal year, as a result of the restructuring of this division, the retail outlet stores will be reported as part of the men's apparel segment of Salant. Principal Product Lines The following table sets forth, for fiscal years 1995 through 1997, the percentage of the Company's total net sales contributed by each category of product: FISCAL YEAR ----------- 1995 1996 1997 ---- ---- ---- Men's Apparel 86% 83% 82% Children's Sleepwear and Underwear 8% 11% 12% Retail Outlet Stores 6% 6% 6% For more detailed information regarding the Company's product categories, see Note 11 to the Consolidated Financial Statements. In Fiscal 1997, approximately 17% of the Company's net sales were made to Sears, approximately 11% of the Company's net sales were made to Federated Department Stores, Inc. ("Federated") and approximately 10% of the Company's net sales were made to TJX Corporation ("TJX"). In 1996, approximately 13% of the Company's net sales were made to Sears. In 1996 and 1995, net sales to Federated represented approximately 11% and 12% of the Company's net sales, respectively. In 1995, approximately 11% of the Company's net sales were made to TJX. In 1995, approximately 13% of the Children's Group's net sales were made to Dayton Hudson Corporation. No other customer accounted for more than 10% of the net sales of the Company or any of its business segments during 1995, 1996 or 1997. The markets in which the Company operates are highly competitive. The Company competes primarily on the basis of brand recognition, quality, fashion, price, customer service and merchandising expertise. A significant factor in the marketing of the Company's products is the consumer perception of the trademark or brand name under which those products are marketed. Approximately 76% of the Company's net sales for Fiscal 1997 was attributable to products sold under Company owned or licensed designer trademarks and other internationally recognized brand names and the balance was attributable to products sold under retailers' private labels, including Sears' Canyon River Blues. The following table lists the principal owned or licensed trademarks under which the Company's products were sold in Fiscal 1997 and the product lines associated with those trademarks. Trademarks used under license are indicated with an asterisk; all other listed trademarks are owned by the Company. TRADEMARK PRODUCT LINES Disney characters * Children's sleepwear and underwear Dr. Denton Children's sleepwear and underwear Gant* Men's dress shirts, neckwear, belts and suspenders Joe Boxer * Children's sleepwear, underwear and sportswear; men's neckwear John Henry Men's dress shirts, neckwear, belts, suspenders and jeans Looney Tunes characters * Children's sleepwear Manhattan Men's dress shirts Oshkosh B'gosh* Children's sleepwear Peanuts* Men's dress shirts and neckwear Perry Ellis * Men's sportswear, dress shirts, neckwear, belts and suspenders Perry Ellis America * Men's casual sportswear and jeans Portfolio By Perry Ellis * Men's dress slacks, dress shirts, neckwear, belts and suspenders Save The Children* Men's neckwear and suspenders Thomson Men's casual and dress slacks Unicef* Men's neckwear During Fiscal 1997, 44% of the Company's net sales was attributable to products sold under the Perry Ellis, Portfolio By Perry Ellis and Perry Ellis America trademarks; these products are sold through leading department and specialty stores. Products sold to Sears under its exclusive brand Canyon River Blues accounted for 14% of the Company's net sales during Fiscal 1997. No other line of products accounted for more than 10% of the Company's net sales during Fiscal 1997. Trademarks Owned by the Company and Related Licensing Income The Company owns the Dr. Denton, John Henry, Lady Manhattan, Manhattan and Thomson trademarks, among others. All of the significant brand names owned by the Company have been registered or are pending registration with the United States Patent and Trademark Office. The Company has sought to capitalize on the consumer recognition of and interest in its trademarks by licensing various of those trademarks to others. As of the end of Fiscal 1997, licenses were outstanding to approximately 18 licensees to make or sell apparel products and accessories in the United States and to 34 licensees in 30 other countries under the Manhattan, Lady Manhattan, John Henry, and Vera trademarks, which produced royalty income of approximately $5.6 million in Fiscal 1997. Products under license include men's belts, dress shirts, leather accessories, neckwear, optical frames, outerwear, pajamas, robes, scarves, shorts, slacks, socks, sportcoats, sunglasses, suspenders and underwear, and women's blouses and tops, gloves, intimate apparel, lingerie, optical frames, scarves and shirts. Trademarks Licensed to the Company The name Perry Ellis and related trademarks are licensed to the Company under a series of license agreements with Perry Ellis International, Inc. ("PEI"). The license agreements contain renewal options, which, subject to compliance with certain conditions contained therein, permit the Company to extend the terms of such license agreements. Assuming the exercise by the Company of all available renewal options, the license agreements covering men's apparel and accessories will expire on December 31, 2015. The Company also has rights of first refusal worldwide for certain new licenses granted by PEI for men's apparel and accessories. The Company is also a licensee of various trademarks, including certain Disney characters (including Disney Babies, Mickey For Kids, Winnie The Pooh and The Lion King-Simba's Pride), Gant, Joe Boxer, Oshkosh B'gosh, Peanuts, Save The Children, Unicef and certain Warner Bros. characters (including certain Looney Tunes characters, such as Bugs Bunny, Daffy Duck and Porky Pig), for various categories of products under license agreements expiring between 1998 and 2002. The agreements under which the Company is licensed to use trademarks owned by others typically provide for royalties at varying percentages of net sales under the licensed trademark, subject to a minimum annual royalty payable irrespective of the level of net sales. The Company anticipates that it should be able to extend, if it so desires, the term of any material licenses when they expire. Design and Manufacturing Products sold by the Company's various divisions are manufactured to the designs and specifications (including fabric selections) of designers employed by those divisions. In limited cases, the Company's designers may receive input from one or more of the Company's licensors on general themes or color palettes. During Fiscal 1997, approximately 12% of the products produced by the Company (measured in units) were manufactured in the United States, with the balance manufactured in foreign countries. Facilities operated by the Company accounted for approximately 75% of its domestic-made products and 37% of its foreign-made products; the balance in each case was attributable to unaffiliated contract manufacturers. In Fiscal 1997, approximately 47% of the Company's foreign production was manufactured in Mexico, approximately 18% was manufactured in Guatemala and approximately 12% was manufactured in the Dominican Republic. 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. Although the Company's operations have not been materially adversely affected by any of such factors to date, any substantial disruption of its relationships with its foreign suppliers could adversely affect its 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 amounts 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 allocations could adversely affect the Company's operations. Raw Materials The raw materials used in the Company's manufacturing operations consist principally of finished fabrics made from natural, synthetic and blended fibers. These fabrics and other materials, such as leathers used in the manufacture of various accessories, are purchased from a variety of sources both within and outside the United States. The Company believes that adequate sources of supply at acceptable price levels are available for all such materials. Substantially all of the Company's foreign purchases are denominated in U.S. currency. No single supplier accounted for more than 10% of Salant's raw material purchases during Fiscal 1997. In Fiscal 1997, the Company entered into forward foreign exchange contracts, relating to 80% of its projected 1998 Mexican peso needs, to fix its cost of acquiring pesos and diminish the risk of foreign currency fluctuation. Employees As of the end of Fiscal 1997, the Company employed approximately 3,800 persons, of whom 3,200 were engaged in manufacturing and distribution operations and the remainder were employed in executive, marketing and sales, product design, engineering and purchasing activities and in the operation of the Company's retail outlet stores. Substantially all of the manufacturing employees are covered by collective bargaining agreements with various unions, which expire between 1998 and 2000. The Company believes that its relations with its employees are satisfactory. 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 larger 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 seeks to maintain its competitive position in the markets for its branded products on the basis of the strong brand recognition associated with those products and, with respect to all of its products, on the basis of styling, quality, fashion, price and customer service. Environmental Regulations Current environmental regulations have not had, and in the opinion of the Company, assuming the continuation of present conditions, are not expected to have a material effect on the business, capital expenditures, earnings or competitive position of the Company. Made in the Shade - Discontinued Operation In June 1997, the Company discontinued the operations of the Made in the Shade division, which produced and marketed women's junior sportswear under the Company owned trademarks Made In The Shade and Prime Time. The financial statements of the Company included in this report treat the Made in the Shade division as a discontinued operation. Vera Scarf Division - Discontinued Operation In February 1995, the Company discontinued its Vera Scarf division, which imported and marketed women's scarves under (i) the Company-owned trademarks Vera and Acute, (ii) trademarks licensed to the Company, including Perry Ellis, and (iii) retailers' private labels. The Company closed the Vera Scarf division in 1995. The financial statements of the Company included in this report treat the Vera Scarf division as a discontinued operation. Acquisition of J.J. Farmer On June 10, 1994, the Company acquired all the capital stock of J.J. Farmer Clothing Inc. (a Canadian corporation) and the assets of J.J. Farmer International Limited (a Hong Kong corporation) (collectively "J.J. Farmer") for approximately $5,311 in cash, subject to adjustment based on a number of items, including the future profitability of J.J. Farmer. As part of the acquisition, the company agreed to pay to the former owners of J.J. Farmer, certain minimum amounts in the years 1996 through 1999. The acquisition has been accounted for as a purchase, and accordingly, J.J. Farmer's operating results have been included in the Company's consolidated results of operations commencing June 11, 1994. J.J. Farmer's net sales for the five months ended May 31, 1994 were $3,392. The excess of cost over the book value of net assets acquired ($4,589 subject to adjustment) was being amortized over a period of not more than 15 years on a straight-line basis. In the second quarter of 1996, the Company discontinued the J.J. Farmer product line and recorded a restructuring charge of $5.7 million, primarily related to the write-off of goodwill and the write-down of other assets. The Company also entered into an agreement with the former owners of J.J. Farmer which eliminated all future minimum payments. As of January 3, 1998, any assets or liabilities related to J.J. Farmer were not material. Bankruptcy Court Cases On February 22, 1985, Salant NY and its two largest subsidiaries, Thomson Company, Inc. and Obion Company, Inc., filed with the Bankruptcy Court separate voluntary petitions for relief under Chapter 11 of the Bankruptcy Code (Case Nos. 85-B-10229 (PBA) through 85-B-10231 (PBA), inclusive). Salant NY's other United States, Canada and Mexico subsidiaries did not seek relief under the Bankruptcy Code or other foreign insolvency laws, respectively. On May 19, 1987, the Bankruptcy Court issued an order confirming the 1987 Chapter 11 Plan. The 1987 Chapter 11 Plan was consummated on June 2, 1987. On June 2, 1987, pursuant to the provisions of the 1987 Chapter 11 Plan, the assets and liabilities of Salant NY, Thomson and Obion were substantively consolidated, and Salant NY, Thomson and Obion and the inactive subsidiaries of Salant NY merged with a wholly-owned subsidiary of Salant NY. The Company is the surviving corporation of such merger. On June 27, 1990, Salant and its wholly owned subsidiary, Denton Mills, Inc., each filed with the Bankruptcy Court a separate voluntary petition for relief under chapter 11 of title 11 of the Bankruptcy Code (Case Nos. 90-B-12037 (CB) and 90-B-12038 (CB)). The Company's other United States subsidiaries did not seek relief under the Bankruptcy Code. On July 30, 1993, the Bankruptcy Court issued an order confirming the 1993 Chapter 11 Plan. The 1993 Chapter 11 Plan was consummated on September 20, 1993. Recent Events For a discussion of recent events, see "BACKGROUND OF RESTRUCTURING." PROPERTIES The Company's principal executive offices are located at 1114 Avenue of the Americas, New York, New York 10036. The Company's principal properties consist of three domestic manufacturing facilities located in Alabama, New York and Tennessee, four manufacturing facilities located in Mexico, and five distribution centers; one in New York, two in South Carolina and two in Texas. At the end of Fiscal 1997, the Company was in the process of closing one distribution facility in South Carolina. The Company owns approximately 1,067,000 square feet of space devoted to manufacturing and distribution and leases approximately 497,000 square feet of such space. The Company owns approximately 69,000 square feet of office space and leases approximately 210,000 square feet of combined office, design and showroom space. The Children's Group has exclusive use of the Tennessee manufacturing facility, shares one of the Mexican manufacturing facilities with the Salant Menswear Group Bottoms division and has its distribution center in a building in Texas. As of the end of Fiscal 1997, the Company's Stores division operated 17 factory outlet stores, comprising approximately 45,000 square feet of selling space, all of which are leased. Except as noted above, substantially all of the owned and leased property of the Company is used in connection with its men's apparel business or general corporate administrative functions. The Company believes that its plant and equipment are adequately maintained, in good operating condition, and are adequate for the Company's present needs. LEGAL PROCEEDINGS (a) Chapter 11 Cases. On June 27, 1990, Salant and Denton Mills each filed with the Bankruptcy Court a separate voluntary petition for relief under chapter 11 of the Bankruptcy Code. On July 30, 1993, the Bankruptcy Court issued an order confirming the 1993 Chapter 11 Plan. The 1993 Chapter 11 Plan was consummated on September 20, 1993. From that date through January 3, 1998 (approximately 51 months), the Company made cash payments of $9.7 million, issued $111.9 million of Senior Notes, and issued 11.1 million shares of common stock in settlement of certain undisputed and disputed claims in the chapter 11 proceedings. The Company anticipates that an additional $1.8 million in cash and an additional 206 thousand shares of common stock will ultimately be distributed in connection with the resolution of all remaining claims. Provisions for such distributions were made in the consolidated financial statements at the time of emergence from the bankruptcy during the year ended January 1, 1994. The process of resolving claims is continuing and, pursuant to the 1993 Chapter 11 Plan, remains under the jurisdiction of the Bankruptcy Court. (b) Other. The Company is a defendant in several other legal actions. In the opinion of the Company's management, based upon the advice of the respective attorneys handling such cases, such actions are not expected to have a material adverse effect on the Company's consolidated financial position, results of operations or cash flow. SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION (Amounts in thousands except share, per share and ratio data) Set forth below are summary consolidated historical financial data of the Company. The summary financial data for each of the years in the five year period ended January 3, 1998 have been derived from the audited Consolidated Financial Statements of the Company. The summary financial data for the six month periods ended July 4, 1998 and June 28, 1997 have been derived from the unaudited financial statements of the Company and include all adjustments of a normal recurring nature which are necessary to present fairly such financial statements. The data presented below is qualified by, and should be read in conjunction with, the Consolidated Financial Statements and related notes thereto, and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The Company's fiscal year ends on the Saturday closest to December 31.
For the Six Months Ended For the Fiscal Year Ended ------------------------ ------------------------- July 4, June 28, Jan. 03, Dec. 28 Dec. 30 Dec. 31 Jan. 1 1998 1997 1998 1996 1994 1994 1994 (52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) ----------------------------------------------------------------------------------------- CONTINUING OPERATIONS: Net sales $ 159,343 $ 169,601 $ 396,832 $ 417,711 $485,825$ $ 398,990 $ 379,012 Reversal of /(Provision 160 1,164 (2,066) (11,730) (3,550) -- (5,500) for) Restructuring costs (a) Income/(loss) from (6,835) (9,540) (10,722) (8,958) (362) 3,398 7,865 continuing operations DISCONTINUED OPERATIONS: -- (e) Loss from operations, -- (8,136) (8,136) (365) (136) (9,639) (638) net of income taxes Estimated loss on -- 580 (1,330) -- -- (1,796) -- disposal, net of income taxes Reversal of estimated -- -- loss on disposal, net of -- -- -- -- 11,772 income taxes Extraordinary gain (b) -- 600 2,100 -- 1,000 63 24,707 Net income/(loss)(a) (6,835) (17,656) (18,088) (9,323) 502 (7,865) 43,706 BASIC EARNINGS/(LOSS PER SHARE: Earnings/(loss) per share from continuing $ (.45) $ (.68) $ (0.71) $ (0.60) $ (0.02) $ (0.23) $ 1.18 operations before extraordinary gain Earnings/(loss) per share from discontinued -- $ (.58) $ (0.62) $ (0.02) $ (0.01) $ (0.76) $ 1.68 operations Earnings per share from -- .04 0.14 -- 0.06 -- 3.72 extraordinary gain Basic earnings/(loss) per (.45) (1.17) (1.19) (0.62) 0.03 (0.53) 6.58 share (a) DILUTED EARNINGS/(LOSS) PER SHARE: Earnings/(loss) per share from continuing $ (.45) $ (.68) $ (0.71) $ (0.60) $ (0.02) $ 0.23 $ 1.10 operations before extraordinary gain Earnings/(loss) per share from discontinued -- (.58) (0.62) (0.02) (0.01) (0.76) 1.57 operations Earnings per share from -- .04 0.14 -- 0.06 -- 3.48 extraordinary gain Diluted earnings/(loss) (.45) (1.17) (1.19) (0.62) 0.03 (0.53) 6.15 per share (a) CASH DIVIDENDS PER SHARE -- -- -- -- -- -- -- WEIGHTED AVERAGE SHARES: Shares used in computing 15,170 15,108 15,139 15,078 15,008 14,954 6,638 basic earnings per share Add - Common stock (d) (d) (d) (d) 110 (d) 465 equivalents Shares used in computing diluted earnings per share 15,170 15,108 15,139 15,078 15,118 14,954 7,103 For the Six Months Ended For the Fiscal Year Ended ------------------------ ------------------------- July 4, June 28, Jan. 03, Dec. 28 Dec. 30 Dec. 31 Jan. 1 1998 1997 1998 1996 1994 1994 1994 (52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) -------------------------------------------------------------------------------------- AT END OF PERIOD: Current assets $ 158,808 $ 168,929 $ 148,899 $ 150,986 $ 163,799 $ 172,234 $ 161,375 Total assets 242,289 256,635 233,377 235,251 253,970 266,157 251,946 Current liabilities (c) 201,481 100,190 185,692 59,566 61,704 71,104 44,427 Long-term debt (c) -- 104,879 -- 106,231 110,040 109,908 111,851 Deferred liabilities 5,340 8,453 8,863 5,382 11,373 13,479 16,766 Working capital/(deficiency) (42,673) 68,739 (36,793) 91,420 102,095 101,130 116,948 Current ratio 0.8:1 1.7:1 0.8:1 2.5:1 2.7:1 2.4:1 3.61:1 Shareholders' equity $ 35,468 $ 43,113 $ 42,303 $ 60,591 $ 70,853 $ 71,666 $ 78,902 Book value per share $ 2.57 $ 3.78 $ 2.79 $ 4.01 $ 4.71 $ 4.78 $ 5.34 Number of shares outstanding 15,170 15,108 15,170 15,094 15,041 15,008 14,781 (a) Includes, for the three month periods ended July 4, 1998 and June 28, 1997, a reversal of a previously recorded restructuring provision of $160 and $1,164, respectively, related to the excess portion of net liabilities set up for the closure of all retail outlet stores other than Perry Ellis outlet stores and the closure of the J.J Farmer sportswear product line, respectively; for the year ended January 3, 1998, a provision of $2,066 (14 cents per share; tax benefit not available) for restructuring costs principally related to (i) $3,530 related to the decision in the fourth quarter to close all retail outlet stores other than Perry Ellis outlet stores and (ii) the reversal of previously recorded restructuring provisions of $1,464, primarily resulting from the settlement of liabilities for less than the carrying amount, resulting in the reversal of the excess portion of the provision; for the year ended December 28, 1996, a provision of $11,730 (78 cents per share; tax benefit not available) for restructuring costs principally related to (i) the write-off of goodwill and the write-down of other assets for a product line which has been put up for sale, (ii) the write-off of certain assets and accrual for future royalties for a licensed product line and (iii) employee costs related to closing certain facilities; for the year ended December 30, 1995, a provision of $3,550 (24 cents per share; tax benefit not available) for restructuring costs principally related to (i) fixed asset write-downs at locations to be closed and (ii) inventory markdowns for discontinued product lines; and for the year ended January 1, 1994, a provision of $5,500 (Basis loss per share of 83 cents; tax benefit not available) for restructuring costs principally related to the costs incurred in connection with the closure of certain unprofitable operations, including (i) inventory markdowns associated with those product lines and (ii) fixed asset write-downs at closed locations. (b) Includes, for the six month period ended June 28, 1997 a gain of $600 for the reversal of excess liabilities previously provided for the anticipated settlement of claims arising from the prior chapter 11 proceedings; for the year ended January 3, 1998, a gain of $2,100 (14 cents per share) related to the reversal of excess liabilities previously provided for the anticipated settlement of claims arising from the Chapter 11 proceeding; for the year ended December 30, 1995, a gain of $1,000 (6 cents per share) related to the reversal of excess liabilities previously provided for the anticipated settlement of claims arising from the Chapter 11 proceeding; for the year ended December 31, 1994, a gain of $63 (no per share effect) related to the purchase and retirement of a portion of the Senior Notes at a price below the principal amount thereof; and for the year ended January 1, 1994, a gain of $24,707 (basic earnings per share of $3.72) related to the settlement and anticipated settlement of claims arising from the Chapter 11 proceeding. (c) At July 4, 1998 and January 3, 1998, long-term debt of $104,879 had been classified as a current liability. See Note 1 to the Consolidated Financial Statements at page F-6 and page F-26 of the Company's Registration Statement of which this Proxy Statement/Prospectus is a part. (d) Common stock equivalents have not been included in these periods as their inclusion would be anti-dilutive to the calculation. (e) 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 in 1997 was $8,136, which included a charge of $4,459 for the write-off of goodwill. Net sales of the division were $2,822, $20,408 and $15,696 in 1997, 1996 and 1995, respectively. Additionally, in 1997, the Company recorded a charge of $1,330 to accrue for expected operating losses during the phase-out period through March 1998. No income tax benefits have been allocated to the division's 1997, 1996 and 1995 losses. In February 1995, the Company discontinued the operations of the Vera Scarf division, which imported and marketed women's scarves. The loss from operations of the division in 1994 was $9,639, which included a fourth quarter charge of $9,004 for the write-off of goodwill and other intangible assets. Net sales of the division were $1,673 and $5,087 in 1995 and 1994, respectively. Additionally, in 1994 the Company recorded a fourth quarter charge of $1,796 to accrue for expected operating losses during the phase-out period through June 1995. No income tax benefits have been allocated to the division's 1994 loss.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW In Fiscal 1997, the Company continued to implement and enhance its plan (i) to concentrate the Company's resources on a limited number of key menswear brand names (including continuing to emphasize and cohesively market the Company's leading Perry Ellis brand), (ii) to further expand the Company's private label business and (iii) to correct operational issues that have hampered the Company in the past. In accordance with these objectives, in Fiscal 1997, the Company (i) discontinued its Made in the Shade women's junior sportswear business, (ii) closed all non-Perry Ellis retail outlet stores and (iii) made significant changes to management. In Fiscal 1997, the Company hired a new Chairman and Chief Executive Officer, Chief Financial Officer, Senior Vice President of Human Resources, President of its Salant Menswear division, and Vice Presidents for Distribution, Manufacturing and Information Services. As part of the Company's business restructuring from Fiscal 1997 the Company closed all retail outlet stores other than Perry Ellis outlet stores. The Company anticipates an improvement in operating income, as a result of closing the retail stores, of approximately $1,591 which represents the three year average operating loss from those closed stores. In March 1998, the Company announced that it had reached an agreement in principle with its major note and equity holders to restructure its existing indebtedness under the Company's Senior Notes. Under this proposed restructuring, the Company would convert the entire $104.879 million outstanding aggregate principal amount of, and all accrued and unpaid interest on, its Senior Notes into New Common Stock. RESULTS OF OPERATIONS Second Quarter of 1998 Compared with Second Quarter of 1997 - ----------------------------------------------------------- Net Sales The following table sets forth the net sales of each of the Company's principal business segments for the three months ended July 4, 1998 and June 28, 1997 and the percentage contribution of each of those segments to total net sales: Percentage Three Months Ended Increase/ ------------------ (Decrease) July 4, 1998 June 28, 1997 --------------- ------------- ---------- (dollars in millions) Men's Apparel $69.4 93% $75.9 93% (9%) Children's Sleepwear and Underwear 5.1 7% 5.5 7% (7%) ----- --- ----- --- ---- Total $74.5 100% $81.4 100%1 (9%) ===== ==== ===== ===== ==== Sales of men's apparel decreased by $6.5 million, or 9%, in the second quarter of 1998, as compared to the second quarter of 1997. This decrease primarily resulted from (a) a $2.4 million decrease in dress shirts, primarily due to a reduction of off-price sales for Perry Ellis dress shirts and reduced sales of Gant dress shirts, (b) a $2.2 million decrease related to the closure of all non-Perry Ellis retail stores in the fourth quarter of 1997 and (c) a $2.0 million decrease in sales of men's slacks due to initial shipments of the Canyon River Khakis program in the second quarter of 1997 and the discontinuance of sales under the Thomson brand in 1998. Sales of children's sleepwear and underwear decreased by $0.4 million, or 7%, in the second quarter of 1998, as compared to the second quarter of 1997. This decrease was primarily a result of lower sales of licensed character sleepwear, partially offset by higher off-price sales related to the disposal of the Joe Boxer sportswear line. As previously announced, the Company determined not to continue with its Joe Boxer sportswear line for Fall 1998. This line accounted for net sales of $0.8 million in the second quarter of 1998 and $0.3 million in the second quarter of 1997. The Company will continue with its Joe Boxer sleepwear and underwear product lines. Gross Profit The following table sets forth the gross profit and gross profit margin (gross profit as a percentage of net sales) for each of the Company's business segments for the three months ended July 4, 1998 and June 28, 1997: Three Months Ended ------------------ July 4, 1998 June 28, 1997 ------------ ------------- (dollars in millions) Men's Apparel $16.9 24.3% $16.0 21.1% Children's Sleepwear and Underwear (0.4) (7.0%) 0.6 10.3% Total $16.5 22.2% $16.6 20.4% ===== ==== The increase in gross profit and gross profit margin in the men's apparel segment was primarily attributable to the change in sales mix, reflecting decreased off-price sales in the second quarter of 1998, and the continuing elimination of unprofitable programs. The decline in gross profit and gross profit margin in children's sleepwear and underwear was primarily attributable to the higher off-price sales discussed above and increased inventory markdowns related to the discontinuance of the Joe Boxer sportswear line. Selling, General and Administrative Expenses As a result of initiatives begun in 1997, selling, general and administrative ("SG&A") expenses for the second quarter of 1998 decreased to $17.2 million (23.1% of net sales) from $20.8 million (25.6% of net sales) for the second quarter of 1997. The decrease primarily resulted from (a) a $2.0 million decrease related to the closure of all non-Perry Ellis retail stores in the fourth quarter of 1997 and (b) a continuing focus by the Company on cost saving opportunities. Reversal of Provision for Restructuring In the second quarter of 1997, the Company reversed a previously recorded restructuring provision by $0.4 million, as these amounts were no longer needed. This provision was for estimated liabilities related to the previously disclosed closure of a manufacturing facility. The cash portion of the remaining reserve for restructuring of $0.9 million is expected to be expended in the last half of 1998. Income/(Loss) from Operations Before Interest and Income Taxes The following table sets forth income/(loss) from operations before interest and income taxes for each of the Company's business segments, expressed both in dollars and as a percentage of net sales, for the three months ended July 4, 1998 and June 28, 1997: Three Months Ended ------------------ July 4, 1998 June 28, 1997 ------------ ------------- (dollars in millions) Men's Apparel (a) $4.0 5.9% ($0.1) (0.1%) Children's Sleepwear and Underwear (2.1) (41.8%) (1.2) (22.8%) 1.9 2.6% (1.3) (1.6%) Corporate expenses (2.7) (2.6) Licensing division income 1.3 1.1 ---- ---- Income/(loss) from operations before interest and income taxes $0.5 0.7% ($2.8) (3.4%) ==== ==== (a) Includes the reversal of restructuring charges of $0.4 million in the second quarter of 1997. Interest Expense, Net Net interest expense was $4.1 million for the second quarter of 1998, compared with $3.9 million for the second quarter of 1997. The increase in interest expense resulted from higher average borrowings during the second quarter of 1998, primarily due to the loss from operations over the past year. Discontinued Operations In the second quarter of 1997, the Company recognized a charge of $7.9 million, or $(0.53) per share, related to the discontinuance of the Made in the Shade division. This charge included a write-off of goodwill of $4.5 million and an accrual of $580 thousand for estimated operating losses during the phase-out period. Net sales of the division for the three months ended June 28, 1997 were $0.9 million. Extraordinary Gain In the second quarter of 1997, the Company recorded an extraordinary gain of $0.6 million related to the reversal of excess liabilities previously provided for the anticipated settlement of claims arising from the Company's prior chapter 11 cases. Net Loss In the second quarter of 1998, the Company reported a net loss of $3.6 million, or ($0.24) per share, as compared with a net loss of $14.1 million, or ($0.94) per share, in the second quarter of 1997. Earnings/(Loss) Before Interest, Taxes, Depreciation, Amortization, Restructuring Charges, Discontinued Operations and Extraordinary Gain Earnings/(loss) before interest, taxes, depreciation, amortization, restructuring charges, discontinued operations and extraordinary gain was $2.9 million (3.9% of net sales) in the second quarter of 1998, compared to ($1.0) million ((1.2%) of net sales) in the second quarter of 1997, an increase of $3.9 million. 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 1998 Compared with Year to Date 1997 - ------------------------------------------------- Net Sales The following table sets forth the net sales of each of the Company's principal business segments for the six months ended July 4, 1998 and June 28, 1997 and the percentage contribution of each of those segments to total net sales: Six Months Ended Percentage ---------------- Increase/ July 4, 1998 June 28, 1997 (Decrease) --------------- ------------- ---------- (dollars in millions) Men's Apparel $146.3 92% $159.7 94% (8%) Children's Sleepwear and Underwear 13.0 8% 9.9 6% 32% Total $159.3 100% $169.6 100% (6%) ====== ==== ====== ==== Sales of men's apparel decreased by $13.4 million, or 8%, in the first half of 1998, as compared to the first half of 1997. This decrease primarily resulted from (i) a $4.6 million reduction in dress shirt sales, of which $3.4 million was related to lower Perry Ellis off-price sales and $1.2 million related to reduced Gant sales, (ii) a $4.3 million reduction related to the closure of all non-Perry Ellis retail stores in the fourth quarter of 1997, (iii) a $2.3 million reduction for Canyon River Blues jeans, resulting from higher initial shipments for new loose fit and wide leg programs, which began in the first half of 1997, and (iv) a $2.0 million reduction for sales under the discontinued Thomson brand in 1998. Sales of children's sleepwear and underwear increased by $3.1 million, or 32%, in the first half of 1998, as compared to the first half of 1997. This increase was primarily a result of (i) increased sales of Joe Boxer sportswear in 1998 and (ii) an increase in the sale of prior season goods carried over from last year. As previously announced, the Company determined not to continue with its Joe Boxer sportswear line for Fall 1998. This line accounted for net sales of $2.3 million in the first half of 1998, as compared to $0.3 million in the first half of 1997. The Company will continue with its Joe Boxer sleepwear and underwear product lines. Gross Profit The following table sets forth the gross profit and gross profit margin (gross profit as a percentage of net sales) for each of the Company's business segments for the six months ended July 4, 1998 and June 28, 1997: Six Months Ended ---------------- July 4, 1998 June 28, 1997 ------------ ------------- (dollars in millions) Men's Apparel $33.2 22.7% $35.0 21.9% Children's Sleepwear and Underwear 0.2 1.2% 1.4 13.8% ---- ---- Total $33.4 21.0% $36.4 21.4% ===== ===== The decline in gross profit in the men's apparel segment was primarily attributable to the reduction in net sales discussed above. The increase in gross profit margin was primarily due to the elimination of unprofitable programs as discussed above. The decline in gross profit margin in children's sleepwear and underwear was primarily attributable to (i) the underabsorption of manufacturing costs in the first half of 1998 related to the planned shift of production closer to the order taking process and (ii) the discontinuance and sell-off of the Joe Boxer sportswear line at significantly reduced margins. Selling, General and Administrative Expenses As a result of initiatives begun in 1997, selling, general and administrative ("SG&A") expenses for the first half of 1998 decreased to $34.3 million (21.5% of net sales) from $41.4 million (24.4% of net sales) for the first half of 1997. The decrease primarily resulted from (a) a $4.0 million decrease related to the closure of all non-Perry Ellis retail stores in the fourth quarter of 1997 and (b) a continuing focus by the Company on cost saving opportunities. Reversal of Provision for Restructuring In the first half of 1997, the Company reversed previously recorded restructuring provisions of $1.2 million, primarily resulting from the settlement of liabilities for less than the carrying amount. Income/(Loss) from Operations Before Interest and Income Taxes The following table sets forth income/(loss) from operations before interest and income taxes for each of the Company's business segments, expressed both in dollars and as a percentage of net sales, for the six months ended July 4, 1998 and June 28, 1997: Six Months Ended ---------------- July 4, 1998 June 28, 1997 ------------ ------------- (dollars in millions) Men's Apparel (a) $7.8 5.4% $3.0 1.9% Children's Sleepwear and Underwear (3.6) (27.8%) (2.3) (22.7%) --- --- 4.2 2.7% 0.7 0.4% Corporate expenses (5.2) (4.7) Licensing division income 2.2 1.9 ---- --- Income/(loss) from operations before interest and income taxes $1.2 0.7% ($2.1) (1.2%) ==== ==== (a) Includes the reversal of restructuring charges of $1.2 million in 1997. Interest Expense, Net Net interest expense was $8.0 million for the first half of 1998, compared with $7.8 million for the first half of 1997. The increase in interest expense resulted from higher average borrowings during the first half of 1998, primarily due to the loss from operations over the past year. Discontinued Operations In the first half of 1997, the Company recognized a charge of $8.7 million, or $(0.58) per share, related to the discontinuance of the Made in the Shade division. This charge included a write-off of goodwill of $4.5 million and an accrual of $580 thousand for estimated operating losses during the phase-out period. Net sales of the division for the six months ended June 28, 1997 were $2.2 million. Extraordinary Gain In the first half of 1997, the Company recorded an extraordinary gain of $0.6 million related to the reversal of excess liabilities previously provided for the anticipated settlement of claims arising from the Company's prior chapter 11 cases. Net Loss In the first half of 1998, the Company reported a net loss of $6.9 million, or ($0.45) per share, as compared with a net loss of $17.7 million, or $1.17 per share, in the first half of 1997. 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 $5.8 million (3.6% of net sales) in the first half of 1998, compared to $1.2 million (0.7% of net sales) in the first half of 1997, an increase of $4.6 million. 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. Fiscal 1997 Compared with Fiscal 1996 - ------------------------------------- Net Sales The following table sets forth the net sales of each of the Company's three principal business segments for the fiscal years ended January 3, 1998 ("Fiscal 1997") and December 28, 1996 ("Fiscal 1996") and the percentage contribution of each of those segments to total net sales: Percentage Increase/ Fiscal 1997 Fiscal 1996 (Decrease) ------------------ --------------- ---------- (dollars in millions) Men's $325.8 82% $344.7 83% (5.5%) Children's 49.2 12% 45.8 11% 7.5% Retail Outlet Stores 21.8 6% 27.2 6% (19.8%) ------- ------ -------- ------ Total $396.8 100% $417.7 100% (5.0%) ====== ===== ====== ==== Sales of men's apparel decreased by $18.9 million, or 5.5%, in Fiscal 1997. This decrease resulted from (a) a $12.4 million reduction in sales of men's slacks, of which $8.4 reflected the elimination of unprofitable programs and the balance was primarily due to operational difficulties experienced in the first quarter of Fiscal 1997 related to the move of manufacturing and distribution out of the Company's facilities in Thomson, Georgia, (b) a $5.7 million reduction in sales of men's sportswear, which includes the elimination of $16.7 million of the Company's J.J. Farmer and Manhattan sportswear lines net sales, offset by an $11.0 million increase in sales of Perry Ellis sportswear products, (c) a $5.1 million decrease in sales of men's accessories, primarily due to the slow-down of the novelty neckwear business and (d) a $4.7 million reduction in sales of certain dress shirt lines, which reflected the elimination of unprofitable businesses. These sales decreases were partially offset by a $9.5 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. The total sales reduction attributable to the elimination of unprofitable programs was $29.8 million. Sales of children's sleepwear and underwear increased by $3.4 million, or 7.5%, in Fiscal 1997. This increase was primarily a result of the continuing expansion of the Joe Boxer children's product lines in Fiscal 1997. At the end of the first quarter of 1998, the Company determined not to continue with its Joe Boxer sportswear line for Fall 1998. Instead, consistent with the approach that the Joe Boxer Corporation (Salant's licensor of the Joe Boxer trademark) has taken, the Company will focus on its core business of underwear and sleepwear. Sales of the retail outlet stores division decreased by $5.4 million, or 19.8%, in Fiscal 1997. This decrease was due to (i) a decrease in the number of stores in the first 10 months of Fiscal 1997 and (ii) the decision in November 1997 to close all non-Perry Ellis outlet stores. The Company ceased to operate the non-Perry Ellis outlet stores in November 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 each of Fiscal 1997 and Fiscal 1996: Fiscal 1997 Fiscal 1996 ----------------- ---------------- (dollars in millions) Men's $69.5 21.3% $74.2 21.5% Children's 7.5 15.2% 11.5 25.1% Retail Outlet Stores 7.5 34.6% 9.2 33.9% ------ ------ Total $ 84.5 21.3% $ 94.9 22.7% ====== ====== The decline in gross profit in the men's apparel segment was primarily attributable to the reduction in net sales discussed above. The gross profit margin of the children's sleepwear and underwear segment declined as a result of (i) a slowdown in sales of certain licensed products, requiring a greater percentage of off-price sales, as well as an increase in discounts and allowances, (ii) an increase in reserves for remaining inventory and (iii) higher distribution and product handling costs. The gross profit of the retail outlet stores decreased primarily as a result of inventory markdowns of $1.6 million (7.3% of net sales) related to the closing of the non-Perry Ellis stores. Excluding these inventory markdowns, the gross profit margin increased 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 ("S,G&A") expenses for Fiscal 1997 were $80.6 million (20.3% of net sales) compared with $83.1 million (19.9% of net sales) for Fiscal 1996. While implementation of the Company's strategic plan resulted in the elimination of certain S,G&A expenses in Fiscal 1997, such eliminations were partially offset by higher amortization costs attributable to the installation of new store fixtures for Perry Ellis sportswear shops in department stores which commenced in 1995. The amortization of these store fixtures accounted for approximately $2.5 million of the total S,G&A expenses in Fiscal 1997, compared with $1.6 million in Fiscal 1996. Other Income Other income for Fiscal 1996 included a gain of $2.7 million related to the sale of a leasehold interest in a facility located in Glen Rock, New Jersey. Provision for Restructuring In Fiscal 1997, the Company recorded a provision for restructuring charge of $2.1 million, consisting of (i) $3.5 million related to the decision in the fourth quarter to close all retail outlet stores other than Perry Ellis outlet stores and (ii) the reversal of previously recorded restructuring provisions of $1.4 million, including $300 thousand in the fourth quarter, primarily resulting from the settlement of liabilities for less than the carrying amount, as a result of a settlement agreement and license arrangement with the former owners of the J.J. Farmer trademark, resulting in the reversal of the excess portion of the provision. The Company recorded a restructuring charge of $11.7 million in Fiscal 1996. Of this amount, (i) $5.7 million was primarily related to the write-off of goodwill and the write-down of other assets of the J.J. Farmer product line, (ii) $2.9 million was attributable to the write-off of certain assets related to the licensing of the Gant brand name for certain of the Company's dress shirt and accessories product lines and the accrual of a portion of future royalties payable under the Gant licenses that are not expected to be covered by future sales, (iii) $1.8 million was primarily related to employee costs associated with the closing of a manufacturing and distribution facility in Thomson, Georgia, (iv) $0.7 million was primarily related to employee costs associated with the closing of a manufacturing facility in Americus, Georgia and (v) $0.6 million related to other severance costs. The Fiscal 1997 restructuring charge related to the retail outlet store closings was comprised of $1.3 million of non-cash charges and $2.2 million requiring cash payments over a period of time. Of the cash portion, $0.6 million was expended during Fiscal 1997 and the balance is expected to be expended in 1998. Income from Continuing Operations Before Interest, Income Taxes and Extraordinary Gain The following table sets forth 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 each of Fiscal 1997 and Fiscal 1996: Fiscal 1997 Fiscal 1996 ----------- ----------- (dollars in millions) Men's (a) $ 19.5 6.0% $ 6.2 1.8% Children's (0.3) (0.6%) 5.4 11.8% Retail Outlet Stores (b) (8.4) (38.4%) (4.2) (15.4%) ------- ------ 10.8 2.7% 7.4 1.8% Corporate expenses (c) (9.3) (5.8) Licensing division income 4.6 5.0 ------- ------ Income from continuing operations before interest, income taxes and extraordinary gain $ 6.1 1.5% $ 6.6 1.6% ====== ===== (a) Includes the reversal of restructuring charges of $1.5 million in Fiscal 1997 and restructuring charges of $11.7 million in Fiscal 1996. (b) Includes restructuring charges of $3.5 million in Fiscal 1997. (c) Includes other income of $2.7 million in Fiscal 1996 related to the sale of a leasehold interest. The $0.5 million decrease in income from continuing operations before interest, income taxes and extraordinary gain in Fiscal 1997 was primarily a result of the significant decline in profitability of the Children's segment. This decline was a result of (i) the decline in gross profit as previously noted and (ii) increased occupancy costs related to new office, design and showroom space acquired in Fiscal 1997. The decline in retail outlet stores operating income is due to the restructuring and inventory markdown costs related to the closing of the non-Perry Ellis stores, offset by the higher gross profit related to the change in transfer pricing, as previously discussed. The increase in corporate expenses is primarily due to costs associated with the significant management changes previously discussed. Interest Expense, Net Net interest expense was $16.7 million for Fiscal 1997 compared with $15.5 million for Fiscal 1996. The $1.2 million increase is a result of higher average borrowings during Fiscal 1997 primarily due to the loss from operations and spending on capital expenditures and store fixtures. Loss from Continuing Operations In Fiscal 1997, the Company reported a loss from continuing operations before extraordinary gain of $10.7 million, or $0.71 per share, compared with a loss from continuing operations of $9.0 million, or $0.60 per share, in Fiscal 1996. Extraordinary Gain The extraordinary gain of $2.1 million recorded in Fiscal 1997, including $1.5 million in the fourth quarter, related to the reversal of excess liabilities previously provided for the anticipated settlement of claims arising from the Company's prior chapter 11 cases. Earnings Before Interest, Taxes, Depreciation, Amortization, Restructuring Charges and Extraordinary Gain Earnings before interest, taxes, depreciation, amortization, restructuring charges and extraordinary gain was $17.1 million (4.3% of net sales) in Fiscal 1997, compared to $26.5 million (6.4% of net sales) in Fiscal 1996, a decrease of $9.4 million, or 35%. The Company believes this information is helpful in understanding cash flow from operations that is available for debt service and capital expenditures. This measure is not contained in Generally Accepted Accounting Principles and is not a substitute for operating income, net income or net cash flows from operating activities. Fiscal 1996 Compared with Fiscal 1995 - ------------------------------------- Net Sales The following table sets forth the net sales of each of the Company's three principal business segments for the fiscal years ended December 28, 1996 ("Fiscal 1996") and December 30, 1995 ("Fiscal 1995") and the percentage contribution of each of those segments to total net sales: Percentage Increase/ Fiscal 1996 Fiscal 1995 (Decrease) --------------- --------------- ---------- (dollars in millions) Men's $344.7 83% $416.7 86% (17.3%) Children's 45.8 11% 39.9 8% 14.8% Retail Outlet Stores 27.2 6% 29.2 6% (7.0%) ------- ------ -------- ------ Total $417.7 100% $485.8 100% (14.0%) ====== ===== ====== ==== The decline in net sales in the men's apparel segment was $72.0 million. Of this amount, $58.8 million was attributable to the planned discontinuation of various product lines and the redirection of other product lines to different channels of distribution. Of the balance, $7.4 million resulted from a decision by Sears, Roebuck & Co. ("Sears") to source its knit and woven Canyon River Blues tops through its own internal sourcing operations and $3.6 million was due to reduced sales of Perry Ellis sportswear as a result of a reduction of $12.3 million in sales to off-price retailers, partially offset by an increase of $8.7 million in sales to department stores. Sales of children's sleepwear and underwear increased by $5.9 million, or 14.8%, in Fiscal 1996. This increase was primarily a result of the continuing expansion of the Joe Boxer children's product lines. Gross Profit The following table sets forth the gross profit and gross profit margin (gross profit as a percentage of net sales) for each of the Company's business segments for each of Fiscal 1996 and Fiscal 1995: Fiscal 1996 Fiscal 1995 --------------- --------------- (dollars in millions) Men's $74.2 21.5% $ 79.1 19.0% Children's 11.5 25.1% 10.8 26.9% Retail Outlet Stores 9.2 33.9% 10.7 36.7% ------ ----- Total $94.9 22.7% $100.6 20.7% ===== ===== ====== The decline in gross profit in the men's apparel segment and for the Company as a whole was primarily attributable to the reduction in net sales discussed above. The gross profit margin for the men's apparel segment and the Company as a whole, however, improved significantly, primarily as a result of (i) a greater percentage of sales of the Company's higher margin Perry Ellis product lines as a percentage of net sales, (ii) planned reductions in sales of lower-margin brands and products, (iii) increased efficiencies at the Company's manufacturing facilities in Mexico, and (iv) reduced markdowns of accessories due to improved consumer acceptance of the Company's neckwear product lines. The gross profit margin for the men's apparel segment was adversely affected, however, by charges of (i) $3.0 million (0.8% of men's apparel net sales) for markdowns related to the discontinuation of the J.J. Farmer and Manhattan sportswear product lines and a change in the primary channel of distribution for products sold under the John Henry label and (ii) $1.9 million (0.5% of men's apparel net sales) related to the closing of manufacturing and distribution facilities in Americus and Thomson, Georgia. The gross profit margin of the children's sleepwear and underwear segment declined as a result of an increased percentage of off-price sales of licensed character products in that segment's total sales mix. The gross profit margin of the Company's retail outlet stores business declined primarily as a result of margin pressures as well as charges of $0.3 million (1.0% of net sales) due to markdowns of discontinued product lines at the Company's outlet stores. Selling, General and Administrative Expenses Selling, general and administrative ("S,G&A") expenses for Fiscal 1996 were $83.1 million (19.9% of net sales) compared with $82.6 million (17.0% of net sales) for Fiscal 1995. While implementation of the Company's strategic plan resulted in the elimination of certain S,G&A expenses in Fiscal 1996, such eliminations were partially offset by higher amortization costs attributable to the installation of new store fixtures for Perry Ellis sportswear shops in department stores and Canyon River Blues shops in Sears stores, which installations commenced in 1995. The amortization of these store fixtures accounted for approximately $1.6 million of the total S,G&A expenses in Fiscal 1996 as compared with $0.4 million in Fiscal 1995. The Company's merchandise coordinator and retail specialist programs, which provide support for the presentation and coordination of the Company's products in retail stores was also enlarged in 1996, primarily to support the expansion of the Perry Ellis sportswear shop program; this increase accounted for a further $1.2 million of the S,G&A expense increase in Fiscal 1996. Total expenses related to these programs were $3.3 million in Fiscal 1996, as compared with $2.1 million in Fiscal 1995. Other Income Other income for Fiscal 1996 included a gain of $2.7 million related to the sale of a leasehold interest in a facility located in Glen Rock, New Jersey. Provision for Restructuring The Company recorded a restructuring charge of $11.7 million in Fiscal 1996. Of this amount, (i) $5.7 million was primarily related to the write-off of goodwill and the write-down of other assets of the J.J. Farmer product line, (ii) $2.9 million was attributable to the write-off of certain assets related to the licensing of the Gant brand name for certain of the Company's dress shirt and accessories product lines and the accrual of a portion of future royalties payable under the Gant licenses that are not expected to be covered by future sales, (iii) $1.8 million was primarily related to employee costs associated with the closing of a manufacturing and distribution facility in Thomson, Georgia, (iv) $0.7 million was primarily related to employee costs associated with the closing of a manufacturing facility in Americus, Georgia and (v) $0.6 million related to other severance costs. Income from Continuing Operations Before Interest, Income Taxes and Extraordinary Gain The following table sets forth 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 each of Fiscal 1996 and Fiscal 1995: Fiscal 1996 Fiscal 1995 --------------- --------------- (dollars in million) Men's (a) $6.2 1.8% $19.6 4.7% Children's 5.4 11.8% 5.2 13.0% Retail Outlet Stores (4.2) (15.4%) (2.7) (9.2%) ----- ----- 7.4 1.8% 22.1 4.6% Corporate expenses (b) (5.8) (8.8) Licensing division income 5.0 5.6 ----- ----- Income from continuing operations before interest, income taxes and extraordinary gain $6.6 1.6% $18.9 3.9% ===== ===== (a) Includes restructuring charges of $11.7 million in Fiscal 1996 and $3.6 million in Fiscal 1995. (b) Includes other income of $2.7 million in Fiscal 1996 related to the sale of a leasehold interest. The $12.3 million reduction in income from continuing operations before interest, income taxes and extraordinary gain in Fiscal 1996 was primarily a result of the $11.7 million restructuring charge (compared with $3.6 million in Fiscal 1995) and $6.3 million of other charges associated with the implementation of the strategic business plan, which was partially offset by a $2.7 million gain on the sale of a leasehold interest, as previously discussed. Interest Expense, Net Net interest expense was $15.5 million for Fiscal 1996 compared with $19.0 million for Fiscal 1995. The $3.5 million decrease is a result of lower average borrowings during Fiscal 1996 primarily due to reduced average levels of inventory. Loss from Continuing Operations In Fiscal 1996, the Company reported a loss from continuing operations of $9.0 million, or $0.60 per share, as compared with a loss from continuing operations before extraordinary gain of $0.4 million, or $0.02 per share, in Fiscal 1995. Extraordinary Gain The extraordinary gain of $1.0 million recorded in the fourth quarter of Fiscal 1995 related to the reversal of excess liabilities previously provided for the anticipated settlement of claims arising from the Company's prior chapter 11 cases. Earnings Before Interest, Taxes, Depreciation, Amortization, Restructuring Charges and Extraordinary Gain Earnings before interest, taxes, depreciation, amortization, restructuring charges and extraordinary gain was $26.5 million (6.4% of net sales) in Fiscal 1996, compared to $30.4 million (6.3% of net sales) in Fiscal 1995, a decrease of $3.9 million, or 12.8%. The Fiscal 1996 amount was negatively affected by $6.3 million of charges primarily associated with the implementation of the Company's strategic business plan. 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 the Credit Agreement with CIT. The Credit Agreement provides the Company with working capital financing, in the form of direct borrowings and letters of credit, up to an aggregate of $120 million (the "Maximum Credit"), subject to an asset-based borrowing formula. As collateral for borrowings under the Credit Agreement, the Company has granted to CIT a security interest in substantially all of the assets of the Company. On March 3, 1998, the Company announced that it had reached an agreement in principle with its major note and equity holders to restructure its existing indebtedness under the Senior Notes pursuant to the Letter Agreement upon which the Restructuring is based. Implementation of the Restructuring will result in the elimination of $11.0 million of annual interest expense to the Company. In connection with the execution of the Letter Agreement, the Company and CIT executed the Twelfth Amendment. See "BACKGROUND OF RESTRUCTURING--The Waiver and Forbearance Under the Credit Agreement and Commitment for New Credit Agreement." In addition, as discussed below, in furtherance of the Restructuring, the Company and CIT executed the Thirteenth Amendment. See "BACKGROUND OF RESTRUCTURING--The Waiver and Forbearance Under the Credit Agreement and Commitment for New Credit Agreement." On June 1, 1998, the Company and CIT executed the Thirteenth Amendment to the Credit Agreement. The Thirteenth Amendment reduced the interest rate on direct borrowings, increased borrowings allowed against eligible inventory, eliminated factoring of accounts receivable and modified the covenant related to maximum net loss. Under the Thirteenth Amendment, CIT also agreed to continue to forbear until November 30, 1998, subject to certain conditions, from exercising any of its rights or remedies under the Credit Agreement arising by virtue of the Company's failure to pay interest on its Senior Notes. The Company has also received a commitment from CIT, under the CIT Commitment Letter, for a new $140 million secured credit facility to become effective upon completion of the Restructuring. The new credit facility will provide financing through December 31, 2001, and is comprised of a $125 million revolving credit facility and a $15 million term loan facility, and includes terms consistent with the Thirteenth Amendment. The closing of the new credit facility with CIT is subject to the satisfaction of a number of conditions. Pursuant to the Credit Agreement, the interest rate charged on direct borrowings is 0.25 percent in excess of the prime rate of The Chase Manhattan Bank, N.A. (the "Prime Rate", which was 8.5% at July 4, 1998) or 2.25% above the London Late Eurodollar rate (the "Eurodollar Rate", which was 5.69% at July 4, 1998). Prior to the Thirteenth Amendment to the Credit Agreement, the Company sold to CIT, without recourse, certain eligible accounts receivable. The credit risk for such accounts was thereby transferred to CIT. Pursuant to the Thirteenth Amendment, new accounts receivable are no longer sold to CIT. The credit risk for accounts receivable previously sold to CIT remains with CIT. The amounts due from CIT have been offset against the Company's direct borrowings from CIT in the accompanying balance sheets. The amounts that have been offset were $9.8 million at July 4, 1998 and $9.7 million at June 28, 1997. On July 4, 1998, direct borrowings (including borrowings under the Eurodollar option) and letters of credit outstanding under the Credit Agreement were $52.2 million, respectively, and the Company had unused availability of $0.1 million. On June 28, 1997, direct borrowings and letters of credit outstanding under the Credit Agreement were $53.4 million and $25.3 million, respectively, and the Company had unused availability of $13.8 million. During the first half of 1998, the maximum aggregate amount of direct borrowings and letters of credit outstanding under the Credit Agreement was $84.6 million at which time the Company had unused availability of $7.0 million. During the first half of 1997, the maximum aggregate amount of direct borrowings and letters of credit outstanding under the Credit Agreement was $92.8 million at which time the Company had unused availability of $10.3 million. On April 4, 1998, direct borrowings (including borrowings under the Eurodollar option) and letters of credit outstanding under the Credit Agreement were $44.6 million and $23.0 million, respectively, and the Company had unused availability of $15.2 million. On March 29, 1997, direct borrowings and letters of credit outstanding under the Credit Agreement were $32.9 million and $32.8 million, respectively, and the Company had unused availability of $12.4 million. During the first quarter of 1998, the maximum aggregate amount of direct borrowings and letters of credit outstanding under the Credit Agreement was $81.1 million at which time the Company had unused availability of $15.2 million. During the first quarter of 1997, the maximum aggregate amount of direct borrowings and letters of credit outstanding under the Credit Agreement was $71.8 million at which time the Company had unused availability of $11.9 million. The Company's cash used in operating activities for the first half of 1998 was $15.6 million, which primarily reflects a $10.5 million increase in inventory and the loss from continuing operations of $6.9 million. The Company's cash used in operating activities for the first quarter of 1998 was $10.6 million, which primarily reflects a $5.5 million increase in accounts receivable and the loss from operations of $3.3 million. Cash used for investing activities in the first quarter of 1998 was $0.8 million, which represented capital expenditures of $0.5 million and the installation of store fixtures in department stores of $0.3 million. Cash used for investing activities in the first half of 1998 was $3.8 million, which represented capital expenditures of $3.4 million and the installation of store fixtures in department stores of $0.4 million. During 1998, the Company plans to make capital expenditures of approximately $11.6 million and to spend an additional $1.7 million for the installation of store fixtures in department stores. Cash provided by financing activities in the first half of 1998 was $18.4 million, which represented short-term borrowings under the Credit Agreement. Cash provided by financing activities in the first quarter of 1998 was $10.8 million, which represented short-term borrowings under the Credit Agreement. At the end of Fiscal 1997, direct borrowings and letters of credit outstanding under the Credit Agreement were $33.8 million and $23.2 million, respectively, and the Company had unused availability of $17.5 million. At the end of Fiscal 1996, direct borrowings and letters of credit outstanding under the Credit Agreement were $7.7 million and $33.6 million, respectively, and the Company had unused availability of $23.6 million. During Fiscal 1997, the maximum aggregate amount of direct borrowings and letters of credit outstanding at any one time under the Credit Agreement was $112.9 million, at which time the Company had unused availability of $10.5 million. During Fiscal 1996, the maximum aggregate amount of direct borrowings and letters of credit outstanding at any one time under the Credit Agreement was $101.0 million, at which time the Company had unused availability of $19.6 million. The Company's cash used in operating activities for Fiscal 1997 was $9.8 million, which primarily reflects the operating loss of $10.7 million and an increase in accounts receivable of $5.7 million, offset by non-cash charges, such as depreciation and amortization, of $8.9 million. Cash used in Fiscal 1997 for investing activities was $10.2 million, of which $7.1 million was related to capital expenditures and $3.1 million to the installation of store fixtures in department stores. During Fiscal 1998, the Company plans to make capital expenditures of approximately $6.4 million and to spend an additional $2.0 million for the installation of store fixtures in department stores. Cash provided by financing activities in Fiscal 1997 was $22.9 million, which represented short-term borrowings under the Credit Agreement of $26.1 million, offset by the retirement of long-term debt of $3.4 million. On October 28, 1996, the Company completed the sale of a leasehold interest in a facility located in Glen Rock, New Jersey. Pursuant to the Indenture governing the Senior Notes, the $3,372,000 net cash proceeds of that sale were applied to the repurchase of a like principal amount of the Senior Notes immediately following the end of the 1996 fiscal year. The instruments governing the Company's outstanding debt contain numerous financial and operating covenants, including restrictions on incurring indebtedness and liens, making investments in or purchasing the stock, or all or a substantial part of the assets of another person, selling property and paying cash dividends. In addition, under the Credit Agreement, the Company is required to maintain a minimum level of unused availability. As of July 4, 1998, the Company was in compliance with this covenant. The Indenture governing the Senior 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 Notes. In contemplation of the Restructuring, the Company elected not to pay the interest payment of approximately $5.5 million that was due and payable under the Senior Notes on March 2, 1998, subject to a 30 day grace period. As of July 4, 1998, interest accrued on the Senior Notes was $9.3 million. Because the Company elected not to pay the interest due on the Senior Notes by the expiration of the applicable grace period, an event of default has occurred with respect to the Senior Notes entitling the Noteholders to accelerate the maturity thereof. Pursuant to the Letter Agreement, Magten has, in accordance with Section 6.5 of the Indenture, caused a written direction to be provided to the Trustee under the Indenture, to forbear during the term of the Letter Agreement from taking any action under the Indenture in connection with the failure by the Company to make the interest payment on the Senior Notes that was due and payable on March 2, 1998. On April 8, 1998, the Trustee issued a Notice of Default stating that as a result of the Company's failure to make the interest payment due on the Senior Notes, an event of default under the Indenture had occurred on April 1, 1998. Pursuant to an amendment to the Letter Agreement, Magten has also agreed to provide a similar written forbearance direction to the Trustee upon the failure by the Company to make the interest payment on the Senior Notes that is due and payable on August 31, 1998. Failure to consummate the Restructuring could result in the acceleration of all of the indebtedness under the Senior Notes and/or the Credit Agreement. The Company's principal sources of liquidity, both on a short-term and a long-term basis, are cash flow from operations and borrowings under the Credit Agreement. Based upon its analysis of its consolidated financial position, its cash flow during the past twelve months and the cash flow anticipated from its future operations, the Company believes that its future cash flows together with funds available under the Credit Agreement, will be adequate to meet the financing requirements it anticipates during the next twelve months, provided that the Company consummates the Restructuring and secures the New Credit Agreement. There can be no assurance, however, (i) that the Company will consummate the Restructuring and secure the New Credit Agreement, or (ii) that future developments and general economic trends will not adversely affect the Company's operations and, hence, its anticipated cash flow. RECENTLY ISSUED ACCOUNTING STANDARDS The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", during the year ending January 2, 1999. SFAS 130 establishes standards for reporting comprehensive income and its components in a full set of general-purpose financial statements. This Statement requires that an enterprise (i) classify items of other comprehensive income by their nature in a financial statements, and (ii) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Adoption of this Statement required the Company to report changes in the excess of additional pension liability over unrecognized prior service cost and foreign currency translation adjustment accounts, previously shown in the stockholders' equity section of the balance sheet, as an increase or decrease to reported net income in arriving at comprehensive income. The Company is required to adopt SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" during the year ending January 2, 1999. The Statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement supersedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise", but retains the requirement to report information about major customers. It amends FASB Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries", to remove the special disclosure requirements for previously unconsolidated subsidiaries. The Company is currently considering what effect adoption of this statement will have on the Company. The Company is required to adopt SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", for the period ended January 2, 1999. This statement revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer as useful. The statement is effective for fiscal year ending January 2, 1999. Restatement of disclosures for earlier periods provided for comparative purposes is required. The Company has not yet determined the impact the adoption of this statement will have on the Company's financial statements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The statement establishes accounting and reporting standards requiring that derivative instruments (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at fair value. The statement requires that changes in a derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15,1999; however, it may be adopted earlier. It cannot be applied retroactively to financial statements of prior periods. The Company has not yet quantified the impact of adopting SFAS No. 133 on their financial statements and has not determined the timing of or method of adoption. FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION This Proxy Statement/Prospectus 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: 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 the Company's overall operations. The Company's current software systems, without modification, will be adversely affected by the inability of the systems to appropriately interpret date information after 1999. As part of the process of (i) improving the Company's IS to provide and enhance support to all operating areas and (ii) resolving year 2000 issues, the Company entered into a working agreement (the "EDS Agreement") with Electronic Data Systems Corporation ("EDS"). The EDS Agreement constituted the initial phase of a long-term project to outsource the Company's IS and to remedy year 2000 issues. As part of this initial phase, the Company and EDS identified the ability of one of the two major enterprise systems in the Company to be modified to make such system Year 2000 compliant and to migrate the operations of the Company to one enterprise system (the "System Conversion"). As a result of the ability to implement the System Conversion and after reviewing the cost of outsourcing the IS function to EDS, Salant has determined not to outsource the IS functions to EDS. Instead, the Company will use internal resources for the System Conversion and other consultants for the implementation of new software. The Company anticipates that the System Conversion, as well as the implementation of new software, will be completed by the first quarter of 1999. The Company anticipates that the cost of the System Conversion and new software will be approximately $10 million, to be incurred during 1998 and 1999. If the Company fails to complete such conversion in a timely manner, such failure will have a material adverse effect on the business, financial condition and results of operations of the Company. SEASONALITY Although the Company typically introduces and withdraws various individual products throughout the year, its principal products are organized into the customary retail Spring, Fall and Holiday seasonal lines. 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. BACKLOG The Company does not consider the amount of its backlog of orders to be significant to an understanding of its business primarily due to increased utilization of EDI technology, which provides for the electronic transmission of orders from customers' computers to the Company's computers. As a result, orders are placed closer to the required delivery date than had been the case prior to EDI technology. At March 7, 1998, the Company's backlog of orders was approximately $94.9 million, 2.3% less than the backlog of orders of approximately $97.1 million that existed at March 1, 1997. FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION This Proxy Statement/Prospectus contains or incorporates by reference forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, the Company cautions that assumed facts or bases almost always vary from the actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, the Company or its management expresses an expectation or belief as to future results, there can be no assurance that the statement of the expectation or belief will result or be achieved or accomplished. The words "believe," "expect," "estimate," "project," "seek," "anticipate" and similar expressions may identify forward-looking statements. The Company's future operating results and financial condition are dependent upon the Company's ability to successfully design, manufacture, import and market apparel. Taking into account the foregoing, the following are identified as important factors that could cause results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company: SUBSTANTIAL LEVEL OF INDEBTEDNESS AND THE ABILITY TO RESTRUCTURE DEBT The Company had current indebtedness of $157.1 million and $149.5 million and $138.7 million as of July 4, 1998 and April 4, 1998 and January 3, 1998, respectively. Of this amount, $104.9 million represents the principal amount of the Senior Notes. The Company will not generate sufficient cash flow from operations to repay this amount at maturity. Accordingly, the Company has entered into the Letter Agreement as described above. Given the Company's past inconsistent operating performance, together with the reluctance of investors to invest in companies suffering from high debt-to-equity ratios and the Company's inability to raise funds in the capital markets to recapitalize the Company, absent the Restructuring, the Company does not believe it will be able to refinance its indebtedness under the Senior Notes. Failure by the Company to consummate the Restructuring as contemplated could result in the acceleration of all of the indebtedness under the Senior Notes and/or the Credit Agreement, and, thus, would be likely to have a material adverse effect on the Company. COMPETITION The apparel industry in the United States is highly competitive and characterized by a relatively small number of multi-line manufacturers (such as the Company) and a large number of specialty manufacturers. The Company faces substantial competition in its markets from manufacturers in both categories. Many of the Company's competitors have greater financial resources than the Company. The Company also competes for private label programs with the internal sourcing organizations of many of its own customers. APPAREL INDUSTRY CYCLES AND OTHER ECONOMIC FACTORS The apparel industry historically has been subject to substantial cyclical variation, with consumer spending on apparel tending to decline during recessionary periods. A decline in the general economy or uncertainties regarding future economic prospects may affect consumer spending habits, which, in turn, could have a material adverse effect on the Company's results of operations and financial condition. RETAIL ENVIRONMENT Various retailers, including some of the Company's customers, have experienced declines in revenue and profits in recent periods and some have been forced to file for bankruptcy protection. To the extent that these financial difficulties continue, there can be no assurance that the Company's financial condition and results of operations would not be adversely affected. SEASONALITY OF BUSINESS AND FASHION RISK The Company's principal products are organized into seasonal lines for resale at the retail level during the Spring, Fall and Holiday Seasons. Typically, the Company's products are designed as much as one year in advance and manufactured approximately one season in advance of the related retail selling season. Accordingly, the success of the Company's products is often dependent on the ability of the Company to successfully anticipate the needs of the Company's retail customers and the tastes of the ultimate consumer up to a year prior to the relevant selling season. FOREIGN OPERATIONS The Company's foreign sourcing operations are subject to various risks of doing business abroad, including currency fluctuations (although the predominant currency used is the U.S. dollar), quotas and, in certain parts of the world, political instability. Any substantial disruption of its relationship with its foreign suppliers could adversely affect the Company's operations. Some of the Company's imported merchandise is subject to United States Customs duties. In addition, bilateral agreements between the major exporting countries and the United States impose quotas, which limit the amount of certain categories of merchandise that may be imported into the United States. Any material increase in duty levels, material decrease in quota levels or material decrease in available quota allocation could adversely affect the Company's operations. The Company's operations in Asia, including those of its licensees, are subject to certain political and economic risks including, but not limited to, political instability, changing tax and trade regulations and currency devaluations and controls. The Company's risks associated with the Company's Asian operations may be higher in 1998 than has historically been the case, due to the fact that financial markets in East and Southeast Asia have recently experienced and continue to experience difficult conditions, including a currency crisis. As a result of recent economic volatility, the currencies of many countries in this region have lost value relative to the U.S. dollar. Although the Company has experienced no material foreign currency transaction losses since the beginning of this crisis, its operations in the region are subject to an increased level of economic instability. The impact of these events on the Company's business, and in particular its sources of supply and royalty income cannot be determined at this time. DEPENDENCE ON CONTRACT MANUFACTURING In 1997, the Company produced 59% of all of its products (in units) through arrangements with independent contract manufacturers. The use of such contractors and the resulting lack of direct control could subject the Company to difficulty in obtaining timely delivery of products of acceptable quality. In addition, as is customary in the industry, the Company does not have any long-term contracts with its fabric suppliers or product manufacturers. While the Company is not dependent on one particular product manufacturer or raw material supplier, the loss of several such product manufacturers and/or raw material suppliers in a given season could have a material adverse effect on the Company's performance. 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. STOCKHOLDERS' MEETING, VOTING RIGHTS AND PROXIES DATE, TIME AND PLACE OF STOCKHOLDERS' MEETING The Stockholders' Meeting will be held at Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York 10004, on _________, 1998, at ____ __.m., New York City time. The Stockholder votes with respect to the Issuance and the Election of the New Board will not be effective unless and until the Charter Amendment is approved at the Stockholders' Meeting and the Exchange Restructuring has been consummated and the Charter Amendment has been filed with the Secretary of State of Delaware. If the Stockholders approve the Stock Award and Incentive Plan, the Stock Award and Incentive Plan will be effective regardless of whether the Exchange Restructuring is implemented or any of the Restructuring Proposals are approved. If each of the Restructuring Proposals is not approved by the Stockholders and/or the Minimum Tender Condition is not satisfied or waived, but the Company receives sufficient acceptances of the Prepackaged Plan to obtain confirmation thereof by the Bankruptcy Court, then the Company intends to pursue confirmation of the Prepackaged Plan under Chapter 11 of the Bankruptcy Code and to attempt to use such acceptances to obtain confirmation of the Prepackaged Plan. If the Prepackaged Restructuring is consummated and a Chapter 11 petition is filed under the Bankruptcy Code, the Company expects that each of the Restructuring Proposals will be implemented pursuant to the Prepackaged Plan. See "DESCRIPTION OF THE PREPACKAGED PLAN." SOLICITATION OF PROXIES; RECORD DATE This Proxy Statement/Prospectus is furnished in connection with the solicitation by the Board of proxies to be voted at the Stockholders' Meeting. In addition, this Proxy Statement/Prospectus is furnished in connection with the solicitation by the Board of Ballots to be voted in connection with the Prepackaged Plan. YOU MUST COMPLETE AND RETURN BOTH THE PROXY AND THE BALLOT IN ORDER TO VOTE ON BOTH THE PROPOSALS AND THE PREPACKAGED PLAN. THE BOARD RECOMMENDS A VOTE "FOR" EACH OF THE PROPOSALS AND THE PREPACKAGED PLAN. The Record Date for purposes of determining which Stockholders are eligible to vote on the Prepackaged Plan and at the Stockholders' Meeting is ________. On the Record Date there were 14,964,608 shares of Old Common Stock outstanding, of which there were [ ] holders of record. Stockholders are not required to vote at the Stockholders' Meeting in order to vote on the Prepackaged Plan. It is important that all Stockholders vote to accept or to reject the Prepackaged Plan because, under the Bankruptcy Code, for purposes of determining whether the requisite acceptances have been received, only Stockholders holders who vote will be counted. Failure by a holder to send a duly completed and signed Ballot will be deemed to constitute an abstention by such holder with respect to a vote on the Prepackaged Plan. Abstentions as a result of not submitting a duly completed and signed Ballot will not be counted as votes for or against the Prepackaged Plan. Any Ballot which is executed by a holder but does not indicate an acceptance or rejection of the Prepackaged Plan will not be counted as a vote for or against the Prepackaged Plan. See "VOTING AND CONFIRMATION OF THE PREPACKAGED PLAN." WHETHER OR NOT YOU ARE ABLE TO ATTEND THE STOCKHOLDERS' MEETING, YOUR VOTE BY PROXY IS VERY IMPORTANT. STOCKHOLDERS ARE ENCOURAGED TO MARK, SIGN AND DATE THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE. STOCKHOLDERS WHO COMPLETE A PROXY WITH RESPECT TO THE STOCKHOLDERS' MEETING SHOULD ALSO DULY COMPLETE AND SIGN A BALLOT IN ORDER TO VOTE ON THE PREPACKAGED PLAN. Proxies and Ballots are being solicited by and on behalf of the Board. All expenses of this solicitation, including the cost of preparing and mailing this Proxy Statement/Prospectus, will be borne by the Company. In addition to solicitation by use of the mails, proxies may be solicited by directors, officers and employees of the Company in person or by telephone, telegram or other means of communication. Such directors, officers and employees will not be additionally compensated, but may be reimbursed for out-of-pocket expenses in connection with such solicitation. Arrangements will also be made with custodians, nominees and fiduciaries for forwarding of proxy solicitation material to beneficial owners of Old Common Stock held of record by such persons, and the Company may reimburse such custodians, nominees and fiduciaries for reasonable expenses incurred in connection therewith. To assure the presence in person or by proxy of the largest number of Stockholders possible, [ ], the Information Agent, has been engaged to solicit Proxies on behalf of the Company for a customary fee plus reasonable out-of-pocket expenses. PURPOSE OF STOCKHOLDERS' MEETING The purpose of the Stockholders' Meeting is to consider the following Proposals set forth in this Proxy Statement/Prospectus: (i) the Charter Amendment, (ii) the Issuance, (iii) the Plan Proposal, (iv) the Election of the New Board, (v) the appointment of Deloitte & Touche as independent auditors to the Company, and (vi) such other business as may properly come before the Stockholders' Meeting or any adjournments or postponements thereof. Each of the Restructuring Proposals is conditioned upon the approval by the Stockholders of each of the other Restructuring Proposals. If any or all of the Restructuring Proposals are not approved by the Stockholders at the Stockholders' Meeting, then none of the Restructuring Proposals will become effective. Ratification of the appointment of Deloitte & Touche and approval of the adoption of the Stock Award and Incentive Plan are not, however, conditions to the consummation of the Exchange Restructuring. THE CHARTER AMENDMENT The Board has unanimously adopted a resolution approving, subject to consummation of the Exchange Restructuring, the amendment of the Company's Certificate of Incorporation by the Charter Amendment. The purposes and effects of the Charter Amendment are to effect (i) the Reverse Split and (ii) an increase in the number of shares of New Common Stock authorized. See "DISCUSSION OF THE PROPOSALS -- The Charter Amendment." If the Reverse Split were not implemented pursuant to the Charter Amendment as part of the Exchange Restructuring, there would be approximately 221,697,896 million shares of New Common Stock issued and outstanding after giving effect to the Exchange Restructuring, and the per share stock price of the New Common Stock would be less than $1.00 per share. Thus, the Reverse Split is necessary in order to "normalize" the post-Restructuring trading of the New Common Stock by reducing the number of outstanding shares and thereby increasing the trading price of the New Common Stock from where it would otherwise trade in the absence of the Reverse Split assuming the aggregate market capitalization of the Company remains constant. Such increase of the trading price may, although there is no assurance that it will, (i) enhance the attractiveness of the New Common Stock to certain institutional investors whose investing guidelines require that the securities that they purchase meet certain minimum trading price criteria, (ii) permit investors to purchase New Common Stock from broker/dealers on margin in accordance with applicable regulations, and (iii) militate in favor of continued listing of the New Common Stock on the NYSE. Pursuant to the Letter Agreement, the Reverse Split is required for the Company to consummate the Exchange Restructuring. The Charter Amendment also has the effect of amending Article Fourth of the Certificate of Incorporation to increase the number of shares of New Common Stock authorized and available for issuance from 30,000,000 to 45,000,000. Management believes that such Amendment would benefit the Company by providing greater flexibility to the Board to issue additional equity securities, for example, to raise additional capital, to facilitate possible future acquisitions, to provide stock-related employee benefits and to effect stock splits of the outstanding New Common Stock. If the Charter Amendment is approved at the Stockholders' Meeting, generally, no Stockholder approval would be necessary for the issuance of all or any portion of the additional shares of New Common Stock unless required by law or any rules or regulations to which the Company is subject. However, as long as the New Common Stock is quoted for trading through the NYSE, the flexibility that the Charter Amendment would provide the Board to issue shares of New Common Stock will be limited by the rules of such exchange which, as presently in effect, would generally require Stockholder approval for the issuance of New Common Stock when: (i) a stock option or purchase plan is to be established or other arrangements made pursuant to which New Common Stock may be acquired by directors or officers, except for warrants or rights issued generally to securityholders of the Company or broadly-based plans or arrangements including other employees; (ii) a business, a company, tangible or intangible assets, or property or securities representing any such interest, are to be acquired, directly or indirectly, from a director, officer or substantial securityholder of the Company (including its subsidiaries, affiliates or other closely related persons) or from any company or party in which one of such persons has a substantial direct or indirect interest if the number of shares of New Common Stock to be issued or the number of shares of New Common Stock into which the securities may be convertible exceeds one percent of the number of shares of New Common Stock, or one percent of the voting power, outstanding before the issuance; (iii) New Common Stock or securities convertible into or exercisable for New Common Stock are to be issued in any transaction or series of related transactions, other than a public offering for cash, if (a) the New Common Stock to be issued has, or will have upon issuance, voting power equal to or in excess of 20% of the voting power outstanding before the issuance of such New Common Stock or securities convertible into or exercisable for New Common Stock, or (b) the number of shares of New Common Stock to be issued is, or will be, equal to or in excess of 20% of the number of shares of New Common Stock outstanding before the issuance of the New Common Stock; or (iv) the issuance would result in a change in control of the Company. Although the Company considers from time to time mergers, acquisitions and other transactions that may involve the issuance of additional shares of New Common Stock (any one or more of which may be under consideration or acted upon at any time), the Company is not a party to any agreements with respect to any such transactions, nor does it have any agreements, commitments or understandings with respect to such transactions or that would involve the issuance of additional shares of New Common Stock in amounts that would exceed the number of currently authorized and unissued shares. See "BACKGROUND OF RESTRUCTURING." Depending upon the consideration per share received by the Company for any subsequent issuance of New Common Stock, such issuance could have a dilutive effect on those Stockholders who paid a higher consideration per share for their stock. Also, future issuances of New Common Stock will increase the number of outstanding shares, thereby decreasing the percentage ownership in the Company (for voting, distributions and all other purposes) represented by existing shares of New Common Stock. The availability for issuance of the additional shares of New Common Stock may be viewed as having the effect of discouraging an unsolicited attempt by another person or entity to acquire control of the Company. Although the Board has no present intention of doing so, the Company's authorized but unissued New Common Stock could be issued in one or more transactions that would make a takeover of the Company more difficult or costly, and therefore less likely. The Company is not aware of any person or entity who is seeking to acquire control of the Company. Holders of New Common Stock do not have any preemptive rights to acquire any additional securities issued by the Company. As of the Record Date, 14,964,608 shares of Old Common Stock were outstanding and 1,823,443 shares of Old Common Stock were reserved for issuance pursuant to the Company's employee benefit plans. Accordingly, only an additional 18,211,949 unreserved shares of Old Common Stock were available for issuance under the Certificate of Incorporation. If the proposed Charter Amendment did not increase the number of shares of New Common Stock authorized, it would be necessary to convene a special meeting of Stockholders before the Company could consummate any transaction in which the number of shares of New Common Stock that would be issued, together with all other new issuances of New Common Stock after the Record Date, would exceed approximately 8,000,000 shares. This could potentially add to the costs of a proposed transaction, and the added time necessary to prepare for and hold a stockholders' meeting could serve as a disincentive for third parties otherwise interested in making an investment in, or entering into other transactions with, the Company. It is for these similar reasons that companies have a substantial number of authorized and unissued shares available for issuance. THE AFFIRMATIVE VOTE OF THE MAJORITY OF THE OUTSTANDING SHARES OF OLD COMMON STOCK ENTITLED TO VOTE ON THE RESTRUCTURING PROPOSALS IS REQUIRED FOR APPROVAL OF THE CHARTER AMENDMENT. ACCORDINGLY, RESTRUCTURING ABSTENTIONS AND BROKER NON-VOTES WILL HAVE THE EFFECT OF A VOTE AGAINST THE PROPOSAL. UNLESS INSTRUCTED TO THE CONTRARY IN THE PROXY, THE SHARES REPRESENTED BY THE PROXIES WILL BE VOTED FOR THE CHARTER AMENDMENT. THE BOARD RECOMMENDS A VOTE "FOR" THE CHARTER AMENDMENT. THE ISSUANCE The Board has unanimously adopted a resolution approving, as part of the Exchange Restructuring, the Issuance. The Stockholder vote with respect to the Issuance will become effective at such time as the Charter Amendment has been filed with the Secretary of State of Delaware and the Exchange Restructuring has been consummated and will not be effective otherwise. The approval of the Issuance by the Company's Stockholders may be required by the applicable rules of the NYSE. For a more complete description of the Issuance, see "DISCUSSION OF THE PROPOSALS -- The Issuance." THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES OF OLD COMMON STOCK REPRESENTED AT THE STOCKHOLDERS' MEETING AND ENTITLED TO VOTE ON THE RESTRUCTURING PROPOSALS IS REQUIRED FOR APPROVAL OF THE ISSUANCE. ACCORDINGLY, ABSTENTIONS WILL HAVE THE EFFECT OF A VOTE AGAINST THIS RESTRUCTURING PROPOSAL WHILE BROKER NON-VOTES WILL NOT AFFECT THE OUTCOME OF THE VOTE ON THE RESTRUCTURING PROPOSAL. UNLESS INSTRUCTED TO THE CONTRARY IN THE PROXY, THE SHARES REPRESENTED BY THE PROXIES WILL BE VOTED FOR THE RESTRUCTURING PROPOSAL TO APPROVE THE ISSUANCE. THE BOARD RECOMMENDS A VOTE "FOR" THE ISSUANCE. THE STOCK AWARD AND INCENTIVE PLAN Should the Stock Award and Incentive Plan be approved by the Stockholders, the Company would be permitted to grant options, stock appreciation rights and other stock-based awards (together, "New Options") for up to 2,463,310 shares of the Company's New Common Stock (10% of the New Common Stock outstanding immediately following the Restructuring on a fully diluted basis inclusive of the Warrants). The Letter Agreement expressly provides that the Company will be authorized to reserve 10% of the New Common Stock pursuant to the Stock Award and Incentive Plan following consummation of the Restructuring. If the Stockholders approve the Stock Award and Incentive Plan, the Stock Award and Incentive Plan will become effective regardless of whether the Exchange Restructuring is implemented or any of the Restructuring Proposals are approved. The purpose of the Stock Award and Incentive Plan is to strengthen the Company by providing an incentive to its directors, officers, employees and consultants and thereby encouraging them to devote their abilities and industry to the success of the Company. The proposed details of such plan are set forth more fully in "DISCUSSION OF THE PROPOSALS -- Stock Award and Incentive Plan." THE AFFIRMATIVE VOTE OF THE MAJORITY OF THE SHARES OF OLD COMMON STOCK REPRESENTED AT THE STOCKHOLDERS' MEETING AND ENTITLED TO VOTE IS REQUIRED FOR APPROVAL OF THE STOCK AWARD AND INCENTIVE PLAN. ACCORDINGLY, ABSTENTIONS WILL HAVE THE EFFECT OF A VOTE AGAINST THIS RESTRUCTURING PROPOSAL WHILE BROKER NON-VOTES WILL NOT AFFECT THE OUTCOME OF THE VOTE ON THE RESTRUCTURING PROPOSAL. UNLESS INSTRUCTED TO THE CONTRARY IN THE PROXY, THE SHARES REPRESENTED BY THE PROXIES WILL BE VOTED TO APPROVE THE STOCK AWARD AND INCENTIVE PLAN. THE BOARD RECOMMENDS A VOTE "FOR" THE PLAN PROPOSAL. ELECTION OF THE NEW BOARD Each of the existing members of the Board has delivered to the Company a resignation letter resigning from the Board effective as of the Exchange Restructuring Date. In accordance with the terms and provisions of the Company's Certificate of Incorporation, by resolution of the Board, the number of directors has been fixed at [________] from and after the Exchange Restructuring Date. As provided for in the Letter Agreement, the new Board will consist of: (i) Mr. Jerald Politzer, the Chairman of the Board and Chief Executive Officer, (ii) [_________] members to be nominated by Magten, subject to consultation with the Company and other Noteholders who may come forward prior to the commencement of the Solicitation; and (iii) one member designated by the current Board. As described above, as contemplated by the Letter Agreement, it is expected that Magten will provide the Company with its Board nominees prior to the commencement of the Solicitation. In addition, the current Board has designated Marvin Schiller to be the current Board's nominee to the new Board. If any nominee should be unavailable for election at the Stockholders' Meeting, the proxies will be voted for the election of such other person as may be recommended by the Board. If the Restructuring is not consummated, the Restructuring Proposal with respect to the Election of the New Board will not be deemed to have been approved or implemented and the current Board will continue. Information about the nominees for election as directors and incumbent directors, including biographical and employment information, is set forth more fully in "DISCUSSION OF THE PROPOSALS -- Election of the New Board." THE AFFIRMATIVE VOTE OF A PLURALITY OF THE VOTES OF THE SHARES OF OLD COMMON STOCK ENTITLED TO VOTE ON THE ELECTION OF DIRECTORS AND REPRESENTED AT THE STOCKHOLDERS' MEETING IS REQUIRED FOR APPROVAL OF THIS RESTRUCTURING PROPOSAL. ACCORDINGLY, ABSTENTIONS WILL HAVE THE EFFECT OF A VOTE AGAINST THE RESTRUCTURING PROPOSAL WHILE BROKER NON-VOTES WILL NOT AFFECT THE OUTCOME OF THE VOTE ON THE RESTRUCTURING PROPOSAL. UNLESS INSTRUCTED TO THE CONTRARY IN THE PROXY, THE SHARES REPRESENTED BY THE PROXIES WILL BE VOTED FOR THE RESTRUCTURING PROPOSAL TO APPROVE THE ELECTION OF EACH ONE OF THE PROPOSED NEW DIRECTORS TO THE BOARD. THE BOARD RECOMMENDS A VOTE "FOR" EACH OF THE DIRECTOR NOMINEES. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS Deloitte & Touche currently serve as independent auditors for the Company. Deloitte & Touche and its predecessors have served as independent auditors for the Company since 1951. Upon the recommendation of the Audit Committee (as defined below), the Board has appointed Deloitte & Touche to serve as the Company's independent auditors to audit its financial statements for Fiscal 1998. Such appointment is conditioned upon ratification by the Stockholders, and the matter will be presented at the Stockholders' Meeting. If the Stockholders do not ratify the appointment, the selection will be reconsidered by the Board. A representative of Deloitte & Touche will be present at the Stockholders' Meeting. The representative will have an opportunity to make a statement and will be available to respond to appropriate questions. THE BOARD RECOMMENDS THAT THE APPOINTMENT OF DELOITTE & TOUCHE BE RATIFIED. VOTING OF PROXIES All shares represented by a properly executed Proxy will be voted at the Stockholders' Meeting in accordance with the directions on such Proxy. If no direction is indicated on a properly executed Proxy, the shares covered thereby will be voted in favor of each of the Proposals. In the event that sufficient votes in favor of Restructuring Proposals are not received by the time scheduled for the Stockholders' Meeting, or if any of the other conditions to the consummation of the Exchange Restructuring and the other elements of the Exchange Restructuring are not satisfied, the persons named as proxies may propose one or more adjournments of the Stockholders' Meeting to permit further solicitation of Proxies with respect to such proposals or to permit the satisfaction of any such condition. Any such adjournment will require the affirmative vote of a majority of the voting power present or represented at the Stockholders' Meeting. VOTING RIGHTS; QUORUM Pursuant to the Company's Certificate of Incorporation, Stockholders will be entitled to one vote per share at the Stockholders' Meeting. The presence, either in person or by properly executed Proxy, of the holders of a majority of the shares of Old Common Stock outstanding and entitled to vote is necessary to constitute a quorum at the Stockholders' Meeting. There is no quorum or minimum number of votes required to be cast with respect to the Prepackaged Plan. NO DISSENTERS' RIGHTS Stockholders have no appraisal or dissenters' rights with respect to the Charter Amendment, the Issuance, the Plan Proposal or the Election of the New Board. REVOCATION OF PROXIES A stockholder who has executed and returned a Proxy may revoke it at any time before it is voted by executing and returning a Proxy bearing a later date, by giving written notice of revocation to the Secretary of the Company or by attending the Stockholders' Meeting and voting in person. PREPACKAGED PLAN The Exchange Restructuring is conditioned on, among other things, 100% of the outstanding Senior Notes being validly tendered pursuant to the Exchange Restructuring. The Letter Agreement contemplates that, if consistent with the Company's obligations under applicable law (which the Company believes includes its fiduciary obligations) and if 100% of the Noteholders do not consent to the Restructuring, and/or the Stockholders do not approve each of the Restructuring Proposals, the Company will take such actions as are necessary to bind the Noteholders and/or the Stockholders, as the case may be, to the terms of the Restructuring. If each of the Restructuring Proposals is not approved by the Stockholders and/or the Minimum Tender Condition is not satisfied or waived, but the Company receives sufficient acceptances of the Prepackaged Plan to obtain confirmation thereof by the Bankruptcy Court, then the Company intends to pursue confirmation of the Prepackaged Plan under Chapter 11 of the Bankruptcy Code and to attempt to use such acceptances to obtain confirmation of the Prepackaged Plan. The Prepackaged Restructuring may be effected with the approval of a minimum of two-thirds of the principal amount and a majority in number of the Noteholders voting on the Prepackaged Plan. If the Prepackaged Restructuring is consummated, the Company expects that each of the Restructuring Proposals will be implemented pursuant to the Prepackaged Plan. Accordingly, this Proxy Statement/Prospectus also serves as a solicitation of acceptances by the Company for the acceptance of the Prepackaged Plan. See "DESCRIPTION OF THE PREPACKAGED PLAN" and the Prepackaged Plan, attached hereto as Annex II. The Company has reserved the right to seek confirmation of the Prepackaged Plan under the "cram-down" provisions of the Bankruptcy Code. Consequently, the Company may decide to seek confirmation of the Prepackaged Plan under the "cram-down" provisions of the Bankruptcy Code if the Stockholders vote to reject the Prepackaged Plan. DISCUSSION OF THE PROPOSALS THE CHARTER AMENDMENT The Board has unanimously adopted resolutions proposing that the Company's Certificate of Incorporation be amended by the Charter Amendment. The Charter Amendment will effect (i) the Reverse Split and (ii) an increase in the number of shares of New Common Stock authorized. Should the Exchange Restructuring be accepted by the Stockholders and the requisite 100% of Noteholders and thereafter consummated, an aggregate of 18,456,350 shares of New Common Stock will be issued to the Noteholders in exchange for their Senior Notes and 1,496,461 shares of New Common Stock will be issued to existing Stockholders. In addition, 2,216,979 Warrants, exercisable for an aggregate of 2,216,979 shares of New Common Stock (subject to adjustment), will be issued to Stockholders. The Charter Amendment will provide that the total number of shares of all classes of stock which the Company shall have authority to issue is fifty million shares, of which forty-five million shall be common stock, par value $1.00 per share, and five million shall be preferred stock, par value $2.00 per share. The number of authorized shares of preferred stock may be increased or decreased by the affirmative vote of the holders of a majority of the stock of the Company entitled to vote generally in the election of directors, voting together as a single class, without a separate vote of holders of preferred stock as a class, except to the extent that any such vote may be required by the resolution providing for the issuance of any series of preferred stock. At the time the Charter Amendment becomes effective, and without any further action on the part of the Company or its stockholders, each ten shares of common stock, then issued and outstanding, shall be changed and reclassified into one fully paid and nonassessable share of common stock, par value $1.00, and each holder of record of ten shares of the Old Common Stock with a par value of $1.00 will have, or be entitled to, a certificate representing one share of New Common Stock with par value $1.00. In lieu of the issuance of any fractional shares that would otherwise result from the Reverse Split, the Company will issue one additional share of New Common Stock. The Charter Amendment, if filed with the Secretary of State of Delaware, would amend the Certificate of Incorporation to effect a ten-to-one reverse stock split of the Company's outstanding shares of Old Common Stock such that each share of Old Common Stock immediately prior to the Exchange Restructuring Date will automatically convert into one-tenth of one share of New Common Stock immediately thereafter. The Reverse Split is necessary in order to "normalize" the post-Restructuring trading of the New Common Stock by reducing the number of outstanding shares and thereby increasing the trading price of the New Common Stock from where it would otherwise trade in the absence of the Reverse Split assuming the aggregate market capitalization of the Company remains constant. No scrip or fractional certificates will be issued in the Reverse Split. Instead, the Company will issue one additional share of New Common Stock to each affected Stockholder at no cost to the Stockholder. The ownership of a fractional interest will not give the holder thereof any voting, dividend or other rights except the right to receive an additional share therefor as described herein. The number of shares of New Common Stock to be issued in connection with settling such fractional interests is not expected to be material. The Company currently has authorized 30,000,000 shares of common stock (including 14,964,608 issued and outstanding shares of Old Common Stock), par value $1.00 per share, and 5,000,000 shares of preferred stock, par value $2.00 per share. As of the date of this Proxy Statement/Prospectus, there were no shares of preferred stock issued and outstanding. If the Charter Amendment is effected pursuant to the Exchange Restructuring, the number of shares of New Common Stock authorized will be increased to 45,000,000 shares. The Board is authorized to fix the relative rights and preferences of the shares of preferred stock, including voting powers, dividend rights, liquidation preferences, redemption rights and conversion privileges. Pursuant to a resolution adopted by the Board on December 8, 1987, in connection with the Company's implementation of the Rights Plan the Company created a series of 50,000 shares of preferred stock designated as "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") having the powers, preferences and rights described in the Certificate of Incorporation of the Company. See "DESCRIPTION OF RIGHTS PLAN." Without Stockholder approval, the Board could adversely affect the voting power of the Stockholders and, by issuing shares of preferred stock with certain voting, conversion and/or redemption rights, which could discourage any attempt to obtain control of the Company. As of the date of this Proxy Statement/Prospectus, no shares of Series A Preferred Stock were issued and outstanding. The final text of the Charter Amendment is subject to change in order to meet the requirements as to form that may be requested or required by the Secretary of State's Office of the State of Delaware. If the requisite approval by the Stockholders is obtained, the Charter Amendment will be effective upon the close of business on the date of filing of the Charter Amendment with the Delaware Secretary of State. Each certificate representing shares of Old Common Stock immediately prior to the Exchange Restructuring will be deemed automatically, without any action on the part of the Stockholders, to represent one-tenth the number of shares of New Common Stock immediately after the Exchange Restructuring Date. A Stockholder's proportionate ownership interest in the Company will remain unchanged by the Charter Amendment. The New Common Stock issued pursuant to the Charter Amendment will be fully paid and nonassessable. The voting and other rights of the Old Common Stock will not be altered by the Charter Amendment except that each share of the Old Common Stock will represent one-tenth of a share of New Common Stock. When the Charter Amendment becomes effective, Stockholders will be asked to surrender certificates representing shares of Old Common Stock in accordance with the procedures set forth in a Letter of Transmittal to be sent by the Company. Upon such surrender, a certificate representing the shares of New Common Stock and the Warrants will be issued and forwarded to the Stockholders; however, each certificate representing shares of Old Common Stock will continue to be valid and represent shares of New Common Stock equal to one-tenth the number of shares of Old Common Stock (rounded up to the nearest whole number). Persons who hold their shares in brokerage accounts or "street name" will not be required to take any further actions to effect the exchange of their certificates. Each of the Restructuring Proposals is conditioned upon the approval by the Stockholders of each of the other Restructuring Proposals. If any or all of the Restructuring Proposals are not approved by the Stockholders at the Stockholders' Meeting, then none of the Restructuring Proposals will become effective. THE BOARD RECOMMENDS A VOTE "FOR" THE CHARTER AMENDMENT. THE ISSUANCE The Board has unanimously adopted a resolution approving, as part of the Exchange Restructuring, the issuance of up to 22,169,790 shares of New Common Stock (including the Warrant Shares) and up to 2,216,979 Warrants pursuant to the Exchange Restructuring. Upon exchange of their Senior Notes, the Noteholders, in the aggregate and as of the Exchange Date, would receive 18,456,350 shares of New Common Stock, which would represent 92.5% of the outstanding shares of New Common Stock following consummation of the Exchange Restructuring (subject to dilution for shares of New Common Stock issued under the Stock Award and Incentive Plan, the Warrant Shares, and in the case of the Exchange Restructuring only, the shares of New Common Stock issued under the Old Plans), based on the number of shares outstanding as of the Record Date. The Stockholders currently own 100% of the common equity of the Company in the form of the Old Common Stock. As of March 16, 1998, there were 14,964,608 shares of Old Common Stock issued and outstanding. Assuming all of the conditions to the Restructuring are fulfilled, the Exchange Restructuring will result in the Stockholders receiving, in exchange for their shares of Old Common Stock, an aggregate of 1,496,461 shares of New Common Stock, after giving effect to the Reverse Split, constituting 7.5% of the New Common Stock issued and outstanding immediately after giving effect to the Exchange Restructuring (subject to dilution for the New Common Stock issued under the Stock Award and Incentive Plan, the Warrant Shares, and in the case of the Exchange Restructuring only, the shares of New Common Stock issued under the Old Plans). In addition, the Stockholders will receive the Warrants to purchase 2,216,979 shares of New Common Stock, which represent the right to purchase up to 10% of the New Common Stock issued and outstanding immediately following consummation of the Exchange Restructuring (on a fully diluted basis). The approval by the Stockholders of the Issuance may be required by the applicable rules of the NYSE. See "BACKGROUND OF RESTRUCTURING," "PURPOSE OF RESTRUCTURING," and "RESTRUCTURING FINANCIAL CONSIDERATIONS." Each of the Restructuring Proposals is conditioned upon the approval by the Stockholders of each of the other Restructuring Proposals. If any or all of the Restructuring Proposals are not approved by the Stockholders at the Stockholders' Meeting, then none of the Restructuring Proposals will become effective. THE BOARD RECOMMENDS A VOTE "FOR" THE ISSUANCE. STOCK AWARD AND INCENTIVE PLAN Pursuant to a resolution of the Board, the Board has adopted the Stock Award and Incentive Plan, which provides for the grant of various types of stock-based compensation to directors, officers and employees of the Company and its subsidiaries. The Stock Award and Incentive Plan has become effective as of the date of such resolution, however, the Stock Award and Incentive Plan and any grants thereunder are subject to subsequent approval by the Company's stockholders. The Stock Award and Incentive Plan is designed with the intention that compensation resulting from options, stock appreciation rights and certain other awards may qualify as "performance-based compensation" under Section 162(m) ("Section 162(m)") of the Internal Revenue Code of 1986, as amended (the "Tax Code"), and to comply with the conditions for exemption from the short-swing profit recovery rules under Rule 16b-3 ("Rule 16b-3") of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The summary that follows is not intended to be complete and is qualified in its entirety by the actual terms of the Stock Award and Incentive Plan, a copy of which is filed as Exhibit 10.50 to the Company's Registration Statement. Stockholders may request a copy of the Stock Award and Incentive Plan by contacting Todd Kahn, General Counsel and Executive Vice President of the Company, at (212) 221-7500. Capitalized terms used but not otherwise defined in the summary that follows shall have the respective meanings ascribed to them in the Stock Award and Incentive Plan. Purpose of the Stock Award and Incentive Plan --------------------------------------------- The purpose of the Stock Award and Incentive Plan is to strengthen the Company by providing an incentive to its directors, officers and employees and thereby encouraging them to devote their abilities and industry to the success of the Company's business enterprise. Eligibility ----------- Awards may be made by the Committee of the Board of Directors of the Company from and after the Restructuring Date (the "Committee"), in its discretion, to directors, officers and employees of the Company and its subsidiaries. Directors of the Company who are not also employees of the Company or any of its subsidiaries are entitled to automatic option grants as provided in the Stock Award and Incentive Plan and described below. Plan Administration and Shares Subject to the Stock Award and Incentive Plan ------------------------------------------------------------- 2,463,310 shares of New Common Stock (subject to adjustment as provided in the Stock Award and Incentive Plan), representing, on a fully diluted basis (inclusive of the Warrants), 10% of the aggregate shares of New Common Stock to be issued and reserved on the Restructuring Date, will be reserved for Awards to be granted under the Stock Award and Incentive Plan. Subject to stockholder approval, these Awards will be granted by the Committee comprised solely of two or more "non-employee directors" within the meaning of Rule 16b-3(b)(3) (or any successor rule) of the Exchange Act, and unless otherwise determined by the Board of Directors of the Company, "outside directors" within the meaning of Treasury Regulation Section 1.162-27(e)(3) and Section 162(m) of the Tax Code, which will administer the Stock Award and Incentive Plan. No individual may be granted Options or Awards with respect to more than a total of 500,000 shares during any one calendar year period under the Stock Award and Incentive Plan. In addition, the maximum dollar amount of cash or the Fair Market Value of shares of New Common Stock that any individual may receive in any calendar year in respect of Performance Units denominated in dollars may not exceed $3,000,000. Shares of New Common Stock subject to the Stock Award and Incentive Plan may either be authorized and unissued shares or previously issued shares acquired or to be acquired by the Company and held in its treasury. Subject to the terms of the Stock Award and Incentive Plan, the Committee has the right to grant Awards to eligible participants and to determine the terms and conditions of Agreements evidencing Awards, including the vesting schedule and exercise price of such Awards, and the effect, if any, of a Change in Control (as defined in the Stock Award and Incentive Plan) on such Awards. Upon the occurrence of a Change in Capitalization, the Stock Award and Incentive Plan permits the Committee to make appropriate adjustments to the type and aggregate number of shares subject to the Stock Award and Incentive Plan or any Award, and to the purchase or exercise price to be paid or the amount to be received in connection with the realization of any Award. Awards ------ Stock Options. Stock options granted pursuant to the Stock Award and Incentive Plan may either be incentive stock options within the meaning of Section 422 of the Tax Code ("ISOs"), or non-qualified stock options ("NQSOs") as determined by the Committee. The exercise price for each share of New Common Stock subject to an option will be determined by the Committee at the time of grant and set forth in an Agreement, provided that the exercise price may not be less than the Fair Market Value of the New Common Stock on the date the option is granted. The option exercise price may be paid in the discretion of the Committee on the date of the grant, in cash or by the delivery of shares then owned by the participant or as otherwise determined by the Committee. No option will be exercisable later than ten years after the date on which it is granted, provided that the Committee may (and in the case of a Formula Option shall) provide that an NQSO may, upon the death of a participant, be exercised for up to one year following the date of such participant's death, even if such period extends beyond ten years from the date such option is granted. ISOs may not be granted to any participant who owns stock possessing (after application of the attribution rules of Section 424(d) of the Tax Code) more than 10% of the total combined voting power of all outstanding classes of stock of the Company, unless the option price is at least 110% of the Fair Market Value at the date of grant and the option is not exercisable after five years from the date of grant. The Stock Award and Incentive Plan provides for automatic option grants ("Formula Options") to certain directors of the Company who are not also employees of the Company and its subsidiaries. Such directors will be granted initial Formula Options in respect of [ ] Shares (on the date of consummation of the Restructuring or, if applicable, when becoming a director for the first time) as well as annual Formula Options in respect of [ ] shares at each subsequent annual stockholders meeting of the Company. Formula Options will be granted with per share exercise prices equal to the Fair Market Value on the date of grant, with ten year terms and subject to the vesting schedule set forth in the Stock Award and Incentive Plan. Stock Appreciation Rights. Under the Stock Award and Incentive Plan, a stock appreciation right in respect of a share of New Common Stock represents the right to receive payment in cash and/or New Common Stock in an amount equal to the excess of the Fair Market Value of such share of New Common Stock on the date the right is exercised over the Fair Market Value on the date the right is granted. The Committee may grant stock appreciation rights to the holders of any options under the Stock Award and Incentive Plan. Such rights may also be granted independently of options. Restricted Stock. The Committee will determine the terms and conditions applicable to Restricted Stock at the time of grant, including the price, if any, to be paid by the grantee for the Restricted Stock, the restrictions placed on the shares, and the time or times when the restrictions will lapse. In addition, at the time of grant, the Committee, in its discretion, may decide: (i) whether any deferred dividends will be held for the account of the grantee or deferred until the restrictions thereon lapse, (ii) whether any deferred dividends will be reinvested in additional Shares or held in cash, (iii) whether interest will be accrued on any dividends not reinvested in additional shares of Restricted Stock and (iv) whether any stock dividends paid will be subject to the restrictions applicable to the Restricted Stock Award. Performance Units and Performance Shares. Performance Units and Performance Shares will be awarded as the Committee may determine, and the vesting of Performance Units and Performance Shares will be based upon the Company's attainment within an established period of specified performance objectives to be determined by the Committee. Upon granting Performance Units or Performance Shares, the Committee may provide, to the extent permitted under Section 162(m) of the Tax Code, the manner in which performance will be measured against the performance objectives, or may adjust the performance objectives to reflect the impact of specified corporate transactions, accounting or tax law changes, and other similar extraordinary and nonrecurring events. Performance Units may be denominated in dollars or in Shares, and payments in respect of Performance Units will be made in cash, Shares, shares of Restricted Stock or any combination of the foregoing, as determined by the Committee. The Agreement evidencing Performance Shares or Performance Units will set forth the terms and conditions thereof. Unless otherwise determined by the Committee at the time of grant, such awards that can be so granted, may be granted in a manner which is intended to qualify for the performance based compensation exemption of Section 162(m). In such event, either the granting or vesting of such awards will be based upon one or more of the following factors: earnings per share, New Common Stock share price, pre-tax profit, net earnings, return on stockholders' equity or assets or any combination of the foregoing. Change In Control ----------------- In the event of a Change in Control, the vesting of options and stock appreciation rights will accelerate and, if so provided by the Committee in an Agreement, the restrictions on Restricted Stock, Performance Units and Performance Shares will lapse. Transferability --------------- Awards under the Stock Award and Incentive Plan will not be transferable except by will or the laws of descent or distribution. Awards will only be exercisable during the lifetime of a participant by such participant only. However, at the discretion of the Committee, any option, other than an ISO, may permit the transfer of such option by a participant to certain family members or trusts for the benefit of such family members by such persons. Certain Federal Income Tax Considerations ----------------------------------------- THE FOLLOWING DISCUSSION OF CERTAIN RELEVANT FEDERAL INCOME TAX EFFECTS APPLICABLE TO CERTAIN AWARDS GRANTED UNDER THE STOCK AWARD AND INCENTIVE PLAN IS A SUMMARY ONLY, AND REFERENCE IS MADE TO THE TAX CODE FOR A COMPLETE STATEMENT OF ALL RELEVANT FEDERAL TAX PROVISIONS. HOLDERS OF AWARDS SHOULD CONSULT THEIR TAX ADVISORS BEFORE REALIZATION OF ANY SUCH AWARDS, AND HOLDERS OF COMMON STOCK PURSUANT TO AWARDS SHOULD CONSULT THEIR TAX ADVISORS BEFORE DISPOSING OF ANY SUCH SHARES. SECTION 16 INDIVIDUALS SHOULD NOTE THAT SOMEWHAT DIFFERENT RULES THAN THOSE DESCRIBED BELOW MAY APPLY TO THEM. ISOs. In general, a recipient will not recognize income upon the grant or exercise of an ISO, and the Company will not be entitled to any business expense deduction with respect to the grant or exercise of an ISO. However, upon the exercise of an ISO, the excess of the fair market value on the date of exercise of the shares received over the exercise price of the option will be treated as an adjustment to alternative minimum taxable income. In order for the exercise of an ISO to qualify as an ISO, a recipient generally must be an employee of the Company or a subsidiary (within the meaning of Section 422 of the Tax Code) from the date the ISO is granted through the date three months before the date of exercise (one year preceding the date of exercise in the case of a recipient whose employment is terminated due to disability). The employment requirement does not apply where a recipient's employment is terminated due to his or her death. If a recipient has held the shares acquired upon exercise of an ISO for at least two years after the date of grant and for at least one year after the date of exercise, when the recipient disposes of the shares, the difference, if any, between the sales price of the shares and the exercise price of the option will be treated as long-term capital gain or loss, provided that any gain will be subject to reduced rates of tax if the shares were held for more than twelve months and will be subject to further reduced rates if the shares were held for more than eighteen months. If a recipient disposes of the shares prior to satisfying these holding period requirements (a "Disqualifying Disposition"), the recipient will recognize ordinary income (treated as compensation) at the time of the Disqualifying Disposition, generally in an amount equal to the excess of the fair market value of the shares at the time the option was exercised over the exercise price of the option. The balance of the gain realized, if any, will be short-term or long-term capital gain, depending upon whether the shares have been held for at least twelve months after the date of exercise. If the recipient sells the shares in a Disqualifying Disposition at a price below the fair market value of the shares at the time the option was exercised, the amount of ordinary income (treated as compensation) will be limited to the amount realized on the sale over the exercise price of the option. In general, the Company will be allowed a business expense deduction to the extent a recipient recognizes ordinary income. NQSOs. In general, a recipient who receives a NQSO will not recognize income at the time of the grant of the option. Upon exercise of a NQSO, a recipient will recognize ordinary income (treated as compensation) in an amount equal to the excess of the fair market value of the shares on the date of exercise over the exercise price of the option. The basis in shares acquired upon exercise of a NQSO will equal the fair market value of such shares at the time of exercise, and the holding period of the shares (for capital gain purposes) will begin on the date of exercise. In general, if the Company complies with the applicable income reporting requirements, it will be entitled to a business expense deduction in the same amount and at the same time as the recipient recognizes ordinary income. In the event of a sale of the shares received upon the exercise of a NQSO, any appreciation or depreciation after the exercise date generally will be taxed as capital gain or loss, provided that any gain will be subject to reduced rates of tax if the shares were held for more than twelve months and will be subject to further reduced rates if the shares were held for more than eighteen months. The foregoing discussion assumes that at the time of exercise, the sale of the shares at a profit would not subject a recipient to liability under Section 16(b) of the Exchange Act. Special rules may apply with respect to persons who may be subject to Section 16(b) of the Exchange Act. Participants who are or may become subject to Section 16 of the Exchange Act should consult with their own tax advisors in this regard. Excise Taxes. Under certain circumstances, the accelerated vesting or exercise of options in connection with a change in control of the Company might be deemed an "excess parachute payment" for purposes of the golden parachute tax provisions of Section 280G of the Tax Code. To the extent it is so considered, a recipient may be subject to a 20% excise tax and the Company may be denied a tax deduction. Section 162(m) Limitation. Section 162(m) generally disallows a federal income tax deduction to any publicly held corporation for compensation paid in excess of $1 million in any taxable year to each of the chief executive officer and the four other most highly compensated executive officers (other than the chief executive officer) who are employed by such corporation on the last day of such corporation's taxable year. The Company has structured the Stock Award and Incentive Plan with the intention that compensation resulting from options, stock appreciation rights, Performance Shares and Performance Units may qualify as "performance-based compensation" and, if so qualified, would be deductible. Treatment of Options Under Old Plans. Options to purchase shares of Old Common Stock granted under the Old Plans will be treated differently depending upon whether the Restructuring is consummated by means of the Exchange Restructuring or the Prepackaged Restructuring. For a discussion of such treatment, see "POST RESTRUCTURING STOCK OPTION GRANTS." The approval of the Stock Award and Incentive Plan by the Stockholders may be required by the applicable rules of the NYSE. THE BOARD OF DIRECTORS BELIEVES THAT THE IMPLEMENTATION OF THE STOCK AWARD AND INCENTIVE PLAN IS IN THE BEST INTERESTS OF THE COMPANY'S STOCKHOLDERS AND RECOMMENDS ITS APPROVAL BY THE STOCKHOLDERS. If the Stockholders approve the Stock Award and Incentive Plan, the Stock Award and Incentive Plan will become effective regardless of whether the Exchange Restructuring is implemented or any of the Restructuring Proposals are approved. THE BOARD RECOMMENDS A VOTE "FOR" THE PLAN PROPOSAL. ELECTION OF THE NEW BOARD The Board currently consists of ten members, divided into three classes, the first class consisting of three members, the second class consisting of two members and the third class consisting of four members. Presently, there is one vacancy on the Board. The Board currently consists of Jerald S. Politzer (Chairman), Harold Leppo, Edward M. Yorke, Robert H. Falk, Ann Dibble Jordan, Robert Katz, John S. Rodgers, Bruce F. Roberts and Marvin Schiller. Article Fifth of the Certificate of Incorporation divides the Board into three classes, with each class serving a three year term. See "MANAGEMENT." Any vacancies in the Board for any reason, and any directorships resulting from any increase in the number of directors, may be filled only by the affirmative vote of a majority of the Board, although less than a quorum. Article Fifth may not be repealed or amended in any respect except with the approval of 67% of the outstanding shares of New Common Stock, and subject to the provisions of any preferred stock outstanding. Each of the existing members of the Board has delivered to the Company a resignation letter resigning from the Board effective as of the Exchange Restructuring Date. In accordance with the terms and provisions of the Company's Certificate of Incorporation, by resolution of the Board, the number of directors has been fixed at [_______] as of the Exchange Restructuring Date. As provided for in the Letter Agreement, the new Board is required to consist of: (i) Jerald Politzer, the Chairman of the Board, (ii) [ ] members to be nominated by Magten, subject to consultation with the Company and other Noteholders who may come forward prior to the commencement of the Solicitation; and (iii) one member designated by the current Board. As described above, as contemplated by the Letter Agreement, it is expected that Magten will provide the Company with its Board nominees prior to the commencement of the Solicitation. In addition, the current Board has designated Marvin Schiller to be the current Board's nominee to the new Board. If any nominee should be unavailable for election at the Stockholders' Meeting, the proxies will be voted for the election of such other person as may be recommended by the Board. The names, principal occupations and other information concerning nominees proposed for election to the Board are presented below. Proxies will be voted for all such nominees, unless marked to the contrary. The Company believes that each nominee will serve as a director, but should any such nominee be unable to serve as a director or withdraw from nomination, Proxies will be voted for the election of such substitute nominee as the Board may propose. Jerald S. Politzer, age 52, joined the Company as a director on March 24, 1997 and Chief Executive Officer commencing April 1, 1997. From July 1989 to November 1996 he had been Executive Vice President of Melville Corporation, a diversified retailer. Mr. Politzer is a director of Norton McNaughton, Inc., a manufacturer of women's apparel. Marvin Schiller, age 63, was Managing Director of A.T. Kearney, Inc., a management consulting firm, from May 1983 until his retirement as of January 1995. Dr. Schiller is a director of LePercq-Istel Fund, Inc., a mutual fund; Strategic Agricultural Management Corp., a software developer and marketer; and Tutor Time Learning Systems Inc., a childcare and educational company. Dr. Schiller has served as a director of the Company since May 1983. Information regarding the remaining Board nominees will be provided once Magten has advised the Company of its Board nominees. If the Restructuring is not consummated, the Board proposal will not be deemed to have been approved or implemented and the current Board will continue. The term of office of the first class ("Class One") elected at the Stockholders' Meeting will expire at the 2000 Annual Meeting; the term of the second class ("Class Two") will expire at the 1999 Annual Meeting; and the term of the third class ("Class Three") will expire at the 2001 Annual Meeting. THE BOARD RECOMMENDS A VOTE "FOR" EACH OF THE DIRECTOR NOMINEES. DESCRIPTION OF NEW COMMON STOCK The following summary description of the New Common Stock does not purport to be complete and is qualified in its entirety by this reference to the Company's Charter Amendment, which is described above. See "DISCUSSION OF THE PROPOSALS - The Charter Amendment." The New Common Stock is identical in all material respects to the Old Common Stock except for the effects of the Reverse Split. Immediately after the Restructuring, the Company will have 50,000,000 authorized shares of stock, consisting of 45,000,000 shares of the Common Stock, par value at $1.00 per share, and 5,000,000 authorized shares of preferred stock, par value $2.00 per share. As of such time, 19,952,811 shares of New Common Stock will be issued and outstanding to approximately [ ] holders of record, and no shares of preferred stock will be issued and outstanding. 18,456,350 shares of New Common Stock will be issued to Noteholders as of immediately prior to the Restructuring and 1,496,461 shares of New Common Stock will be issued to Stockholders as of immediately prior to the Restructuring in connection with the Restructuring (not including Warrant Shares and shares issuable upon the exercise of stock options granted to the Company's employees and directors under the Stock Award and Incentive Plan and, in the event the Exchange Restructuring is consummated, the Old Plans). All of the New Common Stock issued and outstanding as of the Exchange Restructuring Date will be fully paid and nonassessable. DISTRIBUTIONS Subject to such preferential rights as may be granted by the Board in connection with future issuances of preferred stock, holders of shares of New Common Stock will be entitled to receive ratably such dividends as may be declared by the Board in its discretion from funds legally available therefor. The Credit Agreement contains negative covenants that restrict, among other things, the ability of the Company to pay dividends and the Company believes that the New Credit Agreement will contain similar restrictions. In the event of a liquidation, dissolution or winding up of the Company, the holders of New Common Stock will be entitled to share ratably in all assets remaining after payment of liabilities and any liquidation preference owed to holders of any preferred stock. Holders of New Common Stock will have no preemptive rights and have no rights to convert their New Common Stock into any other securities. VOTING Subject to any preferential rights of holders of preferred stock, Stockholders are entitled to one vote per share on all matters to be voted on by Stockholders. Matters submitted for Stockholder approval require a majority vote of the shares, except where the vote of a greater number is required by the DGCL. Article Sixth of the Certificate of Incorporation provides that any action required or permitted to be taken by the Stockholders of the Company must be effected at a duly called annual or special meeting of such holders and may not be effected by written consent of the Stockholders. Article Sixth may not be repealed or amended in any respect except with the approval of 67% of the outstanding shares of New Common Stock. ELECTION OF DIRECTORS Article Fifth of the Certificate of Incorporation divides the Board into three classes, with each class serving a three year term. Any vacancies in the Board, for any reason, and any directorships resulting from any increase in the number of directors, may be filled only by the affirmative vote of a majority of the Board, although less than a quorum. Article Fifth may not be repealed or amended in any respect except with the approval of 67% of the outstanding shares of New Common Stock and subject to the provisions of any preferred stock outstanding. SHARES RESERVED IN CONNECTION WITH THE 1993 CHAPTER 11 PLAN In accordance with the 1993 Chapter 11 Plan, the Company reserved for issuance a certain number of shares of Old Common Stock in order to satisfy certain claims that had been asserted in the 1990 Chapter 11 Case pursuant to the terms and conditions of the 1993 Chapter 11 Plan. As of the date hereof, the Company continues to have 206,392 shares of Old Common Stock reserved for such purpose. Upon the consummation of the Restructuring, such shares will be canceled and the Company intends to reserve for issuance approximately 20,639 shares of New Common Stock (reflecting the Reverse Split) for the purpose of settling any remaining claims in the 1990 Chapter 11 Case for which a settlement of stock may be appropriate. For a discussion of the claims settlement process, see "BUSINESS AND PROPERTIES OF THE COMPANY -- Legal Proceedings." DESCRIPTION OF WARRANTS The following is a summary of certain provisions of the Warrant Agreement, and the Warrants to be issued thereunder. For more complete information regarding the Warrant Agreement and the Warrants, reference is made to the Warrant Agreement, a copy of which is attached as Exhibit 10.52 to the Company's Registration Statement and which is incorporated herein by reference. Capitalized terms used but not defined herein shall have the meanings assigned to them in the Warrant Agreement. Stockholders may obtain a copy of the Warrant Agreement by contacting Todd Kahn, General Counsel and Executive Vice President of the Company, at (212) 221-7500. This Proxy Statement/Prospectus constitutes the Company's Prospectus with respect to the Warrants (and the New Common Stock issuable upon exercise of the Warrants) to be issued to Stockholders immediately after the consummation of the Restructuring. GENERAL Immediately after the consummation of the Restructuring and the Reverse Split, the Company will issue to the Stockholders upon surrender of such Stockholders' Old Common Stock certificates, shares of New Common Stock and Warrant Shares at an Exercise Price of $6.2648 per share. Stockholders will receive, for each share of Old Common Stock held, one-tenth of a share of New Common Stock and .14814815 Warrants. The Stockholders will receive, in the aggregate, 2,216,979 Warrants exercisable, for 2,216,979 shares of New Common Stock or approximately 10% of the New Common Stock after giving effect to the Restructuring, based on 14,964,608 outstanding shares of Old Common Stock as of the Record Date. The Company will not be required to issue any fractional shares of New Common Stock or Warrants. Whenever any distribution of Warrants exercisable into fractional shares of New Common Stock would otherwise be called for, the actual distribution will reflect a rounding up or a rounding down to the nearest share of New Common Stock, provided that, whenever any distribution of a Warrant that is exercisable into exactly one-half of a share of New Common Stock, the actual distribution will reflect a rounding up to the nearest share of New Common Stock. The Exercise Price and the number of Warrant Shares are both subject to adjustment in certain cases referred to below. Following the consummation of the Exchange Restructuring, holders of Old Common Stock will be issued Warrants upon receipt by the Depositary of a duly completed Letter of Transmittal (to be sent to the Stockholders by the Company promptly after consummation of the Restructuring). The Warrants will be exercisable immediately after the consummation of the Restructuring and prior to 5:00 p.m., New York City time, on the seventh anniversary of the date of issuance. The exercise and transfer of the Warrants will be subject to applicable Federal and state securities laws. The Warrants may be exercised by surrendering warrant certificates ("Warrant Certificates") evidencing the Warrants to be exercised to the Company at the Warrant Agent's principal office, (i) a written notice of such holder's election to exercise such Warrant, which notice will include the number of shares of New Common Stock to be purchased; (ii) payment of the Warrant Price (as defined in the Warrant Agreement) for the account of the Company and (iii) such Warrant. Payment of the aggregate Warrant Price may be made by certified or official bank check or wire transfer payable to the order of the Warrant Agent on account of the Company. Upon surrender of the Warrant Certificate and payment of the Warrant Price, the Warrant Agent will deliver or cause to be delivered, to or upon the written order of such holder, an executed certificate or certificates representing the aggregate number of full shares of New Common Stock issuable upon such exercise. If any Warrant is exercised in part, the Warrant Agent will, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to the holder a new Warrant evidencing the rights of such holder to purchase the unpurchased shares of New Common Stock called for by such Warrant. The holders of the Warrants will have no right to vote on matters submitted to the stockholders of the Company and will have no right to receive dividends. In the event of the liquidation, dissolution or winding up of the affairs of the Company, the holders of the Warrants will be entitled to receive, in lieu of each share of New Common Stock such holders would otherwise be entitled to receive upon exercise of the Warrants, the same kind and amount of any stock, securities or assets as may be issuable, distributable or payable in such event with respect to each share of New Common Stock. In the event a bankruptcy or reorganization subsequent to the Restructuring is commenced by or against the Company, a bankruptcy court may hold that unexercised Warrants are executory contracts which may be subject to rejection by the Company with approval of the bankruptcy court, and the holders of the Warrants may, even if sufficient funds are available, receive nothing or a lesser amount as a result of any such bankruptcy case than they would be entitled to if they had exercised their Warrants prior to the commencement of any such case. In the event of a taxable distribution to holders of New Common Stock that results in an adjustment to the number of shares of New Common Stock or other consideration for which a Warrant may be exercised, the holders of the Warrants may, in certain circumstances, be deemed to have received a distribution subject to United States Federal income tax as a dividend. See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS:STOCKHOLDERS." ADJUSTMENTS The number of shares of New Common Stock purchasable upon exercise of Warrants and the Exercise Price will be subject to adjustment in certain events including, among others, that if the Company: (i) pays a dividend or makes a distribution on its New Common Stock in shares of its New Common Stock, (ii) subdivides its New Common Stock into a greater number of shares, (iii) combines its outstanding shares of New Common Stock into a smaller number of shares, (iv) makes a distribution on New Common Stock in shares of its capital stock other than the New Common Stock; or (v) issues by reclassification of New Common Stock any shares of its capital stock. AMENDMENT No provision of the Warrant Agreement may be amended without the consent of the Company, holders of 66 2/3% of the then issued and outstanding New Common Stock, the Warrant Agent and a majority of the holders of the Warrants; provided that no Warrant may be modified or amended to reduce the number of shares of New Common Stock for which such Warrant is exercisable or to increase the price at which such shares may be purchased upon exercise of such Warrant without the prior written consent of the holder thereof. GOVERNING LAW The Warrant Agreement and the Warrants will be governed by and construed in accordance with, the laws of the State of New York, without regard to the provisions thereof relating to conflicts of law. DESCRIPTION OF NEW CIT CREDIT AGREEMENT The Company intends to enter into a New Credit Agreement, effective as of the Restructuring Date, which will replace the Company's current working capital facility under the Credit Agreement. From the beginning of Fiscal 1998, the Company received and reviewed various proposals for a New Credit Agreement which were submitted by CIT as well as various other prospective lenders. After reviewing the proposals for a New Credit Agreement received from the various lenders, and conducting extensive negotiations with certain of the lenders who submitted proposals, the Company determined that the proposal submitted by CIT contained the most advantageous terms and conditions. As a result, the Company entered into the CIT Commitment Letter, which sets forth the principal terms and conditions of an agreement for a new $140 million secured credit facility with CIT (the "New CIT Credit Agreement") that the Company intends to enter into on the Restructuring Date. Pursuant to the CIT Commitment Letter, the New CIT Credit Agreement will provide for a general working capital facility, in the form of direct borrowings and letters of credit, up to $125,000,000, subject to an asset-based borrowing formula. The New CIT Credit Agreement will also provide for a $15,000,000 term loan facility. As collateral for borrowings under the New CIT Credit Agreement, the Company will grant to CIT a security interest in substantially all of the assets of the Company. The New CIT Credit Agreement will have an initial term commencing on the Restructuring Date and continuing through and including December 31, 2001. The New CIT Credit Agreement will also provide, among other things, that (i) the Company will be charged an interest rate on direct borrowings of .25% in excess of the prime rate of The Chase Manhattan Bank, N.A. or 2.25% in excess of the London Late Eurodollar Rate; and (ii) CIT may, in its sole discretion, make loans to the Company in excess of the borrowing formula. Pursuant to the CIT Commitment Letter, the New CIT Credit Agreement will also provide that the $15 million term loan portion of the facility shall be repaid based upon a five year amortization schedule in consecutive monthly installments, commencing on the first day of the month immediately following the date six months after the closing of the New CIT Credit Agreement and continuing thereafter with the final installment in the amount of the then remaining balance of the term loan, together with all unpaid and accrued interest thereon, due and payable on December 31, 2001. The CIT Commitment Letter provides that the New CIT Credit Agreement will contain financial covenants ("Maintenance Covenants") as to (i) minimum tangible net worth, (ii) maximum net loss, (iii) minimum interest coverage ratio, and (iv) maximum capital expenditures. Pursuant to the CIT Commitment Letter, there will be no other Maintenance Covenants contained in the New CIT Credit Agreement. The Company believes that the New CIT Credit Agreement will also contain restrictive covenants and events of default similar to those that are in the existing Credit Agreement. For a description of those restrictive covenants and events of default, see "DESCRIPTION OF CERTAIN EXISTING INDEBTEDNESS OF THE COMPANY--Revolving Credit Agreement." Pursuant to the CIT Commitment Letter and in accordance with the Twelfth Amendment, no closing or facility fees will be charged to the Company by CIT in consideration of the execution and delivery of the New CIT Credit Agreement. The Company believes that the terms and conditions of the New CIT Credit Agreement set forth in the CIT Commitment Letter are significantly more favorable than those currently existing under the Credit Agreement with CIT. Moreover, the Company also believes that the New CIT Credit Agreement will be adequate to permit the Company to operate its business in accordance with the Three-Year Business Plan. The execution of the New CIT Credit Agreement is subject to various conditions, including, but not limited to, consummation of the Restructuring by no later than November 30, 1998. There is no assurance that such conditions will be satisfied or that the New CIT Credit Agreement will be executed. In addition, under the Letter Agreement, the New CIT Credit Agreement must be on terms and conditions reasonably satisfactory to Magten, Apollo and the Company. DESCRIPTION OF REGISTRATION RIGHTS AGREEMENT In connection with the Restructuring, the Company will also enter into, on the Exchange Restructuring Date, the Registration Rights Agreement. Under the terms and conditions of the Registration Rights Agreement, the Company must use commercially reasonable efforts to register the New Common Stock pursuant to a "shelf registration," and to keep such shelf registration continuously effective for three years (subject to a two-year extension of such period to the extent that a registration statement filed on Form S-3 is available to the Company at the end of such initial three-year period), subject to the right to suspend the use of the prospectus constituting part of such registration statement for designated corporate purposes. Thereafter, holders who did not resell New Common Stock during the three-year period, but whose resales would have been covered by the registration statement, will be entitled to exercise, over a two-year period, up to three demand registrations and will be entitled to piggyback registration rights as well during such period. In the event that the shelf registration does not become effective within one hundred days after the date that the registration statement is filed, holders of the New Common Stock whose resales would have been covered by the registration statement will be entitled to exercise, over a two-year period, up to four demand registrations and will be entitled to piggyback registration rights as well during such period. A copy of the Registration Rights Agreement is attached as Exhibit 10.51 to the Company's Registration Statement. Stockholders may obtain a copy of the Registration Rights Agreement by contacting Todd Kahn, General Counsel and Executive Vice President of the Company, at (212) 221-7500. DESCRIPTION OF CERTAIN EXISTING INDEBTEDNESS OF THE COMPANY The following summary of the principal terms of certain of the existing indebtedness of the Company does not purport to be complete and is qualified in its entirety by reference to the documents governing such indebtedness, including the definitions of certain terms therein, copies of which have been filed or incorporated as exhibits to the Registration Statement of which this Proxy Statement/Prospectus is a part. Whenever particular provisions of such documents are referred to herein, such provisions are incorporated by reference, and the statements are qualified in their entirety by such reference. GENERAL The following is a summary of certain existing indebtedness and other financing arrangements of the Company or its Subsidiaries. The descriptions of the loans outstanding under the Credit Agreement and the Senior Notes are qualified in their entirety by reference to the agreements and instruments governing such financing arrangements. Noteholders are referred to the Credit Agreement and the Indenture for a statement of their terms. REVOLVING CREDIT AGREEMENT The Company is a party to the Credit Agreement with CIT. The Credit Agreement provides the Company with general working capital financing, in the form of direct borrowings and letters of credit, up to the Maximum Credit (as defined in the Credit Agreement), subject to an asset-based borrowing formula. As collateral for borrowings under the Credit Agreement, the Company has granted to CIT a security interest in substantially all of the assets of the Company. The Credit Agreement imposes a number of restrictive covenants that affect the Company and its subsidiaries with respect to, among others things: (i) creating liens; (ii) incurring indebtedness and contingent obligations; (iii) paying dividends and redeeming capital stock; (iv) merging and selling assets; (v) engaging in sale and lease back transactions; (vi) making investments in other persons; (vii) engaging in certain affiliate transactions; (viii) making capital expenditures; (ix) selling accounts receivable; and (x) amending certain of its debt instruments and making payment in respect of the obligations represented thereby. The Credit Agreement contains a number of events of default, including the following: (i) failure to make payments of interest and principal when due; (ii) material error in any representation or warranty or certificate made under the Credit Agreement; (iii) failure of the Company to perform any of its respective agreements under the Credit Agreement; (iv) a default in the payment of any obligation of the Company or its subsidiaries on indebtedness in excess of $750,000 owing to any one person other than CIT; (v) entry of a judgment in excess of $500,000 in the aggregate and the same remains undischarged for a period in excess of 30 days; (vi) certain events of insolvency and bankruptcy of the Company or its subsidiaries; (vii) certain events in respect of pension plans; (viii) the incurrence of environmental liability; (ix) certain change of control events; and (x) a material adverse change in the condition (financial or otherwise) of the Company. On March 2, 1998, the Company entered into the Twelfth Amendment with CIT, wherein CIT (i) waived, as of January 3, 1998, the Company's failure to meet the financial covenants related to stockholders' equity and maximum loss, as set forth in the Credit Agreement; (ii) agreed to forbear (subject to certain conditions) from exercising any of its rights or remedies arising under the Credit Agreement arising from the Company's failure to make the interest payment on the Senior Notes due and payable on March 2, 1998; (iii) agreed to continue making loans, advances and other financial accommodations to the Company, subject to the terms and conditions of the Twelfth Amendment; (iv) increased the borrowings allowed against eligible inventory to 60%; (v) provided the Company with a discretionary $3 million seasonal overadvance; and (vi) reduced the Maximum Credit from $135 million to $120 million. Under the Twelfth Amendment and prior to the effectiveness of the Thirteenth Amendment, to the extent that the Company failed to maintain certain levels of borrowing under its asset-based borrowing formula, the Company was required to maintain a certain minimum interest coverage ratio and was subject to a covenant limiting the maximum loss the Company could incur in any twelve consecutive calendar months. In consideration for CIT's entering into the Twelfth Amendment, the Company agreed to pay CIT certain fees. See "BACKGROUND TO THE RESTRUCTURING -- The Waiver and Forbearance Agreement Under the Credit Agreement and Commitment for New Credit Agreement." Under the Twelfth Amendment, such agreement to forbear by CIT was to terminate on July 1, 1998 or earlier upon the happening of (a) the occurrence of any Event of Default (as defined in the Credit Agreement) other than a Payment Default (as defined in the Twelfth Amendment), or (b) the failure of the Company to execute and deliver to CIT before June 1, 1998, (i) a commitment letter executed by CIT providing for the agreement between CIT and the Company to enter into a new $135 million syndicated credit facility (in replacement of the financing and factoring arrangements provided by CIT pursuant to the Credit Agreement) on terms and conditions satisfactory to CIT or (ii) a copy of a commitment letter executed between another lender and the Company providing for a credit facility to the Company which by its terms provides for closing and funding thereof on or before July 1, 1998, and enabling the Company upon such closing and funding to simultaneously terminate the Credit Agreement and all other Financing Agreements (as defined in the Credit Agreement) and to satisfy in full all of its then existing Obligations (as defined in the Credit Agreement) to CIT; (c) the exercise of any right or remedy with respect to any of the Collateral (as defined in the Credit Agreement) by any holder of any Senior Notes or by the Trustee under the Indenture; or (d) the payment of any interest on the Senior Notes in respect of the Company's failure to make the March 2, 1998 interest payment or otherwise. In addition, the Twelfth Amendment created two new Events of Default under the Credit Agreement: (i) the termination of E&Y as business consultant to the Company and the failure to replace E&Y with another business consultant satisfactory to CIT within 5 business days, and (ii) any event occurring after March 2, 1998 which materially and adversely affects the Company's businesses. In conjunction with obtaining the financing commitment under the CIT Commitment Letter, CIT has agreed to further support the Restructuring by entering into the Thirteenth Amendment, dated as of June 1, 1998, wherein CIT agreed (i) to continue to forbear (subject to certain conditions) from exercising any of its rights or remedies under the Credit Agreement arising from the Company's failure to make the interest payment on the Senior Notes due and payable on March 2, 1998 or by virtue of an event of default arising from the failure of the Company to make the interest payment on the Senior Notes due and payable on August 31, 1998; (ii) to continue to make loans, advances and other financial accommodations to the Company through the earlier of the Restructuring Date and November 30, 1998, subject to the terms and conditions of the Thirteenth Amendment; and (iii) to amend certain provisions of the Credit Agreement, including a reduction of the rate of interest charged on the revolving credit loans, an increase in the advance rate for revolving credit loans made under the Credit Agreement and the elimination of any and all provisions providing for the factoring of the Company's accounts receivable. Under the Thirteenth Amendment, such agreement to forbear by CIT will terminate on November 30, 1998 or earlier upon the happening of (a) the occurrence of any Event of Default (as defined in the Credit Agreement), other than by virtue of the Company's failure to make the March 2, 1998 or August 31, 1998 interest payment on the Senior Notes or the commencement or continuation of a chapter 11 case to effectuate the Restructuring; or (b) the exercise of any right or remedy with respect to any of the Collateral by any holder of the Senior Notes or by the Trustee under the Indenture; or (c) the payment of any interest on the Senior Notes in respect of the Company's non-payment of the interest that was payable on March 2, 1998 or that will be payable on August 31, 1998 or otherwise; or (d) the occurrence of an Agreement Termination Event (as defined in the Letter Agreement), except under certain circumstances. In accordance with the Twelfth Amendment, no additional closing fees, facility fees or amendment fees were charged to the Company by CIT in consideration of the execution and delivery of the Thirteenth Amendment. Pursuant to the Thirteenth Amendment, CIT also agreed (i) to reduce the interest rate on direct borrowings from .75% in excess of the Prime Rate or 3.00% in excess of the Eurodollar Rate to .25% and 2.25%, respectively; and (ii) to increase the borrowings allowed against eligible inventory to 65% for the period from June 1, 1998 through September 20, 1998. The Thirteenth Amendment also amends the Credit Agreement to include a maximum net loss covenant that provides that, if on the last day of June, July or August 1998, the Company fails to maintain Excess Availability (as defined in the Credit Agreement) of at least an amount equal to five percent of the value of Eligible Inventory (as defined in the Credit Agreement), then the aggregate cumulative net loss (exclusive of certain costs incurred in connection with the Restructuring) incurred by the Company during Fiscal 1998 through the end of any such month on which the Company failed to maintain at least such Excess Availability, shall not exceed $8,850.000. The Thirteenth Amendment also provides that in the event that the Company seeks to consummate the Restructuring by filing a chapter 11 case, (i) the Credit Agreement will remain in full force and effect (subject to certain conditions) and (ii) immediately upon commencement of the chapter 11 case, the Company and CIT will seek an order of Bankruptcy Court approving and authorizing the extension of post-petition financing by CIT to the Company on the same terms and conditions as set forth in the Credit Agreement (the "Financing Order"). In addition, the Thirteenth Amendment created two new Events of Default under the Credit Agreement as follows: if, in the event a chapter 11 case is commenced to effectuate the Prepackaged Plan, (i) there is a violation of the Financing Order or (ii) the chapter 11 case is converted to a proceeding under chapter 7 of the Bankruptcy Code, or is terminated or dismissed prior to the consummation of the transactions contemplated by the Restructuring, or a plan of reorganization other than the Prepackaged Plan is confirmed. THE SENIOR NOTES The Company is the obligor on the Senior Notes outstanding pursuant to the Indenture, dated September 20, 1993, as amended, between the Company and Bankers Trust Company, as Trustee. Pursuant to the Indenture, the Senior Notes bear interest at a rate of 10-1/2% per annum. As of March 2, 1998, the aggregate principal face amount of Senior Notes outstanding was $104,879,000. The Indenture requires that 100% of the principal be repaid on December 31, 1998. The Indenture also requires the Company to pay interest semi-annually on the last day of February and August of each year, commencing February 28, 1994. In addition, the Indenture also requires the Company to use a portion of the proceeds from certain asset sales to pay amounts outstanding under the Senior Notes. The relative priority of liens in and upon the Company's collateral as between CIT and the Noteholders is governed by the Intercreditor Agreement, dated September 20, 1993 (the "Intercreditor Agreement"), by and between CIT and Bankers Trust Company, as Trustee. Pursuant to the Intercreditor Agreement, (i) CIT has a first priority lien upon all of the Company's accounts, chattel paper, instruments, documents (other than chattel paper, instruments and documents constituting general intangibles), inventory, equipment, books and records and real property (other than two parcels (the "Excepted Property")) and any proceeds of the foregoing (collectively, the "CIT Priority Collateral"), and (ii) the Noteholders have a first priority lien upon all of the Company's general intangibles, certain pledged stock, the Excepted Property and any proceeds of the foregoing (collectively, the "Noteholder Priority Collateral"). In addition, CIT holds a junior lien on all of the Noteholder Priority Collateral and the Noteholders hold a junior lien on all of the CIT Priority Collateral. However, the Intercreditor Agreement provides that upon a written declaration by CIT that an Event of Default under the Credit Agreement has occurred and all obligations thereunder are due and payable and an exercise by CIT of its rights and remedies, CIT is entitled to the first $15 million of proceeds from the Company's general intangibles (the "CIT Intangibles Limited Priority"). Under the agreement, the CIT Intangibles Limited Priority is of no further force and effect (i) from and after the release by CIT of its lien upon any of the CIT Priority Collateral (other than any such release in consideration of the contemporaneous delivery to CIT of all of the net proceeds arising from the sale, transfer or other disposition of such released CIT Priority Collateral and the application of such net proceeds by CIT to payment to such extent of the then outstanding CIT obligations) or (ii) in the event that the Company refinances the CIT obligations without liens on all of the CIT Priority Collateral. The Intercreditor Agreement also provides that, except as set forth in the immediately preceding sentence with respect to the CIT Intangibles Limited Priority, the priority of liens set forth in that agreement "shall not be altered or otherwise affected by any modification, renewal, restatement, extension or refinancing" of any obligations owed to CIT or the Noteholders. The Indenture imposes a number of restrictive covenants that affect the Company and its subsidiaries with respect to, among other things: (i) incurring indebtedness; (ii) creating liens; (iii) merging and selling assets; (iv) engaging in certain intercompany transactions; (v) permitting changes of control to occur; and (vi) engaging in transactions with stockholders and affiliates. The Indenture contains a number of events of default, including the following: (i) failure to make payments of interest when due, and the continuation of such failure for 30 days; (ii) failure to pay principal when due; (iii) default in the payment of any obligation of the Company or any of its subsidiaries on indebtedness in the aggregate principal amount of $3,000,000 or more; (iv) failure of the Company to comply with any of its covenants or agreements under the Indenture; (v) entry of a judgment in excess of $3,000,000; and (vi) certain events of insolvency and bankruptcy of the Company of any and its subsidiaries. On March 2, 1998, the Company elected not to pay the interest payment of $5.5 million that was due and payable under the Senior Notes, subject to a 30 day grace period. Because the Company elected not to pay the interest due on the Senior Notes by the expiration of the applicable grace period, an event of default has occurred with respect to the Senior Notes entitling the Noteholders to accelerate the maturity thereof. Holders of at least 25% in the aggregate principal face amount of the Senior Notes may accelerate all outstanding indebtedness under the Senior Notes pursuant to the terms of the Indenture. If such holders accelerate the indebtedness under the Senior Notes, the Company may be required to commence a proceeding under the Federal bankruptcy laws without having solicited acceptances for the prepackaged plan prior to commencement of such proceeding. Pursuant to the Letter Agreement, Magten has, in accordance with Section 6.5 of the Indenture, caused a written direction to be provided to the Trustee, to forbear during the term of the Letter Agreement from taking any action under the Indenture in connection with the failure by the Company to make the interest payment on the Senior Notes that was due and payable on March 2, 1998. On April 8, 1998, the Trustee issued a Notice of Default stating that as a result of the Company's failure to make the interest payment due on the Senior Notes, an event of default under the Indenture had occurred on April 1, 1998. DESCRIPTION OF RIGHTS PLAN The Company is a party to the Rights Plan which provides for a dividend distribution of one Right for each share of Old Common Stock to holders of record of the Old Common Stock at the close of business on December 23, 1997. With certain exceptions, the Rights will become exercisable only in the event that an acquiring party accumulates 20 percent or more of the Company's voting stock, or if a party announces an offer to acquire 30 percent or more of such voting stock. Each Right, when exercisable, will entitle the holder to buy one-hundredth of a share of the Company's Series A Preferred Stock at a price of $30 per right or, upon the occurrence of certain events, to purchase either common stock of the Company or shares in an Acquiring Entity (as defined in the Rights Plan) at half the market value thereof. The Company will generally be entitled to redeem the Rights at a redemption price of $0.03 per Right at any time until the 10th day following the acquisition of a 20 percent position in its shares of Old Common Stock. In July 1993, the Rights Plan was amended to provide that an acquisition or offer by Apollo, or any of Apollo's Subsidiaries (as defined in the Rights Plan), will not cause the Rights to become exercisable. Pursuant to the December 10, 1997 amendment to the Rights Plan, the expiration date of the Rights was extended to December 23, 2002. On [_________], 1998, in connection with the Restructuring and consistent with the terms of the Letter Agreement, the Company amended the Rights Plan to provide, among other things, that the Rights will expire under the Rights Plan immediately prior to the consummation of the Restructuring. DESCRIPTION OF THE CHAPTER 11 CASE TIMETABLE FOR THE CHAPTER 11 CASE In the event that the Company pursues the Restructuring pursuant to the Prepackaged Plan, following the Filing Date, the Company expects the Chapter 11 Case to proceed on the following estimated timetable. There can be no assurance, however, that the Bankruptcy Court's orders to be entered on or after the Filing Date or actions that may be taken by various parties-in-interest will permit the Chapter 11 Case to proceed as expeditiously as anticipated. On the Filing Date, the Company intends to seek an order that the hearing to consider the adequacy of the disclosure made to Noteholders and Stockholders, at which the Bankruptcy Court would consider whether the Solicitation of votes to accept or reject the Prepackaged Plan complied with Section 1126(b) of the Bankruptcy Code so as to permit the prepetition votes on the Prepackaged Plan to be counted towards confirmation, be held immediately prior to the hearing on the Confirmation of the Prepackaged Plan. The Company anticipates that the hearing on confirmation of the Prepackaged Plan would occur on or about 30 days after the commencement of the Chapter 11 Case. The Company anticipates that at least 25 days' notice of the Confirmation Hearing and of the time for filing objections to confirmation of the Prepackaged Plan will be given to all creditors and interest holders. Assuming that the Prepackaged Plan is confirmed at the initial Confirmation Hearing, the Prepackaged Plan provides that the Effective Date will be a date which is 11 days after the Confirmation Date, or, if such date is not a Business Day, the next succeeding Business Day, or such earlier date after the Confirmation Date as agreed to in writing between the Company and Magten so long as no stay of the Confirmation Order is in effect on such date; provided, however, that if, on or prior to such date, all conditions to the Effective Date set forth in Article Thirteen of the Prepackaged Plan have not been satisfied, or waived, then the Effective Date will be the first Business Day following the day on which all such conditions to the Effective Date have been satisfied or waived. Under the foregoing timetable, the Company would emerge from the Chapter 11 Case within 45 to 60 days after the Filing Date. There can be no assurance, however, that this projected timetable will be achieved. ADEQUACY OF DISCLOSURE In order for the Prepackaged Plan to be consummated, among other things, the Bankruptcy Court must determine that the Solicitation of acceptances for the Prepackaged Plan was in compliance with section 1126(b) of the Bankruptcy Code. Section 1126(b) provides, in pertinent part, that the solicitation of acceptances or rejections on a plan of reorganization must be in compliance with any applicable nonbankruptcy law, rule, or regulation governing the adequacy of disclosure in connection with such solicitation. Thus, the Bankruptcy Court must determine that the Solicitation of acceptances for the Prepackaged Plan was in compliance with applicable nonbankruptcy laws rules and regulations, including but not limited to, the Securities Act, the Exchange Act, and state "blue sky" securities laws. COMMITTEES To facilitate negotiations and otherwise provide for a unified and efficient representation of unsecured creditors and equity interest holders with similar rights and interests, the United States Trustee will generally appoint one or more statutory committees as soon as practicable after the Filing Date, pursuant to section 1102 of the Bankruptcy Code. Ordinarily, one committee will be appointed to represent unsecured creditors, but the United States Trustee may appoint additional committees to represent equity interest holders and/or creditors if deemed necessary to assure adequate representation of creditors or equity interest holders. A creditors' committee will ordinarily consist of those creditors willing to serve who hold the seven largest unsecured claims against the debtor of those claims to be represented by the committee, or of the members of a prepetition committee if it was fairly chosen and is representative. The fees and expenses of such committees, including those of legal counsel and financial advisors, are paid for from the debtor's estate subject to Bankruptcy Court approval. However, given the prepackaged nature of the Prepackaged Plan and the unimpaired treatment of unsecured creditors, the United States Trustee may elect not to appoint an unsecured creditors' committee in the Chapter 11 Case. Holders of equity interests are not ordinarily represented by an official committee, but such a committee may be appointed if the United States Trustee deems it appropriate or if the Bankruptcy Court determines such an official committee to be necessary to assure the adequate representation of interest holders. Committees appointed by the United States Trustee would be considered parties-in-interest and would have a right to be heard on all matters concerning the Chapter 11 cases, including the confirmation of a plan of reorganization and, additionally, would be entitled to consult with the debtor concerning the administration of the Chapter 11 case and perform such other functions and services that would further the interests of those creditors or interest holders they represent. ACTIONS TO BE TAKEN UPON COMMENCEMENT OF CASE The Company does not expect the Chapter 11 Case to be protracted. To expedite its emergence from Chapter 11, the Company intends to seek the relief detailed below, among other relief, from the Bankruptcy Court on the Filing Date. Such relief, if granted, will facilitate the administration of the Chapter 11 Case, but there can be no assurance, however, that the Bankruptcy Court will grant the relief sought. Applications to Retain Professionals Upon commencement of the Chapter 11 Case, the Company intends to file applications to retain the reorganization professionals who will assist and advise the Company in connection with administration of the Chapter 11 Case. The Company also may seek authority to retain certain professionals to assist with the operation of its businesses in the ordinary course. Such so-called "ordinary course professionals" will not be involved in the administration of the Chapter 11 Case. Motion to Waive Filing of Schedules and Statement of Financial Affairs Section 521 of the Bankruptcy Code and Bankruptcy Rule 1007 direct that debtors must prepare and file certain schedules of claims, executory contracts and unexpired leases and related information (the "Schedules") and a statement of financial affairs (the "Statement") when a Chapter 11 case is commenced. The purpose of filing the Schedules and the Statement is to provide a debtor's creditors, equity interest holders and other interested parties with sufficient information to make informed decisions regarding the debtor's reorganization. However, a bankruptcy court may modify or dispense with the filing of the Schedules and the Statement pursuant to Section 521 of the Bankruptcy Code. The Company believes that the Chapter 11 Case constitutes an ideal case wherein the filing of the Statement and the Schedules should not be required. Therefore, the Company intends to request that the Bankruptcy Court order that the Company not be required to file the Schedules and the Statement. Motion to Mail Notices and to Provide Only Publication Notice of Meeting of Creditors to Unimpaired Creditors Pursuant to the Bankruptcy Rules, the Clerk of the Bankruptcy Court, or another party that the Bankruptcy Court may direct, must provide notice of the commencement of the Chapter 11 Case and of the meeting of creditors held pursuant to section 341 of the Bankruptcy Code (the "Section 341 Meeting") to all creditors. In addition, at least two other notices, notice of the hearing on approval of confirmation of the Prepackaged Plan and notice of the entry of an Order confirming the Prepackaged Plan, must be given to all creditors and equity security holders. Due to the size of the Chapter 11 Case and the large number of creditors and equity security holders, the Company will request that the Company, or its noticing agent, be authorized to mail all required notices in the Chapter 11 Case. Motion to Continue Using Existing Bank Accounts, Payroll Accounts and Business Forms Because the Company expects the Chapter 11 Case to be pending for less than two months, and because of the administrative hardship that any operating changes would impose on it, the Company intends to seek authority to continue using its existing bank accounts, payroll accounts and business forms and to follow its internal investment and deposit guidelines. Absent the Bankruptcy Court's authorization of the continued use of the Company's current bank accounts, payroll accounts and business forms, the Company's normal business activities would be disrupted, to the detriment of the Company's estate and its creditors. Continued use of its existing bank accounts, payroll accounts and business forms will facilitate the Company's smooth and orderly transition into Chapter 11, minimize the disruption to its businesses while in Chapter 11, and expedite the Company's emergence from Chapter 11. Requiring the Company to cancel its existing bank accounts, payroll accounts and establish new accounts or create new business forms would likely increase the costs of the Chapter 11 Case and only frustrate the Company's efforts to reorganize expeditiously. Motion for Authority to Pay Prepetition Employee Wages and Associated Benefits The Company believes that any delay in paying prepetition compensation or benefits to its employees would destroy the Company's relationships with employees and irreparably harm employee morale at a time when the dedication, confidence and cooperation of the Company's employees are most critical. Accordingly, in order to ensure the continuity of its work force and to further accommodate the unimpaired treatment of employee benefits, the Company intends to seek the approval of the Bankruptcy Court, immediately upon commencement of the Chapter 11 Case, to honor payroll checks outstanding as of the Filing Date (or to issue replacement checks), to permit the Company's employees to utilize their paid vacation time which was accrued prior to the commencement of the Chapter 11 Case (so long as they remain employees of the Company) and to continue paying medical and other benefits under all applicable employee health and insurance plans. The Company also intends to seek authorization from the Bankruptcy Court to honor, pay and/or perform in the ordinary course, wages, salaries, paid vacation and other employee benefits which accrue after the Filing Date. There can be no assurance, however, that any necessary approval will be obtained. Employee claims and benefits not paid or honored, as the case may be, prior to the consummation of the Prepackaged Plan will be paid or honored upon consummation of the Prepackaged Plan or as soon thereafter as such payment or other obligation becomes due or performable. The Company also intends to leave unaltered all other legal, equitable and contractual rights of employees under its employment and severance policies, compensation and benefit plans and all other agreements, contracts and programs applicable to its employees, other than any equity or equity-based incentive plans. See "DESCRIPTION OF THE PREPACKAGED PLAN." Motion for Authority to Maintain Workers' Compensation Insurance Policies and to Pay Prepetition Workers' Compensation Claims To ensure that the Company's workers' compensation, automobile and general liability insurance coverages remain in effect, the Company shall seek authority to maintain its workers' compensation, automobile and general liability insurance policies. Likewise, to the extent necessary, the Company shall also seek authority to pay retroactive prepetition premiums on certain other workers' compensation insurance policies and to honor prepetition workers' compensation claims. The failure to maintain such insurance by the payment of the premiums could subject the Company or their officers to criminal penalties. Chapter 11 Financing In order to ensure that the Company's business operations can continue without interruption during the Chapter 11 Case, in accordance with the terms of the Company's existing pre-bankruptcy working capital facility with CIT under the Credit Agreement, the Company intends, subject to Bankruptcy Court approval, to enter into a debtor-in-possession financing arrangement with CIT on the same terms and conditions as the facility provided under the Credit Agreement. Motion to Honor Commission and Expense Checks Prior to the commencement of the Chapter 11 Case and in the ordinary course of business, the Company owed its sales agents (the "Agents") certain prepetition commissions and expenses accrued in the rendition of services of its Agents. The Company needs to be authorized to pay and reimburse its Agents for all current, accrued and unpaid commissions and expenses. The Company believes that it is essential to the continued operation of its business and to a successful restructuring that it retain its Agents, therefore, the Company will request that it be allowed to pay those certain prepetition commissions and expenses. Motion Restraining and Enjoining Utilities from Discontinuing Service In connection with its ongoing business operations, the Company obtains electricity, natural gas, water, telephone services, trash removal and other utility services from various utility companies. The Company will seek an order directing the utility companies not to refuse or discontinue service. If services are disrupted, even for a brief period, irreparable harm will be caused to the Company's efforts to restructure, therefore, the Company will request that the utilities be enjoined from interrupting and discontinuing service. Motion to Pay Custom Duties, Broker Charges, Shipping Charges and Related Possessory Liens It is essential to the Company's efforts to reorganize that the flow of goods into the United States continue uninterrupted. Any failure to pay custom duties, broker charges, shipping charges and related possessory liens will likely result in a refusal by the U.S. Customs Service to clear goods and, in addition, overseas carriers, storage facilities and port authorities may refuse to release goods, thereby hindering the delivery of merchandise to the Company or its customers at a critical point in its Restructuring. The Company intends to forestall any break in the flow of goods by requesting that it be allowed to pay the appropriate charges described herein. Confirmation Hearings As discussed above, the Company anticipates that as soon as practicable after commencing its Chapter 11 Case, it will seek an order of the Bankruptcy Court scheduling concurrent hearings to consider (i) the adequacy of the disclosure made to Stockholders pursuant to this Proxy Statement/Prospectus and made to Noteholders pursuant to the Exchange Restructuring Prospectus and the Company's solicitation of votes on the Prepackaged Plan under ss. 1126 of the Bankruptcy Code and (ii) confirmation of the Prepackaged Plan. The Company anticipates that notice of these hearings will be published in The New York Times (National Edition), and will be mailed to all known Holders of Claims and Interests, at least twenty-five days before the date by which objections must be filed with the Bankruptcy Court. See "FEASIBILITY OF THE PREPACKAGED PLAN AND THE BEST INTERESTS OF CREDITORS TEST." DESCRIPTION OF THE PREPACKAGED PLAN BRIEF EXPLANATION OF CHAPTER 11 Chapter 11 is the principal business reorganization chapter of the Bankruptcy Code. Under Chapter 11 of the Bankruptcy Code, a debtor is authorized to reorganize its business for the benefit of itself and its creditors and stockholders. In addition to permitting rehabilitation of the debtor, another goal of Chapter 11 is to promote equality of treatment of creditors and equity security holders, respectively, who hold substantially similar claims or interests with respect to the distribution of the value of a debtor's assets. In furtherance of these two goals, upon the filing of a petition for relief under Chapter 11, Section 362 of the Bankruptcy Code generally provides for an automatic stay of substantially all acts and proceedings against the debtor and its property, including all attempts to collect claims or enforce liens that arose prior to the commencement of the debtor's Chapter 11 case. The consummation of a plan of reorganization is the principal objective of a Chapter 11 case. A plan of reorganization sets forth the treatment of claims against and interests in a debtor. Confirmation of a plan of reorganization by the Bankruptcy Court makes the plan binding upon the debtor, any issuer of securities under the plan, any person or entity acquiring property under the plan and any creditor of or equity security holder in the debtor, whether or not such creditor or equity security holder (i) is impaired under or has accepted the plan or (ii) receives or retains any property under the plan. Subject to certain limited exceptions, and except as provided in the plan itself or the confirmation order, confirmation discharges the debtor from any debt that arose prior to the date of confirmation of the plan and substitutes therefor the obligations specified under the confirmed plan, and terminates all rights and interests of prepetition equity security holders. The following is an overview of certain material provisions of the Prepackaged Plan. The following summaries of the material provisions of the Prepackaged Plan do not purport to be complete and are qualified in their entirety by reference to all the provisions of the Prepackaged Plan, including all exhibits thereto, all documents described therein and the definitions therein of certain terms used below. GENERAL INFORMATION CONCERNING TREATMENT OF CLAIMS AND INTERESTS The Prepackaged Plan provides for (i) payment in full or other treatment as agreed upon by the Holders of allowed Administrative Expenses, Allowed Priority Tax Claims, Allowed Priority Claims, and the Allowed CIT Claim, and (ii) reinstatement or other treatment as agreed upon by the Holders of Allowed Miscellaneous Secured Claims and Allowed General Unsecured Claims or the Miscellaneous Secured Claims and/or General Unsecured Claims will remain unaltered. The Prepackaged Plan provides that Holders of Allowed Senior Note Claims will receive New Common Stock in exchange for their Allowed Senior Note Claims. The Prepackaged Plan also provides that Holders of Allowed Old Common Stock Interests, which will be canceled pursuant to the Prepackaged Plan, will receive New Common Stock and Warrants on account of their Allowed Old Common Stock Interests. Holders of Other Interests will receive no distribution under the Prepackaged Plan. See "DESCRIPTION OF NEW COMMON STOCK" and "DESCRIPTION OF WARRANTS" for a description of the New Common Stock and the Warrants. The Company intends that pre-Filing Date Claims of vendors will be paid in full in Cash no later than on the Effective Date or the date after the Effective Date that such payment is due in the ordinary course of business, consistent with past practice. To allow the Company to complete a financial restructuring in the manner which will maximize its enterprise value, the Company is soliciting prepetition acceptances of the Prepackaged Plan from Holders of Senior Notes Claims and Old Common Stock Interests prior to filing the Chapter 11 Case. Holders of Other Interests do not receive or retain any property under the Prepackaged Plan. Under Section 1126(g) of the Bankruptcy Code, the Holders of Other Interests are deemed not to have accepted the Prepackaged Plan, and the acceptance of such Holders will not be solicited. The Company presently intends to seek to consummate the Prepackaged Plan and to cause the Effective Date to occur as soon as practicable. There can be no assurance, however, as to when the Effective Date will actually occur. Procedures for the distribution of cash and securities pursuant to the Prepackaged Plan, including matters that are expected to affect the timing of the receipt of distributions by Holders of Claims and Interests in certain Classes and that could affect the amount of distributions ultimately received by such Holders. Management of the Company believes that the Prepackaged Plan provides treatment for all Classes of Claims and Interests reflecting an appropriate resolution of their Claims and Interests, taking into account the differing nature of such Claims and Interests. The Bankruptcy Court must find, however, that a number of statutory tests are met before it may confirm the Prepackaged Plan. Many of these tests are designed to protect the interest of Holders of Claims or Interests who do not vote to accept the Prepackaged Plan, but who will be bound by the provisions of the Plan if it is confirmed by the Bankruptcy Court. The "cramdown" provisions of Section 1129(b) of the Bankruptcy Code, for example, permit confirmation of a Chapter 11 plan of reorganization in certain circumstances even if the plan is not accepted by all impaired classes of claims and interests. See "VOTING AND CONFIRMATION OF THE PREPACKAGED PLAN." The Company will request that the Bankruptcy Court confirm the Prepackaged Plan under Bankruptcy Code section 1129(b). Section 1129(b) permits confirmation of the Prepackaged Plan despite rejection by one or more impaired classes if the Bankruptcy Court finds that the Prepackaged Plan "does not discriminate unfairly" and is "fair and equitable" as to the rejecting class or classes. Because Class 7 is deemed not to have accepted the Prepackaged Plan, the Company will request that the Bankruptcy Court find that the Prepackaged Plan is fair and equitable and does not discriminate unfairly as to Class 7 (and any other class that fails to accept the Prepackaged Plan). For a more detailed description of the requirements for acceptance of the Prepackaged Plan and of the criteria for confirmation notwithstanding rejection by certain classes, see "FEASIBILITY OF THE PREPACKAGED PLAN AND BEST INTERESTS OF CREDITORS TEST." CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS One of the key concepts under the Bankruptcy Code is that only claims and equity interests that are "allowed" may receive distributions under a Chapter 11 plan. The term is used throughout the Prepackaged Plan and the descriptions below. In general, an "allowed" claim or "allowed" equity interest simply means that the debtor agrees, or in the event of a dispute, that the Bankruptcy Court determines, that the claim or equity interest, including the amount, is in fact a valid obligation of the debtor; in other words, that the claim or equity interest exists. Section 502(a) of the Bankruptcy Code provides that a timely-filed claim or equity interest is automatically "allowed" unless the debtor or other party-in-interest objects. However, section 502(b) of the Bankruptcy Code specifies certain claims that may not be "allowed" in bankruptcy even if a proof of claim is filed. These include claims that are unenforceable under the governing agreement or applicable nonbankruptcy law, claims for unmatured interest, property tax claims in excess of the debtor's equity in the property, certain claims for services that exceed their reasonable value, lease and employment contract rejection damage claims in excess of specified amounts, late-filed claims, and contingent claims for contribution and reimbursement. In addition, Bankruptcy Rule 3003(c)(2) prohibits the allowance of any claim or equity interest that either is not listed on the debtor's schedules or is listed as disputed, contingent, or unliquidated, if the holder has not filed a proof of claim or equity interest before the established deadline. Senior Note Claims in Class 3 shall be deemed Allowed as provided below. Section 1123 of the Bankruptcy Code requires that, for purposes of treatment and voting, a Chapter 11 plan divide the different claims against, and equity interests in, the debtor into separate classes based upon their legal nature. In accordance with Section 1123 of the Bankruptcy Code, claims of a substantially similar legal nature are usually classified together, as are equity interests which give rise to the same legal rights; the "claims" and "equity interests" themselves, rather than their holders, are classified. Under a Chapter 11 plan, the separate classes of claims and equity interests must be designated either as "impaired" or "unimpaired" by the plan. If a class of claims is "impaired," the Bankruptcy Code affords certain rights to the holders of such claims, such as the right to vote on the plan (unless the plan provides for no distribution to the holders, in which case, the holder is deemed to reject the plan), and the right to receive under the Chapter 11 plan, no less value than the holder would receive if the debtor were liquidated under Chapter 7. Under Section 1124 of the Bankruptcy Code, a class of claims or interests is "impaired" unless the plan (i) does not alter legal, equitable, and contractual rights of the holders or (ii) irrespective of the holders' acceleration rights, cures all defaults (other than those arising from the debtor's insolvency, the commencement of the case, or nonperformance of a nonmonetary obligation), reinstates the maturity of the claims or interests in the class, compensates the holders for actual damages incurred as a result of their reasonable reliance upon any acceleration rights, and does not otherwise alter their legal, equitable, and contractual rights. Typically, this means the holder of an unimpaired claim will receive on the later of the effective date or the date on which amounts owing are due and payable, payment in full, in cash, with postpetition interest to the extent appropriate and provided under the governing agreement (or if there is no agreement, under applicable nonbankruptcy law), and the remainder of the debtor's obligations, if any, will be performed as they come due in accordance with their terms. Thus, other than its right to accelerate the debtor's obligations, the holder of an unimpaired claim will be placed in the position it would have been in had the debtor's case not been commenced. As discussed above, Section 1123 of the Bankruptcy Code provides that a plan of reorganization shall classify the claims of a debtor's creditors and equity interest holders. In compliance therewith, the Prepackaged Plan divides Claims and Interests into seven Classes and sets forth the treatment for each Class. In accordance with Section 1123(a), Administrative Expenses and Priority Tax Claims have not been classified. The Company also is required, as discussed above under Section 1122 of the Bankruptcy Code, to classify Claims against and Interests in the Company into Classes that contain Claims and Interests that are substantially similar to the other Claims and Interests in such Classes. The Company believes that the Prepackaged Plan has classified all Claims and Interests in compliance with the provisions of Section 1122 of the Bankruptcy Code, but once the Chapter 11 Case has been commenced, it is possible that a Holder of a Claim or Interest may challenge the classification of Claims and Interests and that the Bankruptcy Court may find that a different classification is required for the Prepackaged Plan to be confirmed. In such event, the Company intends, to the extent permitted by the Bankruptcy Court and the Prepackaged Plan, to make such reasonable modifications of the classifications under the Prepackaged Plan to permit confirmation and to use the Prepackaged Plan acceptances received in this Solicitation for the purpose of obtaining the approval of the reconstituted Class or Classes of which the accepting Holder is ultimately deemed to be a member. Any such reclassification could adversely affect the Class in which such Holder was initially a member, or any other Class under the Prepackaged Plan, by changing the composition of such Class and the vote required of that Class for approval of the Prepackaged Plan. Furthermore, a reclassification of a Claim or Interest after solicitation of acceptances of the Prepackaged Plan could necessitate a resolicitation of acceptances of the Prepackaged Plan. The classification of Claims and Interests and the nature of distributions to Holders of Impaired Claims or Impaired Interests in each Class are summarized below. See "DESCRIPTION OF NEW COMMON STOCK" and "DESCRIPTION OF WARRANTS" for a description of the manner in which the number of shares of New Common Stock and number of Warrants will be determined and "DISCUSSION OF RISK FACTORS," for a discussion of various other factors that could materially affect the value of the New Common Stock, Warrants and Warrant Shares distributed pursuant to the Prepackaged Plan. Except for Disputed Claims, distributions will be deemed made on the Effective Date if made on the Effective Date or as soon as practicable thereafter. See "PROVISIONS COVERING DISTRIBUTIONS" for a discussion of Prepackaged Plan provisions that may affect the timing of distributions under the Prepackaged Plan. Distributions on account of Claims that become Allowed Claims after the Effective Date will be made pursuant to Article Ten of the Prepackaged Plan (relating to timing and calculation of amounts to be distributed under the Prepackaged Plan) and Article Eleven of the Prepackaged Plan (relating to distributions on account of Disputed Claims once they are Allowed). UNCLASSIFIED CLAIMS The Bankruptcy Code does not require classification of certain priority claims against a debtor. In this case, these unclassified claims include Administrative Expenses and Priority Tax Claims. All distributions referred to below that are scheduled for the Effective Date will be made on the Effective Date or as soon as practicable thereafter. Administrative Expenses Administrative Expenses are the actual and necessary costs and expenses of the Company's Chapter 11 Case that are allowed under Sections 503(b) and 507(a)(1) of the Bankruptcy Code. Those expenses will include the postpetition salaries and other employee benefits, postpetition rents, amounts owed to vendors providing goods and services to the Company during the Chapter 11 Case, tax obligations incurred after the Filing Date, and certain statutory fees and charges assessed under section 1930 of title 28 of the United States Code. Other Administrative Expenses include the actual, reasonable fees and expenses of the Company's advisors and the advisors to any official committees appointed in, and incurred during, the Chapter 11 Case. Administrative Expenses representing liabilities incurred in the ordinary course of business, consistent with past practice, by the Company or liabilities arising under loans or advances to the Company after the Filing Date, whether or not incurred in the ordinary course of business, will be paid by the Company in accordance with the terms and conditions of the particular transaction and any related agreements and instruments. All other Allowed Administrative Expenses will be paid, in full, in cash, on the Effective Date or as soon thereafter as is practicable, or on such other terms as to which the Company and the Holder of such Administrative Expense agree. The Company anticipates that most Administrative Expenses will be paid as they come due during the Chapter 11 Case and that the Administrative Expenses to be paid on the Effective Date of the Prepackaged Plan will, for the most part, comprise the allowed fees and expenses incurred by professionals retained in the case and the costs attendant to the Company's assumption of executory contracts and unexpired leases under the Prepackaged Plan. The Company estimates that, assuming the Effective Date occurs forty-five days after the commencement of the Chapter 11 Case, allowed Administrative Expenses will approximate $[______] (of which approximately $[______] is estimated for the fees and expenses of the Company's professionals). All payments to professionals for compensation and reimbursement of expenses and all payments to reimburse expenses of members of statutory committees will be made in accordance with the procedures established by the Bankruptcy Code and the Bankruptcy Rules relating to the payment of interim and final compensation and expenses. The Bankruptcy Court will review and determine all such requests. In addition to the foregoing, Section 503(b) of the Bankruptcy Code provides for payment of compensation to creditors, indenture trustees, and other persons making a "substantial contribution" to a Chapter 11 case, and to attorneys for, and other professional advisors to, such persons. Requests for such compensation must be approved by the Bankruptcy Court after notice and a hearing at which the Company and other parties-in-interest may participate, and if appropriate, object to the allowance thereof. Under the Prepackaged Plan, each Holder of an allowed Administrative Expense will be paid in full in Cash on the later of (i) the Effective Date and (ii) the date on which the Bankruptcy Court enters an order allowing such Administrative Expense; provided, however, that allowed Administrative Expenses representing obligations incurred in the ordinary course of business, consistent with past practice, or assumed by the Company shall be paid in full or performed by the Company or Reorganized Salant in the ordinary course of business, consistent with past practice; provided further, however, that allowed Administrative Expenses incurred by the Company or Reorganized Salant after the Confirmation Date, including (without limitation) claims for professionals' fees and expenses, shall not be subject to application and may be paid by the Company or Reorganized Salant, as the case may be, in the ordinary course of business and without further Bankruptcy Court approval. Priority Tax Claims Priority Tax Claims essentially consist of unsecured claims by federal and state governmental units for taxes specified in Section 507(a)(8) of the Bankruptcy Code, such as certain income taxes, property taxes, excise taxes, and employment and withholding taxes. These unsecured claims are given a statutory priority in right of payment. The Company estimates that on the Effective Date, the Allowed Priority Tax Claims will aggregate no more than $[____]. At the sole option of the Company, each Holder of an Allowed Priority Tax Claim shall receive (i) Cash payments made in equal annual installments beginning on or before the first anniversary following the Effective Date with the final installment being payable no later than the sixth anniversary of the date of the assessment of such Allowed Priority Tax Claim, together with interest on the unpaid balance of such Allowed Priority Tax Claim from the Effective Date calculated at the Market Rate; or (ii) such other treatment agreed to by the Holder of such Allowed Priority Tax Claim and the Company or Reorganized Salant, as the case may be. The foregoing treatment of Allowed Priority Tax Claims is consistent with the provisions of Section 1129(a)(9)(C) of the Bankruptcy Code, and the Holders of Allowed Priority Tax Claims are not entitled to vote on the Prepackaged Plan. CLASSIFIED CLAIMS AND INTERESTS Class 1-Priority Claims Class 1 Claims are Unimpaired. Class 1 consists of all Allowed Priority Claims. A Priority Claim is a Claim for an amount entitled to priority under Sections 507(a)(3), 507(a)(4), 507(a)(5) or 507(a)(6) of the Bankruptcy Code, and does not include any Administrative Expense or Priority Tax Claim. These Priority Claims include, among others: (a) unsecured Claims for accrued employee compensation earned within 90 days prior to the Filing Date, to the extent of $4,300 per employee; and (b) contributions to employee benefit plans arising from services rendered within 180 days prior to the Filing Date, but only for such plans to the extent of (i) the number of employees covered by such plans multiplied by $4,300, less (ii) the aggregate amount paid to such employees under Section 507(a)(3) of the Bankruptcy Code, plus the aggregate amount paid by the estate on behalf of such employees to any other employee benefit plan. The Prepackaged Plan provides that, on the latest of (i) the Effective Date, (ii) the date on which such Priority Claim becomes an Allowed Priority Claim, or (iii) the date on which the Company and the Holder of such Allowed Priority Claims otherwise agree, each Holder of an Allowed Priority Claim will be entitled to receive Cash in an amount sufficient to render such Allowed Priority Claim Unimpaired under Section 1124 of the Bankruptcy Code. Allowed Priority Claims in Class 1 are not Impaired under the Prepackaged Plan and the Holders of Allowed Priority Claims in Class 1 will be deemed to have accepted the Prepackaged Plan. Class 2-CIT Claim Class 2 Claims are Unimpaired. Class 2 consists of the CIT Claim. The CIT Claim is any and all Claims in respect of all or any portion of the aggregate outstanding and unpaid amount of principal and interest due and owing under, and subject to the terms and provisions of, the Credit Agreement and any and all related documents. Under the Prepackaged Plan, at the election of the Company prior to the Effective Date, on the Effective Date or as soon as practicable thereafter, CIT will be entitled to receive on account of the CIT Claim one of the following treatments: (i) CIT will receive a distribution in Cash equal to 100% of its Allowed CIT Claim, (ii) the Allowed CIT Claim shall be otherwise rendered Unimpaired in accordance with Section 1124 of the Bankruptcy Code, or (iii) such other treatment as mutually agreed to by the Company and CIT. The Class 2 CIT Claim is Unimpaired and, accordingly, the Holder of such Claims is not entitled to vote for or against the Prepackaged Plan and will be deemed to have accepted the Prepackaged Plan. Class 3-Senior Notes Claims Class 3 Claims are Impaired. Class 3 consists of all Senior Note Claims. The Senior Note Claims are any and all Claims in respect of all or any portion of the aggregate outstanding and unpaid principal and interest due and owing under, and subject to the terms and provisions of, the Senior Notes, and any other indebtedness of the Company due and owing under the Indenture or the Senior Notes as of the Filing Date. Under the Prepackaged Plan, each Holder of an Allowed Class 3 Senior Note Claim will receive on the Effective Date, or as soon as practicable thereafter, on account of such Holder's Allowed Senior Note Claim, such Holder's pro rata share of 18,456,350 shares of New Common Stock (or 175.977555 shares of New Common Stock for each $1,000 principal face amount of Senior Notes held by such Holder). The aggregate Senior Note Claims in Class 3 shall be deemed Allowed in the aggregate amount of $110,379,000, plus interest in the amount of $30,590 for each day after February 28, 1998, until and including the Filing Date. The Senior Note Claims are not disputed, contingent or unliquidated, and no Holder of a Senior Note Claim or the Trustee shall be required to file a proof of claim in order for such Claims to be Allowed pursuant to the Prepackaged Plan. Any Claims filed with respect to the Senior Note Claims shall be disallowed as duplicative of the Claim deemed filed and Allowed as provided in Section 6.3(c) of the Prepackaged Plan. The reasonable fees, costs and expenses of the Trustee as provided for pursuant to the Indenture shall be paid in cash in accordance with Section 14.10 of the Prepackaged Plan. Class 4-Miscellaneous Secured Claims Class 4 Claims are Unimpaired. Class 4 consists of all Miscellaneous Secured Claims. Miscellaneous Secured Claims are any Claims, other than the CIT Claim and the Senior Note Claims, that is a Secured Claim within the meaning of, and to the extent provided in, Section 506 of the Bankruptcy Code. To the extent, if any, that the value of the collateral securing a Class 4 Miscellaneous Secured Claim is less than the amount of such Allowed Miscellaneous Secured Claim, the difference will be treated as a Class 5 General Unsecured Claim. Under the Prepackaged Plan, at the election of the Company prior to the Effective Date, on the Effective Date, or as soon as practicable thereafter, each Holder of an Allowed Class 4 Miscellaneous Secured Claim, will be entitled to receive one of the following treatments: (i) the legal, equitable and contractual rights to which such Allowed Miscellaneous Secured Claim entitles such Holder will remain unaltered, (ii) such Holder's Allowed Class 4 Miscellaneous Secured Claim will be reinstated and rendered Unimpaired in accordance with Section 1124(2) of the Bankruptcy Code, or (iii) such other treatment as mutually agreed to by the Company and such Holder. Class 4 Miscellaneous Secured Claims are Unimpaired and, accordingly, the Holders of such Claims are not entitled to vote for or against the Prepackaged Plan and will be deemed to have accepted the Prepackaged Plan. Class 5-General Unsecured Claims Class 5 Claims are Unimpaired. Class 5 consists of all General Unsecured Claims. General Unsecured Claims are any Claim against the Company other than the CIT Claim, a Miscellaneous Secured Claim, a Senior Note Claim, a Priority Claim, a Priority Tax Claim or an Administrative Expense. The Prepackaged Plan provides that, at the election of the Company, prior to the Effective Date, on the Effective Date or as soon as practicable thereafter, each Holder of an Allowed General Unsecured Claim that has not been fully paid or satisfied prior to the Effective Date will be entitled to receive on account of such Holder's Allowed General Unsecured Claim one of the following treatments: (i) the legal, equitable and contractual rights to which such Allowed General Unsecured Claim entitles such Holder will remain unaltered; (ii) such Holder's Allowed General Unsecured Claim will be reinstated and rendered Unimpaired in accordance with Section 1124 of the Bankruptcy Code; or (iii) such other treatment as mutually agreed to by the Company and such Holder. Allowed General Unsecured Claims in Class 5 are not Impaired under the Prepackaged Plan and the Holders of General Unsecured Claims in Class 5 will be deemed to have accepted the Prepackaged Plan. Class 5 also includes any Claims of the Pension Benefit Guaranty Corporation (the "PBGC"). The Company intends that any such Claims of the PBGC will continue and remain unaffected by confirmation and consummation of the Prepackaged Plan. Upon commencement of the Chapter 11 Case, the Company intends that salaries or wages, as the case may be, accrued paid vacation, health related benefits, severance benefits, field management and executive/administrative management incentive plans and similar employee benefits will be unaffected. Employee benefit claims that accrue prior to the Filing Date will receive unimpaired treatment under the terms of the Prepackaged Plan. To ensure the continuity of the Company's work force and to further accommodate the unimpaired treatment of employee benefits, the Company intends to seek immediate authorization from the Bankruptcy Court to honor payroll checks outstanding as of the Filing Date (or to issue replacement checks), to permit employees to utilize paid vacation time accrued prior to the Filing Date (so long as they remain employees of the Company) and to continue paying medical and other benefits under all applicable employee health and insurance plans. The Company also intends to seek authorization from the Bankruptcy Court to honor, pay and/or perform in the ordinary course, wages, salaries, paid vacation and other employee benefits which accrue after the Filing Date. There can be no assurance, however, that any necessary approval will be obtained. Employee claims and benefits not paid or honored, as the case may be, prior to consummation of the Prepackaged Plan will be paid or honored upon consummation of the Prepackaged Plan or as soon thereafter as such payment or other obligation becomes due or performable. The Company also intends to leave unaltered all other legal, equitable and contractual rights of employees under its employment and severance policies, compensation and benefit plans and all other agreements, contracts and programs applicable to its employees, other than the Existing Equity-Based Plans. Class 6--Holders of Old Common Stock Interests Class 6 Interests are Impaired. Class 6 consists of all Old Common Stock Interests. Old Common Stock Interests are any Interests evidenced by Old Common Stock. Under the Prepackaged Plan, on the Effective Date or as soon as practicable thereafter, each Holder of an Allowed Class 6 Old Common Stock Interest will receive on account of such Holder's Allowed Old Common Stock Interest such Holder's pro rata share of: (i) 1,496,461 shares of New Common Stock, and (ii) the Warrants. Each Warrant entitles the holder to purchase one share of New Common Stock for $6.2648 per share, subject to adjustment. Class 7--Other Interests Class 7 Interests are Impaired. Class 7 consists of all Other Interests. Other Interests consist of any equity interests in the Company, including, without limitation, any rights, options, warrants, calls, subscriptions or other similar rights or agreements, commitments or outstanding securities obligating the Company to issue, transfer or sell any shares of capital stock of the Company, but excluding any Old Common Stock Interest. Under the Prepackaged Plan, on the Effective Date, all Other Interests will be extinguished and no distributions will be made in respect of such Other Interests. Class 7 Other Interests do not receive or retain any property under the Prepackaged Plan. Under Section 1126(g) of the Bankruptcy Code, the Holders of Other Interests are deemed not to have accepted the Prepackaged Plan, and the acceptance of such Holders will not be solicited. SOURCES OF CASH TO MAKE PREPACKAGED PLAN DISTRIBUTIONS Except as otherwise provided in the Prepackaged Plan or the Confirmation Order, all Cash necessary for Reorganized Salant to make payments pursuant to the Prepackaged Plan will be obtained from the new credit facility provided to Reorganized Salant under the New Credit Agreement. EXECUTORY CONTRACTS AND UNEXPIRED LEASES Generally Under Section 365 of the Bankruptcy Code, the Company has the right, subject to Bankruptcy Court approval, to assume or reject any executory contracts or unexpired leases. If an executory contract or unexpired lease entered into before the Filing Date is rejected by the Company, it will be treated as if the Company breached such contract or lease on the date immediately preceding the Filing Date, and the other party to the agreement may assert a General Unsecured Claim for damages incurred as a result of the rejection. In the case of rejection of employment agreements and real property leases, damages are subject to certain limitations imposed by Sections 365 and 502 of the Bankruptcy Code. See Article Eight of the Prepackaged Plan. Assumption and Rejection Pursuant to the Prepackaged Plan, each executory contract or unexpired lease that is not listed on Exhibit E to the Prepackaged Plan or has not been expressly assumed or rejected by order of the Bankruptcy Court on or prior to the Confirmation Date will, as of the Confirmation Date (subject to the occurrence of the Effective Date), be deemed to have been assumed by the Company unless there is then pending before the Bankruptcy Court a motion to reject such unexpired lease or executory contract. Each unexpired lease and executory contract listed on Exhibit E to the Prepackaged Plan will be specifically rejected pursuant to the Prepackaged Plan as of the Effective Date. Entry of the Confirmation Order by the clerk of the Bankruptcy Court will constitute an order approving such assumptions and rejections, as the case may be, pursuant to Section 365(a) of the Bankruptcy Code. Given that the achievement of the future operating results set forth in the Three-Year Business Plan is predicated upon, among other things, the current senior management of the Company remaining with Reorganized Salant after the Effective Date, the Company intends that the existing employment agreements with its senior management will be assumed pursuant to the Prepackaged Plan. Bar Date for Rejection Damages Pursuant to the Prepackaged Plan, unless otherwise provided by an order of the Bankruptcy Court entered prior to the Confirmation Date, proof of any Claim against the Company arising from the rejection of any executory contract or unexpired lease pursuant to an order of the Bankruptcy Court must be filed with the Bankruptcy Court within the later of (a) the time period established by the Bankruptcy Court in an order of the Bankruptcy Court approving such rejection, or (b) if no such time period is or was established, thirty (30) days from the date of entry of such order of the Bankruptcy Court approving such rejection. Any Entity that fails to file proof of its Claim arising from such a rejection within the period set forth above will be forever barred from asserting a Claim against the Company, Reorganized Salant, or the property or interests in property of the Company or Reorganized Salant. All Allowed Claims arising from the rejection of executory contracts or unexpired leases will be classified as a General Unsecured Claim (Class 5) under the Prepackaged Plan. IMPLEMENTATION OF THIS PLAN Vesting of Property Except as otherwise provided in the Prepackaged Plan, on the Effective Date, title to all property of the Company's estate shall pass to Reorganized Salant free and clear of all Claims, Interests and liens (including, without limitation, all liens securing the Senior Note Claims). Confirmation of the Prepackaged Plan (subject to the occurrence of the Effective Date) will be binding and the Company's debts, without in any way limiting the discharge and release provisions contained in Article Twelve of the Prepackaged Plan, will be discharged as provided in Section 1141 of the Bankruptcy Code. Transactions on Business Days Pursuant to the Prepackaged Plan, if the Effective Date or any other date on which a transaction may occur under the Prepackaged Plan will occur on a day that is not a Business Day, the transactions contemplated by the Prepackaged Plan to occur on such day will instead occur on the next succeeding Business Day. Restated Certificate of Incorporation; Restated By-laws Pursuant to the Prepackaged Plan, on the Effective Date or as soon thereafter as is practicable, Reorganized Salant will file with the Secretary of State of the State of Delaware, in accordance with Sections 103 and 303 of the DGCL, the Reorganized Salant Certificate of Incorporation and such certificate will be the certificate of incorporation for Reorganized Salant. Pursuant to the Prepackaged Plan, on the Effective Date, the Reorganized Salant By-Laws will become the by-laws of Reorganized Salant. Implementation Pursuant to the Prepackaged Plan, the Company will be authorized to take all necessary steps, and perform all necessary acts, to consummate the terms and conditions of the Prepackaged Plan. Pursuant to the Prepackaged Plan, on or before the Effective Date, the Company may file with the Bankruptcy Court such agreements and other documents as may be necessary or appropriate to effectuate or further evidence the terms and conditions of the Prepackaged Plan and the other agreements referred to herein. The Company or Reorganized Salant, as the case may be, may, and will, execute such documents and take such other actions as are necessary to effectuate the transactions provided for in the Prepackaged Plan. Issuance of New Securities Pursuant to the Prepackaged Plan, the issuance and distribution of the New Common Stock and the Warrants by Reorganized Salant is authorized and directed without the need for any further corporate action, under applicable law, regulation, order, rule or otherwise. Cancellation of Existing Securities and Agreements Pursuant to the Prepackaged Plan, on the Effective Date, the Senior Notes, the Old Common Stock, and any rights, options, warrants, calls, subscriptions, or other similar rights or other agreements or commitments, contractual or otherwise, obligating the Company to issue, transfer, or sell any shares of Old Common Stock or any other capital stock of the Company will be canceled. Except for purposes of effectuating the distributions under the Prepackaged Plan, on the Effective Date, the Indenture will be canceled. Board of Directors of Reorganized Salant Pursuant to the Prepackaged Plan, on the Effective Date, the operation of Reorganized Salant will become the general responsibility of its Board, subject to, and in accordance with, the Reorganized Salant Certificate of Incorporation and the Reorganized Salant By-Laws. The initial Board of Reorganized Salant will consist of the individuals identified on Exhibit D to the Prepackaged Plan. Such directors will be deemed elected or appointed, as the case may be, pursuant to the Confirmation Order, but will not take office and will not be deemed to be elected or appointed until the occurrence of the Effective Date. Those directors not continuing in office will be deemed removed therefrom as of the Effective Date pursuant to the Confirmation Order. Employee Benefit Plans Pursuant to the Prepackaged Plan and subject to the occurrence of the Effective Date, all employee benefit plans, policies, and programs of the Company, and the Company's obligations thereunder, will survive confirmation of the Prepackaged Plan, remain unaffected thereby, and not be discharged. Employee benefit plans, policies, and programs will include, without limitation, all savings plans, retirement pension plans, health care plans, disability plans, severance benefit plans, life, accidental death, and dismemberment insurance plans (to the extent not executory contracts assumed under the Prepackaged Plan), but will exclude all Existing Equity-Based Plans. The Stock Award and Incentive Plan Pursuant to the Prepackaged Plan, the Stock Award and Incentive Plan will remain in effect after the Effective Date; provided, that, if the Stock Award and Incentive Plan has not previously been approved by the stockholders of the Company, the Stock Award and Incentive Plan and any grants made thereunder shall be subject to the subsequent approval of the stockholders of Reorganized Salant. Survival of Indemnification Obligations Notwithstanding anything to the contrary contained in the Prepackaged Plan, the obligations of the Company to indemnify (i) its present or former directors, officers, agents, employees and representatives, pursuant to the Certificate of Incorporation, By-Laws, applicable statutes or contractual obligations, in respect of all past, present and future actions, suits and proceedings against any of such directors, officers, agents, employees and representatives, based upon any act or omission related to service with, for or on behalf of the Company, and (ii) Magten in accordance with and pursuant to paragraph 8 of the Letter Agreement, shall not be discharged or impaired by confirmation or consummation of the Prepackaged Plan but shall survive unaffected by the reorganization contemplated by the Prepackaged Plan and shall be treated as, and deemed to be, Allowed General Unsecured Claims under the Prepackaged Plan, pursuant to the Reorganized Salant By-Laws and Certificate of Incorporation, applicable statutes or contractual obligations, by Reorganized Salant regardless of such confirmation, consummation and reorganization. Listing of New Common Stock; Registration of Securities Pursuant to the Prepackaged Plan, Reorganized Salant will use its best efforts to (i) maintain its status as a reporting company under the Exchange Act and cause, on the Effective Date, the shares of New Common Stock issued hereunder to be listed on the NYSE, or, if Reorganized Salant is unable to have the shares of New Common Stock listed on the NYSE, on another national securities exchange, or, as to the New Common Stock, quoted in the national market system of the National Association of Securities Dealers' Automated Quotation System, (ii) in accordance with the terms of the Registration Rights Agreement, file and have declared effective as soon as possible thereafter a registration statement or registration statements under the Securities Act, for the offering on a continuous or delayed basis in the future of the shares of New Common Stock (the "Shelf Registration"), (iii) cause to be filed with the Commission on the Effective Date a registration statement on Form 10 under the Exchange Act with respect to the New Common Stock, (iv) keep the Shelf Registration effective for a three-year period, and (v) supplement or make amendments to the Shelf Registration, if required under the Securities Act or by the rules or regulations promulgated thereunder or in accordance with the terms of the Registration Rights Agreement, and have such supplements and amendments declared effective as soon as practicable after filing. In addition, on the Effective Date, Reorganized Salant will enter into the Registration Rights Agreement in the form of Exhibit B attached to the Prepackaged Plan. See "DESCRIPTION OF REGISTRATION RIGHTS AGREEMENT." Retention and Enforcement of Causes of Action Pursuant to the Prepackaged Plan and pursuant to Section 1123(b)(3) of the Bankruptcy Code, Reorganized Salant will retain and will have the exclusive right, in its discretion, to enforce against any Entity any and all Causes of Action of the Company, including all Causes of Action of a trustee and debtor-in-possession under the Bankruptcy Code, other than those released or compromised as part of, or under, the Prepackaged Plan. PROVISIONS COVERING DISTRIBUTIONS Timing of Distributions Under the Prepackaged Plan Pursuant to the Prepackaged Plan, except as otherwise provided therein, payments and distributions in respect of Allowed Claims and Allowed Interests which are required by the Prepackaged Plan to be made on the Effective Date will be made by the Company, Reorganized Salant or its designee or, in the case of the distributions to the Noteholders, by Reorganized Salant or its designee (with the assistance of the Trustee, if necessary), on, or as soon as practicable following, the Effective Date. Distributions of New Common Stock to the Noteholders will be made at the addresses of the registered Holders of the Senior Notes last provided in writing to the Trustee. Distributions of New Common Stock and Warrants to the Stockholders will be made at the addresses of the holders of record of the Old Common Stock as of the Distribution Record Date. Allocation of Consideration Pursuant to the Prepackaged Plan, the aggregate consideration to be distributed to the Holders of Allowed Claims in each Class under the Prepackaged Plan will be treated as first satisfying an amount equal to the stated principal amount of the Allowed Claim for such Holders and any remaining consideration as satisfying accrued, but unpaid, interest, if any. Cash Payments Pursuant to the Prepackaged Plan, cash payments made pursuant to the Prepackaged Plan will be in U.S. dollars. Cash payments of $1,000,000 or more to be made pursuant to the Prepackaged Plan will, to the extent requested in writing no later than five days after the Confirmation Date, be made by wire transfer from a domestic bank. Cash payments to foreign creditors may be made, at the option of the Company or Reorganized Salant, in such funds and by such means as are necessary or customary in a particular foreign jurisdiction. Cash payments made pursuant to the Prepackaged Plan in the form of checks issued by Reorganized Salant shall be null and void if not cashed within 120 days of the date of the issuance thereof. Requests for reissuance of any check shall be made directly to Reorganized Salant or its designee as set forth in the Prepackaged Plan. Payment of Statutory Fees Pursuant to the Prepackaged Plan, all fees payable to the United States Trustee pursuant to 28 U.S.C. ss. 1930 as determined by the Bankruptcy Court at the Confirmation Hearing will be paid by the Company on or before the Effective Date. No Interest Pursuant to the Prepackaged Plan, except with respect to holders of Unimpaired Claims entitled to interest under applicable non-bankruptcy law or as expressly provided herein, no Holder of an Allowed Claim or Interest will receive interest on the distribution to which such Holder is entitled hereunder, regardless of whether such distribution is made on the Effective Date or thereafter. Fractional Securities Pursuant to the Prepackaged Plan, and notwithstanding any other provision of the Prepackaged Plan, only whole numbers of shares of New Common Stock and Warrants will be issued or transferred, as the case may be, pursuant to the Prepackaged Plan. Reorganized Salant will not distribute any fractional shares of New Common Stock or fractional interests in Warrants. For purposes of distribution, fractional shares of New Common Stock and fractional Warrants will be rounded up to the nearest share of New Common Stock or Warrant, as the case may be. Withholding of Taxes Pursuant to the Prepackaged Plan, Reorganized Salant will withhold from any property distributed under the Prepackaged Plan any property which must be withheld for taxes payable by the Entity entitled to such property to the extent required by applicable law. As a condition to making any distribution under the Prepackaged Plan, Reorganized Salant or its designee, as the case may be, may request that the Holder of any Allowed Claim provide such Holder's taxpayer identification number and such other certification as may be deemed necessary to comply with applicable tax reporting and withholding laws. Pro Rata Distribution Pursuant to the Prepackaged Plan, where the Prepackaged Plan provides for pro rata distribution, the property to be distributed under the Prepackaged Plan will be divided pro rata among the Holders of Allowed Claims or Allowed Interests of the relevant Class based on the Allowed amount of all of such Claims or Interests in such Class. Distribution Record Date Pursuant to the Prepackaged Plan, as of the close of business on the Distribution Record Date, the transfer registers for the Senior Notes and Old Common Stock maintained by the Company, or its respective agents, will be closed. Reorganized Salant, and its designees and the Trustee will have no obligation to recognize the transfer of any Senior Notes or Old Common Stock occurring after the Distribution Record Date and will be entitled for all purposes relating to the Prepackaged Plan to recognize and deal only with those Holders of record as of the close of business on the Distribution Record Date. Persons Deemed Holders of Registered Securities Pursuant to the Prepackaged Plan, except as otherwise provided therein, the Company, Reorganized Salant or its designee or, in the case of the Noteholders, the Trustee, shall be entitled to treat the record holder of a registered security as the Holder of the Claim or Interest in respect thereof for purposes of all notices, payments or other distributions under the Prepackaged Plan unless the Company, Reorganized Salant, its designee or the Trustee, as the case may be, has received written notice specifying the name and address of any new Holder thereof (and the nature and amount of the interest of such new Holder) at least ten (10) Business Days prior to the date of such notice, payment or other distribution. In the event of any dispute regarding the identity of any party entitled to any payment or distribution in respect of any Claim or Interest under the Prepackaged Plan, no payments or distributions will be made in respect of such Claim or Interest until the Bankruptcy Court resolves that dispute pursuant to a Final Order. Surrender of Existing Securities Pursuant to the Prepackaged Plan, as a condition to receiving any distribution under the Prepackaged Plan, each Holder of a Senior Note, Old Common Stock Interest, or other instrument evidencing a Claim or Interest must surrender such Senior Note, Old Common Stock Interest, or other instrument to Reorganized Salant or its designee. Reorganized Salant appoints the Trustee under the Indenture as its designee to receive the Senior Notes. Any Holder of a Claim or Interest that fails to (a) surrender such instrument or (b) execute and deliver an affidavit of loss and/or indemnity reasonably satisfactory to Reorganized Salant and furnish a bond in form, substance, and amount reasonably satisfactory to Reorganized Salant before the later to occur of (i) the second anniversary of the Effective Date and (ii) six months following the date such Holder's Claim becomes an Allowed Claim, will be deemed to have forfeited all rights, Claims, and/or Interests and may not participate in any distribution under the Prepackaged Plan. Special Procedures for Lost, Stolen, Mutilated or Destroyed Instruments Pursuant to the Prepackaged Plan, in addition to any requirements under the Company's Certificate of Incorporation or By-laws, any Holder of a Claim or an Interest evidenced by an Instrument that has been lost, stolen, mutilated or destroyed will be required to, in lieu of surrendering such Instrument, deliver to Reorganized Salant or its designee: (a) evidence satisfactory to Reorganized Salant or its designee, as the case may be, of the loss, theft, mutilation or destruction; and (b) such security or indemnity as may be required by Reorganized Salant or its designee, as the case may be, to hold Reorganized Salant and/or its designee, as applicable, harmless from any damages, liabilities or costs incurred in treating such individual as a Holder of an Instrument. Upon compliance with the foregoing provision of the Prepackaged Plan, the Holder of a Claim or Interest evidenced by any such lost, stolen, mutilated or destroyed Instrument will, for all purposes under the Prepackaged Plan, be deemed to have surrendered such Instrument. Undeliverable or Unclaimed Distributions Pursuant to the Prepackaged Plan, any Entity that is entitled to receive a Cash distribution under the Prepackaged Plan but that fails to cash a check within 120 days of its issuance will be entitled to receive a reissued check from Reorganized Salant for the amount of the original check, without any interest, if such Entity requests Reorganized Salant or its designee to reissue such check and provides Reorganized Salant or its designee, as the case may be, with such documentation as Reorganized Salant or its designee requests to verify that such Entity is entitled to such check, prior to the second anniversary of the Effective Date. If an Entity fails to cash a check within 120 days of its issuance and fails to request reissuance of such check prior to the later to occur of (i) the second anniversary of the Effective Date and (ii) six months following the date such Holder's Claim becomes an Allowed Claim, such Entity will not be entitled to receive any distribution under the Prepackaged Plan. If the distribution to any Holder of an Allowed Claim or Allowed Interest is returned to Reorganized Salant or its designee (the "Distribution Agent") as undeliverable, no further distributions will be made to such Holder unless and until Reorganized Salant or its designee is notified in writing of such Holder's then-current address; provided, however, that in the case of an undeliverable distribution to a Holder of a Senior Note Claim or an Old Common Stock Interest, the Distribution Agent shall conduct two database searches using at least one information database service (as such term is defined in Rule 19b-4 of the Securities Act). The database searches will be conducted by using such Holder's tax identification number or name, if the tax identification number is not likely to locate such Holder, will be without charge to such Holder of the Allowed Claim or Allowed Interest and will be conducted (i) between three and twelve months after the date such distribution becomes undeliverable and (iii) between six and twelve months after the first search. The Distribution Agent need not conduct the database searches if (i) it has received documentation that the Holder of a Senior Note Claim or an Old Common Stock Interest is deceased, (ii) the aggregate value of accounts listed in the master Holder file or all accounts owned by such Holder as recorded in the Distribution Agent's master Holder files is less than $25, and (iii) such Holder is not a natural person. Undeliverable distributions will remain in the possession of Reorganized Salant or its designee pursuant to the Prepackaged Plan until such time as a distribution becomes deliverable. The Distribution Agent shall maintain information in a master Holder file with respect to the total number of lost Holder accounts and the percentage (as compared to the total number of accounts) of lost Holder accounts for Holders of Senior Note Claims or Old Common Stock Interests lost one year or less, three years or less, five years or less, more than five years and for assets which have ascheated to unclaimed property administrators. Such reports shall be filed with the Commission. Subject to the obligations of the Distribution Agent set forth above, all claims for undeliverable distributions will have to be made on or before the later to occur of (i) the second anniversary of the Effective Date and (ii) six months following the date such Holder's Claim or Interest becomes an Allowed Claim or Allowed Interest. After such date, all unclaimed property will revert to Reorganized Salant and the claim of any Holder or successor to such Holder with respect to such property will be discharged and forever barred notwithstanding any federal or state escheat laws to the contrary. PROCEDURES FOR RESOLVING DISPUTED CLAIMS Objections to Claims Pursuant to the Prepackaged Plan, only the Company and Reorganized Salant will have the authority to file objections to Claims after the Effective Date. Subject to an order of the Bankruptcy Court providing otherwise, Reorganized Salant may object to a Claim by filing an objection with the Bankruptcy Court and serving such objection upon the Holder of such Claim not later than one hundred and twenty (120) days after the Effective Date or one hundred and twenty (120) days after the filing of the proof of such Claim, whichever is later, or such other date determined by the Bankruptcy Court upon motion to the Bankruptcy Court without further notice or hearing. Notwithstanding the foregoing, neither the Company nor Reorganized Salant shall object to the allowance of the Senior Note Claims as described in Section 6.3(c) of the Prepackaged Plan. Procedure Pursuant to the Prepackaged Plan, unless otherwise ordered by the Bankruptcy Court or agreed to by written stipulation of the Company or Reorganized Salant, or until an objection thereto by the Company or by Reorganized Salant is withdrawn, the Company or Reorganized Salant will litigate the merits of each Disputed Claim until determined by a Final Order; provided, however, that, (a) prior to the Effective Date, the Company, subject to the approval of the Bankruptcy Court, and (b) after the Effective Date, Reorganized Salant, subject to the approval of the Bankruptcy Court, may compromise and settle any objection to any Claim. Payments and Distributions With Respect to Disputed Claims Pursuant to the Prepackaged Plan, no payments or distributions will be made in respect of a Disputed Claim until such Disputed Claim becomes an Allowed Claim. Timing of Payments and Distributions With Respect to Disputed Claims Pursuant to the Prepackaged Plan, and subject to the provisions of the Prepackaged Plan, payments and distributions with respect to each Disputed Claim that becomes an Allowed Claim that would have otherwise been made had the Disputed Claim been an Allowed Claim on the Effective Date will be made within thirty (30) days after the date that such Disputed Claim becomes an Allowed Claim. Holders of Disputed Claims that become Allowed Claims will be bound, obligated and governed in all respects by the provisions of the Prepackaged Plan. Individual Holder Proofs of Interest Pursuant to the Prepackaged Plan, individual Holders of Allowed Old Common Stock Interests are not required to file proofs of such Interests unless they disagree with the number of shares set forth on the Company's stock register. DISCHARGE, INJUNCTION, RELEASES AND SETTLEMENTS OF CLAIMS Discharge of All Claims and Interests and Releases Pursuant to the Prepackaged Plan and except as otherwise specifically provided by the Prepackaged Plan, the confirmation of the Prepackaged Plan (subject to the occurrence of the Effective Date) will discharge and release the Company, Reorganized Salant, its successors and assigns and their respective assets and properties from any debt, charge, Cause of Action, liability, encumbrances, security interest, Claim, Interest, or other cause of action of any kind, nature or description (including, but not limited to, any claim of successor liability) that arose before the Confirmation Date, and any debt of the kind specified in Sections 502(g), 502(h) or 502(i) of the Bankruptcy Code, whether or not a proof of Claim is filed or is deemed filed, whether or not such Claim is Allowed, and whether or not the Holder of such Claim has accepted the Prepackaged Plan. Furthermore, except as otherwise specifically provided by the Prepackaged Plan, the distributions and rights that are provided in the Prepackaged Plan to Class 3 and Class 6 will be in complete satisfaction, discharge and release, effective as of the Effective Date of all Claims and Causes of Action against, liabilities of, liens on, charges, encumbrances, security interests, obligations of and Interests in the Company, Reorganized Salant, or the direct or indirect assets and properties of the Company or Reorganized Salant, whether known or unknown, based on the same subject matter as any Claim or Interest, or based on any act or omission, transaction or other activity or security, instrument or other agreement of any kind or nature occurring, arising or existing prior to the Effective Date that was or could have been the subject of any Claim or Interest, in each case regardless of whether a proof of Claim or Interest was filed, whether or not Allowed and whether or not the Holder of the Claim or Interest has voted to accept or reject the Prepackaged Plan. In addition, except as otherwise specifically provided by the Prepackaged Plan, any Holder of a Claim in Class 3 or Class 6 accepting any distribution pursuant to the Prepackaged Plan will be presumed conclusively to have released the Company and Reorganized Salant from any Cause of Action based on the same subject matter as the Claim on which the distribution is received. The release described in the preceding sentence shall be enforceable as a matter of contract against any Entity that accepts any distribution pursuant to the Prepackaged Plan. All injunctions or stays entered in the Chapter 11 Case and existing immediately prior to the Confirmation Date will remain in full force and effect until the Effective Date. Injunction Pursuant to the Prepackaged Plan, the satisfaction, release and discharge provisions of the Prepackaged Plan, will act as an injunction against any Entity commencing or continuing any action, employment of process, or act to collect, offset or recover any Claim or Cause of Action satisfied, released or discharged under the Prepackaged Plan. The injunction, discharge and releases provisions of the Prepackaged Plan will apply regardless of whether or not a proof of Claim or Interest based on any Claim, debt, liability or Interests is filed or whether or not a Claim or Interest based on such Claim, debt, liability or Interest is Allowed, or whether or not such Entity voted to accept or reject the Prepackaged Plan. Exculpation Pursuant to the Prepackaged Plan, in consideration of the distributions under the Prepackaged Plan, upon the Effective Date, each Holder of a Claim or Interest will be deemed to have released the Company and its directors, officers, employees, agents, attorneys, independent accountants, financial advisors, investment bankers and employees and representatives (as applicable) employed by the Company from and after the Filing Date and Magten and its attorneys, advisors, and financial advisors employed by Magten from and after the Filing Date, from any and all Causes of Action (other than the right to enforce the Company's obligations under the Prepackaged Plan and the right to pursue a Claim based on any willful misconduct) arising out of actions or omissions during the administration of the Company's estate. Guaranties and Claims of Subordination Pursuant to the Prepackaged Plan, the classification and the manner of satisfying all Claims under the Prepackaged Plan takes into consideration the possible existence of any alleged guaranties by the Company of obligations of any Entity or Entities, and that the Company may be joint obligors with another Entity or Entities with respect to the same obligation. All Claims against the Company based upon any such guaranties will be satisfied, discharged and released in the manner provided in the Prepackaged Plan and the Holders of Claims will be entitled to only one distribution with respect to any given obligation of the Company. Pursuant to the Prepackaged Plan, except as expressly provided for in the Prepackaged Plan, to the fullest extent permitted by applicable law, all Claims against and Interests in the Company, and all rights and Claims between or among Holders of Claims and Interests relating in any manner whatsoever to Claims against or Interests in the Company, based on any contractual, legal or equitable subordination rights, will be terminated on the Effective Date and discharged in the manner provided in the Prepackaged Plan, and all such Claims, Interests and rights so based and all such contractual, legal and equitable subordination rights to which any Entity may be entitled will be irrevocably waived by the acceptance by such Entity (or, unless the Confirmation Order provides otherwise, the Class of which such Entity is a member) of the Prepackaged Plan or of any distribution pursuant to the Prepackaged Plan. Except as otherwise provided in the Prepackaged Plan and to the fullest extent permitted by applicable law, the rights afforded and the distributions that are made in respect of any Claims or Interests hereunder will not be subject to levy, garnishment, attachment or like legal process by any Holder of a Claim or Interest by reason of any contractual, legal or equitable subordination rights, so that, notwithstanding any such contractual, legal or equitable subordination, each Holder of a Claim or Interest will have and receive the benefit of the rights and distributions set forth in the Prepackaged Plan. Pursuant to the Prepackaged Plan, and pursuant to Bankruptcy Rule 9019 and any applicable state law and as consideration for the distributions and other benefits provided under the Prepackaged Plan, the provisions regarding Claims of subordination of the Prepackaged Plan will constitute a good faith compromise and settlement of any Causes of Action relating to the matters described in such provisions of the Prepackaged Plan which could be brought by any Holder of a Claim or Interest against or involving another Holder of a Claim or Interest, which compromise and settlement is in the best interests of Holders of Claims and Interests and is fair, equitable and reasonable. This settlement will be approved by the Bankruptcy Court as a settlement of all such Causes of Action. Entry of the Confirmation Order will constitute the Bankruptcy Court's approval of this settlement pursuant to Bankruptcy Rule 9019 and its finding that this is a good faith settlement pursuant to any applicable state law, including, without limitation, the laws of the States of New York and Delaware, given and made after due notice and opportunity for hearing, and will bar any such Cause of Action by any Holder of a Claim or Interest against or involving another Holder of a Claim or Interest. CONDITIONS PRECEDENT TO CONFIRMATION ORDER AND EFFECTIVE DATE Conditions Precedent to Entry of the Confirmation Order Pursuant to the Prepackaged Plan, the following condition must occur and be satisfied or waived in accordance with the Prepackaged Plan on or before the Confirmation Date for the Prepackaged Plan to be confirmed on the Confirmation Date: the Confirmation Order is in form and substance reasonably acceptable to the Company, Magten and Apollo. Conditions Precedent to the Effective Date Pursuant to the Prepackaged Plan, the following conditions must occur and be satisfied or waived by the Company on or before the Effective Date for the Prepackaged Plan to become effective on the Effective Date. 1. Final Order. The Confirmation Order will have become a Final Order; 2. Working Capital Facility. Reorganized Salant will have executed an agreement for a working capital facility on terms reasonably satisfactory to Apollo and Magten; 3. Certificate of Incorporation. The Reorganized Salant Certificate of Incorporation, in the form of Exhibit I, attached to the Prepackaged Plan, will have been filed with the Secretary of State of the State of Delaware, in accordance with Sections 103 and 303 of the DGCL; and 4. Authorizations, Consents and Approvals. All authorizations, consents and regulatory approvals required (if any) in connection with the Prepackaged Plan's effectiveness will have been obtained. Waiver of Conditions Pursuant to the Prepackaged Plan, with the prior written consent (which consent will not be unreasonably withheld) of Magten and Apollo, but not otherwise, the Company may waive one or more of the conditions precedent to the confirmation or effectiveness of the Prepackaged Plan set forth in the Prepackaged Plan. Effect of Failure of Conditions Pursuant to the Prepackaged Plan, if each of the conditions to effectiveness and the occurrence of the Effective Date has not been satisfied or duly waived on or before the first Business Day that is more than 179 days after the date the Bankruptcy Court enters an order confirming the Prepackaged Plan, or by such later date as is proposed and approved, after notice and a hearing, by the Bankruptcy Court, then upon motion by the Company or any party in interest made before the time that each of the conditions has been satisfied or duly waived, the order confirming the Prepackaged Plan may be vacated by the Bankruptcy Court; provided, however, that notwithstanding the filing of such a motion, the order confirming the Prepackaged Plan shall not be vacated if each of the conditions to consummation is either satisfied or duly waived before the Bankruptcy Court enters an order granting the relief requested in such motion. If the order confirming the Prepackaged Plan is vacated pursuant to the foregoing provision of the Prepackaged Plan, the Prepackaged Plan will be null and void in all respects, and nothing contained in the Prepackaged Plan will (a) constitute a waiver or release of any claims against or equity interests in the Company or (b) prejudice in any manner the rights of the Holder of any claim or equity interest in the Company. MISCELLANEOUS PROVISIONS Bankruptcy Court to Retain Jurisdiction Pursuant to the Prepackaged Plan, the business and assets of the Company will remain subject to the jurisdiction of the Bankruptcy Court until the Effective Date. From and after the Effective Date, the Bankruptcy Court will retain and have exclusive jurisdiction of all matters arising out of, and related to the Chapter 11 Case or the Prepackaged Plan pursuant to, and for purposes of, Subsection 105(a) and Section 1142 of the Bankruptcy Code and for, among other things, the following purposes: (a) to determine any and all disputes relating to Claims and Interests and the allowance and amount thereof; (b) to determine any and all disputes among creditors with respect to their Claims; (c) to consider and allow any and all applications for compensation for professional services rendered and disbursements incurred in connection therewith; (d) to determine any and all applications, motions, adversary proceedings and contested or litigated matters pending on the Effective Date and arising in or related to the Chapter 11 Case or this Plan; (e) to remedy any defect or omission or reconcile any inconsistency in the Confirmation Order; (f) to enforce the provisions of the Prepackaged Plan relating to the distributions to be made hereunder; (g) to issue such orders, consistent with Section 1142 of the Bankruptcy Code, as may be necessary to effectuate the consummation and full and complete implementation of the Prepackaged Plan; (h) to enforce and interpret any provisions of the Prepackaged Plan; (i) to determine such other matters as may be set forth in the Confirmation Order or that may arise in connection with the implementation of the Prepackaged Plan; (j) to determine the amounts allowable as compensation or reimbursement of expenses pursuant to Section 503(b) of the Bankruptcy Code; (k) to hear and determine disputes arising in connection with the interpretation, implementation, or enforcement of the Prepackaged Plan and the Related Documents; (l) to hear and determine any issue for which the Prepackaged Plan or any Related Document requires a Final Order of the Bankruptcy Court; (m) to hear and determine matters concerning state, local, and federal taxes in accordance with Sections 346, 505, and 1146 of the Bankruptcy Code; (n) to hear and determine any issue related to the composition of the initial Board of Reorganized Salant; (o) to hear any other matter not inconsistent with the Bankruptcy Code; and (p) to enter a Final Decree closing the Chapter 11 Case. Binding Effect of this Plan Pursuant to the Prepackaged Plan, the provisions of the Prepackaged Plan will be binding upon and inure to the benefit of the Company, Reorganized Salant, Magten, Apollo, any Holder of a Claim or Interest, their respective predecessors, successors, assigns, agents, officers, managers and directors and any other Entity affected by the Prepackaged Plan. Nonvoting Stock Pursuant to the Prepackaged Plan, and in accordance with Section 1123(a)(6) of the Bankruptcy Code, the Reorganized Salant Certificate of Incorporation will contain a provision prohibiting the issuance of nonvoting equity securities by Reorganized Salant for a period of one year following the Effective Date. Authorization of Corporate Action Pursuant to the Prepackaged Plan, the entry of the Confirmation Order will constitute a direction and authorization to and of the Company to take or cause to be taken any action necessary or appropriate to consummate the provisions of the Prepackaged Plan and the Related Documents prior to and through the Effective Date (including, without limitation, the filing of the Reorganized Salant Certificate of Incorporation), and all such actions taken or caused to be taken will be deemed to have been authorized and approved by the Bankruptcy Code. Retiree Benefits Pursuant to the Prepackaged Plan, on and after the Effective Date, to the extent required by Section 1129(a)(13) of the Bankruptcy Code, Reorganized Salant will continue to pay all retiree benefits (if any), as the term "retiree benefits" is defined in Section 1114(a) of the Bankruptcy Code, maintained or established by the Company prior to the Confirmation Date. Withdrawal of the Prepackaged Plan Pursuant to the Prepackaged Plan, the Company reserves the right, at any time prior to the entry of the Confirmation Order, to revoke or withdraw the Prepackaged Plan. If the Company revokes or withdraws the Prepackaged Plan, if the Confirmation Date does not occur, or if the Effective Date does not occur then (i) the Prepackaged Plan will be deemed null and void and (ii) the Prepackaged Plan will be of no effect and will be deemed vacated, and the Chapter 11 Case will continue as if the Prepackaged Plan had never been filed and, in such event, the rights of any Holder of a Claim or Interest will not be affected nor will such Holder be bound by, for purposes of illustration only, and not limitation, (a) the Prepackaged Plan, (b) any statement, admission, commitment, valuation or representation contained in the Prepackaged Plan, this Proxy Statement/Prospectus or the Related Documents or (c) the classification and proposed treatment (including any allowance) of any Claim in the Prepackaged Plan. Dissolution of Statutory Committees Pursuant to the Prepackaged Plan, on the Effective Date, any statutory committees appointed in the Chapter 11 Case pursuant to Section 1102 of the Bankruptcy Code will cease to exist and its members and employees or agents (including, without limitation, attorneys, investment bankers, financial advisors, accountants and other professionals) shall be released and discharged from further duties, responsibilities and obligations relating to and arising from and in connection with this Chapter 11 Case. Fees, Costs and Expenses of Trustee Pursuant to the Prepackaged Plan, and subject to applicable provisions of the Bankruptcy Code and Bankruptcy Court authorization and approval to the extent necessary, the Trustee will be entitled to payment for its reasonable fees, costs and expenses as provided for pursuant to the Indenture; provided, however, that if the Company or Reorganized Salant decides, in its sole discretion, that the fees, costs and expenses of the Trustee are reasonable, the Company or Reorganized Salant may pay the same without application to or further order of the Bankruptcy Court unless the Confirmation Order provides otherwise. Amendments and Modifications to the Prepackaged Plan Pursuant to the Prepackaged Plan, the Prepackaged Plan may be altered, amended or modified by the Company, after consultation with Magten, before or after the Confirmation Date, as provided in Section 1127 of the Bankruptcy Code. Section 1125(e) of the Bankruptcy Code The Prepackaged Plan provides that upon confirmation of the Prepackaged Plan, (i) the Company will be deemed to have solicited acceptances of the Prepackaged Plan in good faith and in compliance with the applicable provisions of the Bankruptcy Code and (ii) the Company, Magten, Apollo, and each of the members of the Creditors' Committee, if any (and each of their respective affiliates, agents, directors, officers, employees, advisors, and attorneys) will be deemed to have participated in good faith and in compliance with the applicable provisions of the Bankruptcy Code in the offer, issuance, sale, and purchase of the securities offered and sold under the Prepackaged Plan, and therefore will have no liability for the violation of any applicable law, rule, or regulation governing the solicitation of acceptances or rejections of the Prepackaged Plan or the offer, issuance, sale, or purchase of the securities offered and sold under the Prepackaged Plan. Pursuant to the Prepackaged Plan, on the Effective Date or as soon thereafter as is practicable, Reorganized Salant will file with the Secretary of State of the State of Delaware, in accordance with Sections 103 and 303 of the DGCL, the Reorganized Salant Certificate of Incorporation and such certificate will be the certificate of incorporation for Reorganized Salant. Pursuant to the Prepackaged Plan, on the Effective Date, the Reorganized Salant By-Laws will become the by-laws of Reorganized Salant. FEASIBILITY OF THE PREPACKAGED PLAN AND THE BEST INTERESTS OF CREDITORS TEST CONFIRMATION HEARING Section 1128(a) of the Bankruptcy Code requires the Bankruptcy Court, after notice, to hold a hearing on confirmation of a plan. As promptly as practicable after the commencement by the Company of the Chapter 11 Case, the Company will request the Bankruptcy Court to schedule a Confirmation Hearing. Notice of the Confirmation Hearing will be provided to all known creditors and equity holders or their representatives. The Confirmation Hearing may be adjourned from time to time by the Bankruptcy Court without further notice except for an announcement of the adjourned date made at the Confirmation Hearing or any subsequent adjourned confirmation hearing. Section 1128(b) of the Bankruptcy Code provides that any party-in-interest may object to confirmation of the Prepackaged Plan. Pursuant to the Bankruptcy Rules, any objection to confirmation of the Prepackaged Plan must be in writing, must conform to the Bankruptcy Rules, must set forth the name of the objector and, the nature and amount of claims or interests held or asserted by the objector and against the Company's estate or property, and the basis for the objection and the specific grounds therefor, and must be filed with the Bankruptcy Court, with a copy to Chambers, together with proof of service thereof, and served upon (i) Fried, Frank, Harris, Shriver & Jacobson, Attorneys for the Company, One New York Plaza, New York, New York 10004, Attention: Brad Eric Scheler, Esq. and Lawrence A. First, Esq., (ii) The United States Trustee for the Southern District of New York, 80 Broad Street, Third Floor, New York, New York 10004, Attention: Carolyn S. Schwartz, Esq., (iii) Hebb & Gitlin, Attorneys for Magten, One State Street, Hartford, Connecticut 06103-3178, Attention: Evan Flaschen, Esq., and (iv) the attorneys for any official committee of unsecured creditors that may be appointed in the Company's Chapter 11 Case, so as to be received no later than the date and time designated in the notice of the Confirmation Hearing. Objections to confirmation of the Prepackaged Plan are governed by Bankruptcy Rule 9014. UNLESS AN OBJECTION TO CONFIRMATION IS TIMELY SERVED AND FILED, IT MAY NOT BE CONSIDERED BY THE BANKRUPTCY COURT. At the Confirmation Hearing, the Bankruptcy Court will confirm the Prepackaged Plan only if all of the following requirements of Section 1129(a) of the Bankruptcy Code are met: 1. The Prepackaged Plan complies with the applicable provisions of the Bankruptcy Code. 2. The Company complies with the applicable provisions of the Bankruptcy Code. 3. The Prepackaged Plan has been proposed in good faith and not by any means forbidden by law. 4. Any payment made or to be made by the Company, or by an entity issuing securities, or acquiring property under the Prepackaged Plan, for services or for costs and expenses in, or in connection with, the Chapter 11 Case or in connection with the Prepackaged Plan and incident to the Chapter 11 Case has been approved by, or be subject to the approval of, the Bankruptcy Court as reasonable. 5. The Company has disclosed the identity and affiliations of any individual proposed to serve, after confirmation of the Prepackaged Plan, as a director or officer of Reorganized Salant, or a successor to the Company under the Prepackaged Plan, and the appointment to or continuance in such office by such individual must be consistent with the interests of creditors and interest holders and with public policy. The Company has disclosed the identity of any "insider" who will be employed or retained by Reorganized Salant and the nature of any compensation for such "insider." 6. With respect to each Impaired Class of Claims or Interests, each holder of a Claim or Interest in such Class has either accepted the Prepackaged Plan or will receive or retain under the Prepackaged Plan on account of such Claim or Interest property of a value, as of the Effective Date, that is not less than the amount that such holder would receive or retain if the Company were liquidated on the Effective Date under Chapter 7 of the Bankruptcy Code. 7. With respect to each Class of Claims or Interests, such Class has either accepted the Prepackaged Plan or is not Impaired by the Prepackaged Plan. If this requirement is not met, the Prepackaged Plan may still be confirmed pursuant to Section 1129(b) of the Bankruptcy Code. See "FEASIBILITY OF THE PREPACKAGED PLAN AND THE BEST INTERESTS OF CREDITORS TEST -- Nonconsensual Confirmation." 8. Except to the extent that the Holder of a particular Claim has agreed to a different treatment of its Claim, the Prepackaged Plan provides that (i) allowed Administrative Expenses will be paid in full in Cash on the Effective Date, (ii) Allowed Priority Claims will be paid in full in Cash on the Effective Date, or if the Class of such Claims accepts the Prepackaged Plan, the Prepackaged Plan may provide for deferred Cash payments, of a value as of the Effective Date, equal to the Allowed amount of such Claims, and (iii) the holder of an Allowed Priority Tax Claim will receive on account of such Claim deferred Cash payments over a period not exceeding six years after the date of assessment of such Claim, of a value, as of the Effective Date, equal to the Allowed amount of such Claim. 9. If a Class of Claims is Impaired under the Prepackaged Plan, at least one Class of Claims that is Impaired by the Prepackaged Plan has accepted the Prepackaged Plan, determined without including any acceptance of the Prepackaged Plan by any "insider." 10. Confirmation of the Prepackaged Plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the Company or any successor of the Company under the Prepackaged Plan. 11. All fees payable under Section 1930 of title 28 as determined by the Bankruptcy Court at the Confirmation Hearing have been paid or the Prepackaged Plan provides for the payment of all such fees on the Effective Date. 12. The Prepackaged Plan provides for the continuation after the Effective Date of payment of all Retiree Benefits (as defined in Section 1114 of the Bankruptcy Code), at the level established pursuant to subsection 1114(e)(1)(B) or 1114(g) of the Bankruptcy Code at any time prior to confirmation of the Prepackaged Plan, for the duration of the period the Company has obligated itself to provide such benefits. The Company believes that the Prepackaged Plan satisfies all of the statutory requirements of Chapter 11 of the Bankruptcy Code. Certain of these requirements are discussed in more detail below. FEASIBILITY OF THE PREPACKAGED PLAN In connection with confirmation of the Prepackaged Plan, Section 1129(a)(11) requires that the Bankruptcy Court find that confirmation of the Prepackaged Plan is not likely to be followed by the liquidation or the need for further financial reorganization of the Company. This is the so-called "feasibility" test. To support its belief in the feasibility of the Prepackaged Plan, the Company has prepared the Projections for the years 1998 through 2000, which Projections are a part of the Three-Year Business Plan. The professionals have not performed an independent investigation of the accuracy or completeness of the Projections. See "FINANCIAL PROJECTIONS AND ASSUMPTIONS USED." The Projections indicate that Reorganized Salant should have sufficient cash flow to make the payments required under the Prepackaged Plan on the Effective Date and to repay and service its debt obligations and to maintain its operations. Accordingly, the Company believes that the Prepackaged Plan complies with the standard of Section 1129(a)(11) of the Bankruptcy Code. As noted in the Projections, however, the Company cautions that no representations can be made as to the accuracy of the Projections or as to Reorganized Salant's ability to achieve the projected results. Many of the assumptions upon which the Projections are based are subject to uncertainties outside the control of the Company. Some assumptions may not materialize, and events and circumstances occurring after the date on which the Projections were prepared may be different from those assumed or may be unanticipated, and may adversely affect the Company 's financial results. As discussed elsewhere in this Proxy Statement/Prospectus, there are numerous circumstances that may cause actual results to vary from the projected results, and the variations may be material and adverse. See "DISCUSSION OF RISK FACTORS" for a discussion of certain risk factors that may affect financial feasibility of the Prepackaged Plan. THE PROJECTIONS WERE NOT PREPARED WITH A VIEW TOWARD COMPLIANCE WITH THE GUIDELINES ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS OR THE RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION REGARDING PROJECTIONS. FURTHERMORE, THE PROJECTIONS HAVE NOT BEEN AUDITED BY THE COMPANY'S INDEPENDENT CERTIFIED ACCOUNTANTS. ALTHOUGH PRESENTED WITH NUMERICAL SPECIFICITY, THE PROJECTIONS ARE BASED UPON A VARIETY OF ASSUMPTIONS, SOME OF WHICH HAVE NOT BEEN ACHIEVED TO DATE AND MAY NOT BE REALIZED IN THE FUTURE, AND ARE SUBJECT TO SIGNIFICANT BUSINESS, LITIGATION, ECONOMIC, AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY. CONSEQUENTLY, THE PROJECTIONS SHOULD NOT BE REGARDED AS A REPRESENTATION OR WARRANTY BY THE COMPANY, OR ANY OTHER PERSON, THAT THE PROJECTIONS WILL BE REALIZED. ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE PRESENTED IN THE PROJECTIONS. BEST INTERESTS TEST As described above, the Bankruptcy Code requires that each holder of an impaired claim or equity interest either (a) accepts the plan or (b) receives or retains under the plan property of a value, as of the effective date of the plan, that is not less than the value such holder would receive or retain if the Company were liquidated under Chapter 7 of the Bankruptcy Code on the Effective Date. The first step in meeting this test is to determine the dollar amount that would be generated from the liquidation of the Company's assets and properties in the context of a Chapter 7 liquidation case. The total cash available would be the sum of the proceeds from the disposition of the Company's assets and the cash held by the Company at the time of the commencement of the Chapter 7 case. The next step is to reduce that total by the amount of any claims secured by such assets, the costs and expenses of the liquidation, and such additional administrative expenses and priority claims that may result from the termination of the Company's business and the use of Chapter 7 for the purposes of liquidation. Next, any remaining cash would be allocated to creditors and shareholders in strict priority in accordance with Section 726 of the Bankruptcy Code (see discussion below). Finally, the present value of such allocations (taking into account the time necessary to accomplish the liquidation) is compared to the value of the property that is proposed to be distributed under the Prepackaged Plan on the Effective Date. The Company's costs of liquidation under Chapter 7 would include the fees payable to a trustee in bankruptcy, as well as those which might be payable to attorneys and other professionals that such a trustee may engage, plus any unpaid expenses incurred by the Company during a Chapter 11 case and allowed in the Chapter 7 case, such as compensation for attorneys, financial advisors, appraisers, accountants and other professionals, and costs and expenses of members of any statutory committee of unsecured creditors appointed by the United States Trustee pursuant to Section 1102 of the Bankruptcy Code and any other committee so appointed. In addition, claims would arise by reason of the breach or rejection of obligations incurred and executory contracts entered into by the Company both prior to, and during the pendency of, the Chapter 11 Case. The foregoing types of claims, costs, expenses, and fees and such other claims which may arise in a liquidation case or result from a pending Chapter 11 case would be paid in full from the liquidation proceeds before the balance of those proceeds would be made available to pay pre-Chapter 11 priority and unsecured claims. In applying the "best interests test," it is possible that claims and equity interests in the Chapter 7 case may not be classified according to the seniority of such claims and equity interests as provided in the Prepackaged Plan. In the absence of a contrary determination by the Bankruptcy Court, all pre-Chapter 11 unsecured claims which have the same rights upon liquidation and would be treated as one class for purposes of determining the potential distribution of the liquidation proceeds resulting from the Company's Chapter 7 case. The distributions from the liquidation proceeds would be calculated ratably according to the amount of the claim held by each creditor. Therefore, creditors who claim to be third-party beneficiaries of any contractual subordination provisions might be required to seek to enforce such contractual subordination provisions in the Bankruptcy Court or otherwise. Section 510 of the Bankruptcy Code specifies that such contractual subordination provisions are enforceable in a Chapter 7 liquidation case. The Company believes that the most likely outcome of liquidation proceedings under Chapter 7 would be the application of the rule of absolute priority of distributions. Under that rule, no junior creditor receives any distribution until all senior creditors are paid in full, with interest, and no equity holder receives any distribution until all creditors are paid in full with interest. Consequently, the Company believes that in a Chapter 7 case, Holders of Senior Note Claims would likely receive less than they would receive under the Prepackaged Plan and Holders of General Unsecured Claims, Old Common Stock Interests and Other Interests would receive no distributions of property. After consideration of the effects that a Chapter 7 liquidation would have on the ultimate proceeds available for distribution to creditors in a Chapter 11 case, including (i) the increased costs and expenses of a liquidation under Chapter 7 arising from fees payable to a trustee in bankruptcy and professional advisors to such trustee, (ii) the erosion in value of assets in a Chapter 7 case in the context of the expeditious liquidation required under Chapter 7 and the "forced sale" atmosphere that would prevail, (iii) the adverse effects on the salability of the capital stock of the subsidiaries as a result of the departure of key employees and the loss of major customers and suppliers, and (iv) substantial increases in claims which would be satisfied on a priority basis or on a parity with creditors in a Chapter 11 case, the Company has determined that confirmation of the Prepackaged Plan will provide each creditor and equity holder with a recovery that is not less than it would receive pursuant to a liquidation of the Company under Chapter 7 of the Bankruptcy Code. Moreover, the Company believes that the value of any distributions from the liquidation proceeds to each class of allowed claims in a Chapter 7 case would be the same or less than the value of distributions under the Prepackaged Plan because such distributions in a Chapter 7 case may not occur for a substantial period of time. In this regard, it is possible that distribution of the proceeds of the liquidation could be delayed for a year or more after the completion of such liquidation in order to resolve the claims and prepare for distributions. In the event litigation were necessary to resolve claims asserted in the Chapter 7 case, the delay could be further prolonged. NONCONSENSUAL CONFIRMATION In the event that any Impaired Class of Claims or Interests does not accept the Prepackaged Plan, the Bankruptcy Court may nevertheless confirm the Prepackaged Plan if all other requirements under Section 1129(a) of the Bankruptcy Code are satisfied, and if, with respect to each Impaired Class which has not accepted the Prepackaged Plan, the Bankruptcy Court determines that the Prepackaged Plan does not "discriminate unfairly" and is "fair and equitable" with respect to such Class. Confirmation under Section 1129(b) of the Bankruptcy Code requires that at least one Impaired Class of Claims accepts the Prepackaged Plan, excluding any acceptance of the Prepackaged Plan by an "insider" (as that term is defined in section 101 of the Bankruptcy Code). In the event Class 3 accepts the Prepackaged Plan, the Company intends to seek confirmation of the Prepackaged Plan notwithstanding the nonacceptance of one or more other Impaired Classes. NO UNFAIR DISCRIMINATION A plan of reorganization does not "discriminate unfairly" with respect to a nonaccepting Class if the value of the cash and/or securities to be distributed to the nonaccepting Class is equal or otherwise fair when compared to the value of distributions to other Classes whose legal rights are the same as those of the nonaccepting Class. The Company believes that the Prepackaged Plan would not discriminate unfairly against any nonaccepting Class of Claims or Interests. FAIR AND EQUITABLE TEST The "fair and equitable" test of Section 1129(b) of the Bankruptcy Code requires absolute priority in the payment of claims and interests with respect to any nonaccepting Class or Classes. The "fair and equitable" test established by the Bankruptcy Code is different for secured claims, unsecured claims and equity interests, and includes the following treatment: Secured Claims. A plan is fair and equitable with respect to a nonaccepting class of secured claims if (1) the holder of each claim in such class will retain its lien or liens and receive deferred cash payments totaling the allowed amount of its claim, of a value, as of the effective date of the plan, equal to the value of such holder's interest in the collateral, (2) the holder of each claim in such class will receive the proceeds from any sale of such collateral or (3) the holder of each claim in such class will realize the indubitable equivalent of its allowed secured claim. Unsecured Claims. A plan is fair and equitable with respect to a nonaccepting class of unsecured claims if (1) the holder of each claim in such class will receive or retain under the plan property of a value, as of the effective date of the plan, equal to the allowed amount of its claim, or (2) holders of claims or interests that are junior to the claims of such creditors will not receive or retain any property under the plan on account of such junior claim or interest. Equity Interests. A plan is fair and equitable with respect to a nonaccepting class of interests if the plan provides that (1) each member of such class receives or retains on account of its interest property of a value, as of the effective date of the plan, equal to the greatest of the allowed amount of any fixed liquidation preference to which such holder is entitled, any fixed redemption price to which such holder is entitled, or the value of such interest, or (2) holders of interests that are junior to the interests of such class will not receive or retain any property under the plan on account of such junior interests. In the event that Class 6 does not accept the Prepackaged Plan, and notwithstanding that Class 7 is deemed not to have accepted the Prepackaged Plan, the Company believes and will be prepared to demonstrate at the Confirmation Hearing that the Prepackaged Plan is "fair and equitable" with respect to all Impaired Classes of Claims and Interests, because, in each case, no class that is junior to such a dissenting class will receive or retain any property on account of the claims or equity interests in such class. SECURITIES ISSUED UNDER PREPACKAGED PLAN -- APPLICATION OF SECURITIES ACT THE SOLICITATION The Company has registered under the Securities Act the offer to exchange New Common Stock and Warrants for Senior Notes and Old Common Stock which may be deemed to be made by the Company pursuant to the Solicitation. ISSUANCE AND RESALE OF NEW SECURITIES UNDER THE PREPACKAGED PLAN Section 1145 of the Bankruptcy Code generally exempts from registration under the Securities Act (and any equivalent state securities or "blue sky" laws) the offer of a debtor's securities under a Chapter 11 plan if such securities are offered or sold in exchange for a claim against, or equity interest in, such debtor. In reliance upon this exemption, the New Common Stock and Warrants to be issued on the Effective Date as provided in the Prepackaged Plan generally will be exempt from the registration requirements of the Securities Act, and state and local securities laws. Accordingly, such securities may be resold without registration under the Securities Act or other federal securities laws pursuant to the exemption provided by Section 4(l) of the Securities Act, unless the holder is an "underwriter" with respect to such securities, as that term is defined in the Bankruptcy Code. In addition, such securities generally may be resold without registration under state securities laws pursuant to various exemptions provided by the respective laws of the several states. However, recipients of securities issued under the Prepackaged Plan are advised to consult with their own counsel as to the availability of any such exemption from registration under state law in any given instance and as to any applicable requirements or conditions to such availability. Section 1145(b) of the Bankruptcy Code defines "underwriter" under section 2(11) of the Securities Act of 1933 as an entity who (A) purchases a claim against, interest in, or claim for an administrative expense in the case concerning, the debtor, if such purchase is with a view to distribution of any security received or to be received in exchange for such a claim or interest; (B) offers to sell securities offered or sold under a plan for the holders of such securities; (C) offers to buy securities offered or sold under a plan from the holders of such securities, if such offer to buy is (i) with a view to distribution of such securities, and (ii) under an agreement made in connection with the plan, with the consummation of a plan, or with the offer or sale of securities under a plan; or (D) is an issuer, as used in section 2(11) of the Securities Act of 1933, with respect to such securities. Notwithstanding the foregoing, statutory underwriters may be able to sell securities without registration pursuant to the resale limitations of Rule 144 under the Securities Act which, in effect, permits the resale of securities received by statutory underwriters pursuant to a Chapter 11 plan, subject to applicable volume limitation, notice and manner of sale requirements, and certain other conditions. Parties which believe they may be statutory underwriters as defined in section 1145 of the Bankruptcy Code are advised to consult with their own counsel as to the availability of the exemption provided by Rule 144. For a description of the Registration Rights Agreement, see "DESCRIPTION OF REGISTRATION RIGHTS AGREEMENT." There can be no assurance that an active market for any of the securities to be distributed under the Prepackaged Plan will develop and no assurance can be given as to the prices at which they might be traded. BECAUSE OF THE COMPLEX, SUBJECTIVE NATURE OF THE QUESTION OF WHETHER A PARTICULAR HOLDER MAY BE AN UNDERWRITER, THE COMPANY MAKES NO REPRESENTATION CONCERNING THE ABILITY OF ANY PERSON TO DISPOSE OF THE SECURITIES TO BE DISTRIBUTED UNDER THE PREPACKAGED PLAN. MOREOVER, SUCH SECURITIES, OR THE DOCUMENTS THAT ESTABLISH THE TERMS AND PROVISIONS THEREOF, MAY CONTAIN TERMS AND LEGENDS THAT RESTRICT OR INDICATE THE EXISTENCE OF RESTRICTIONS ON THE TRANSFERABILITY OF SUCH SECURITIES. THE COMPANY RECOMMENDS THAT RECIPIENTS OF SECURITIES UNDER THE PREPACKAGED PLAN CONSULT WITH LEGAL COUNSEL CONCERNING THE LIMITATIONS ON THEIR ABILITY TO DISPOSE OF SUCH SECURITIES. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PREPACKAGED PLAN If the Chapter 11 Case is commenced but the Prepackaged Plan is not confirmed, the alternatives include (a) continuation of the Chapter 11 Case and formulation of an alternative plan or plans of reorganization or (b) liquidation of the Company under Chapter 7 or Chapter 11 of the Bankruptcy Code. CONTINUATION OF THE CHAPTER 11 CASE If the Company were to commence the Chapter 11 Case and remain in Chapter 11, the Company could continue to operate its businesses and manage its properties as a debtor-in-possession, but it would remain subject to the restrictions imposed by the Bankruptcy Code. It is not clear whether the Company could survive as a going-concern in a protracted Chapter 11 case. The Company could have difficulty sustaining the high costs, operating financing, and the confidence of the Company's and its subsidiaries' customers and trade vendors, of the Company remaining in Chapter 11. Ultimately, the Company (or other parties in interest) could propose another plan or attempt to liquidate the Company under Chapter 7 or Chapter 11. Such plans might involve either a reorganization and continuation of the Company's business, or an orderly liquidation of its assets, or a combination of both. LIQUIDATION UNDER CHAPTER 7 OR CHAPTER 11 If the Prepackaged Plan is not confirmed, the Company's Chapter 11 Case could be converted to a liquidation case under Chapter 7 of the Bankruptcy Code. In a Chapter 7 case, a trustee would be appointed to liquidate promptly the assets of the Company. The Company believes that in liquidation under Chapter 7, before creditors received any distributions, additional administrative expenses involved in the appointment of a trustee and attorneys, accountants, and other professionals to assist such trustee, along with an increase in expenses associated with an increase in the number of unsecured claims that would be expected, would cause a substantial diminution in the value of the estate. The assets available for distribution to creditors would be reduced by such additional expenses and by Claims, some of which would be entitled to priority, which would arise by reason of the liquidation and from the rejection of leases and other executory contracts in connection with the cessation of the Company operations and the failure to realize the greater going-concern value of the Company's assets. The Company could also be liquidated pursuant to the provisions of a Chapter 11 plan of reorganization. In a liquidation under Chapter 11, the Company's assets could be sold in a more orderly fashion over a longer period of time than in a liquidation under Chapter 7. Thus, Chapter 11 liquidation might result in larger recoveries than in a Chapter 7 liquidation, but the delay in distributions could result in lower present values received and higher administrative costs. Because a trustee is not required in a Chapter 11 case, expenses for professional fees could be lower than in a Chapter 7 case, in which a trustee must be appointed. Any distribution to the holders of Claims under a Chapter 11 liquidation plan probably would be delayed substantially. The Company's liquidation analysis, prepared with its financial advisors and included above in this Proxy Statement/Prospectus, is by law premised upon a liquidation in a Chapter 7 case. In that analysis, the Company has taken into account the nature, status, and underlying value of its assets, the ultimate realizable value of its assets, and the extent to which such assets are subject to liens and security interests. CERTAIN CONSEQUENCES OF THE RESTRUCTURING Stockholders should carefully consider the following possible material disadvantages to the Restructuring: (a) The Stockholders currently own 100% of the common equity of the Company in the form of the Old Common Stock. As of March 16, 1998, there were 14,964,608 shares of Old Common Stock issued and outstanding. Assuming all of the conditions to the Restructuring are fulfilled, the Exchange Restructuring will result in the Stockholders receiving, in exchange for their shares of Old Common Stock, an aggregate of 1,496,461 shares of New Common Stock after giving effect to the Reverse Split, constituting 7.5% of the Old Common Stock issued and outstanding immediately after giving effect to the Exchange Restructuring (subject to dilution for the New Common Stock under the Stock Award and Incentive Plan, the Warrants Shares, and in the case of the Exchange Restructuring only, the shares of New Common Stock issued under the Old Plans). In addition, the Stockholders will receive the Warrants, which represent the right to purchase up to 10% of the New Common Stock issued and outstanding immediately after giving effect to the Exchange Restructuring (on a fully diluted basis). The issuance of New Common Stock to the Noteholders pursuant to the Exchange Restructuring or the Prepackaged Plan, as applicable, will result in significant dilution of the equity interests of the existing holders of Old Common Stock as a percentage of the total number of outstanding shares of the common stock of the Company. (b) Based upon the current market price of the Old Common Stock (after giving effect to the Reverse Split), the Warrants may be "out of the money" immediately following the Restructuring, and no assurance can be made that the Warrants will ever be "in the money." (c) There can be no assurance that an active market for the Warrants or the New Common Stock will develop or, if any such market does develop, that it will continue to exist. Further, the degree of price volatility in any such market that does develop may be significant. Accordingly, no assurance can be given as to the liquidity of the market for any of the Warrants or the New Common Stock or the price at which any sales may occur. (d) There are certain Federal income tax considerations with respect to the Restructuring, including the Company's net operating loss carryovers being reduced or subject to limitations on use, although such reduction or limitation would be greater under the Exchange Restructuring than under the Prepackaged Restructuring. (e) Commencement of bankruptcy proceedings, even if only to confirm the Prepackaged Plan, could adversely affect the relationship between the Company and its subsidiaries, employees, customers and suppliers. For additional information on the consequences of implementing the Restructuring, see "RISK FACTORS." VOTING AND CONFIRMATION OF THE PREPACKAGED PLAN In the event that the Company pursues the Prepackaged Restructuring and files the Chapter 11 Case, the Bankruptcy Code requires that, in order to confirm the Prepackaged Plan, the Bankruptcy Court must make a series of findings concerning the Prepackaged Plan and the Company, including, without limitation, that (i) the Prepackaged Plan has classified Claims and Interests in a permissible manner, (ii) the Prepackaged Plan complies with applicable provisions of the Bankruptcy Code, (iii) the Company has complied with applicable provisions of the Bankruptcy Code, (iv) the Company has proposed the Prepackaged Plan in good faith and not by any means forbidden by law, (v) the disclosure required by Section 1125 of the Bankruptcy Code has been made, (vi) the Prepackaged Plan has been accepted by the requisite votes of creditors (except to the extent that "cramdown" is available under Section 1129(b) of the Bankruptcy Code) (see "FEASIBILITY OF THE PREPACKAGED PLAN AND THE BEST INTERESTS OF CREDITORS TEST"), (vii) the Prepackaged Plan is feasible and confirmation is not likely to be followed by the liquidation or the need for further financial reorganization of the Company, (viii) the Prepackaged Plan is in the "best interests" of all Holders of Claims or Interests in an Impaired Class by providing to such Holders on account of their Claims or Interests property of a value, as of the Effective Date, that is not less than the amount that such Holder would receive or retain in a Chapter 7 liquidation, unless each Holder of a Claim or Interest in such Class has accepted the Prepackaged Plan, (ix) all fees and expenses payable under 28 U.S.C. ss. 1930, as determined by the Bankruptcy Court at the hearing on Confirmation, have been paid or the Prepackaged Plan provides for the payment of such fees on the Effective Date, and (x) the Prepackaged Plan provides for the continuation after the Effective Date of all retiree benefits, as defined in Section 1114 of the Bankruptcy Code, at the level established at any time prior to confirmation pursuant to Sections 1114(e)(1)(B) or 1114(g) of the Bankruptcy Code, for the duration of the period that the Company has obligated itself to provide such benefits. THE FOLLOWING VOTING PROCEDURES ARE APPLICABLE SOLELY TO VOTING TO ACCEPT THE PREPACKAGED PLAN AND DO NOT APPLY TO VOTING AND TENDER PROCEDURES IN CONNECTION WITH THE EXCHANGE OFFER. VOTING PROCEDURES FOR PREPACKAGED PLAN AND REQUIREMENTS Pursuant to the Bankruptcy Code, only Classes of Claims and Interests that are "impaired," as defined in Section 1124 of the Bankruptcy Code, under the Prepackaged Plan are entitled to vote to accept or reject the Prepackaged Plan. A Class is Impaired unless the Prepackaged Plan (i) leaves unaltered the legal, equitable or contractual rights to which the Claims or Interests of that Class entitle the Holders of such Claims or Interests or (ii) cures any defaults that occurred before or after the filing of the Chapter 11 Case (other than a default of a kind specified in Section 365(b)(2) of the Bankruptcy Code), reinstates the maturity of the debt as it existed before such default, compensates the Holders for any damages incurred as a result of any reasonable reliance upon any contractual provision or applicable law entitling the Holder to accelerate the debt, and does not otherwise alter the legal, equitable and contractual rights of such Holders. Classes of Claims and Interests that are not impaired are conclusively presumed to have accepted the Prepackaged Plan and are not entitled to vote on the Prepackaged Plan. Classes of Claims and Interests whose Holders receive or retain no property under the Prepackaged Plan are deemed not to have accepted the Prepackaged Plan and are not entitled to vote on the Prepackaged Plan. The classification of Claims and Interests is summarized, together with notations as to whether each Class of Claims or Interests is impaired or unimpaired, in "DESCRIPTION OF THE PREPACKAGED PLAN -- Classification and Treatment of Claims and Interests." Additional information regarding voting is contained in the instructions accompanying the Ballots. Under Section 1126(b) of the Bankruptcy Code, a holder of a claim or interest that has accepted a plan of reorganization before the commencement of a Chapter 11 case will be deemed to have accepted the plan for purposes of confirmation under Chapter 11 of the Bankruptcy Code if the bankruptcy court determines that the solicitation of such acceptances was in compliance with any applicable non-bankruptcy law governing the adequacy of disclosure in connection with such a solicitation, or, if there is no such applicable non-bankruptcy law, such acceptance or rejection was solicited after disclosure to such holder of adequate information as defined in Section 1125(a) of the Bankruptcy Code. Under Bankruptcy Rule 3018(b), solicitations of acceptances of a plan of reorganization before the commencement of a Chapter 11 case shall be rejected by a bankruptcy court if the bankruptcy court finds that (i) the plan was not transmitted to substantially all creditors and equity interest holders of the same class, (ii) an unreasonably short time was prescribed for such creditors or equity interest holders to vote on the plan or (iii) the solicitation was not in compliance with Section 1126(b) of the Bankruptcy Code. The Company believes that its Solicitation of acceptances of the Prepackaged Plan complies with the requirements of Section 1126(b), Bankruptcy Rule 3018(b) and all applicable federal and state securities laws for purposes of Solicitation of acceptances or rejections of the Prepackaged Plan. If the Bankruptcy Court finds such compliance, then Holders casting Ballots to accept or reject the Prepackaged Plan will be deemed by the Bankruptcy Court to have accepted or rejected the Prepackaged Plan. Unless the Bankruptcy Court later determines that any acceptances of the Prepackaged Plan may be revoked, all such acceptances will remain in full force and effect until the Bankruptcy Court determines whether such acceptances constitute acceptances or rejections for purposes of confirmation under the Bankruptcy Code. The Company also reserves the right to use acceptances of the Prepackaged Plan received in this Solicitation to seek confirmation of the Prepackaged Plan under any other circumstances, including the filing of an involuntary bankruptcy petition against the Company. For a discussion of other significant conditions to confirmation under the Bankruptcy Code, see "FEASIBILITY OF THE PREPACKAGED PLAN AND THE BEST INTERESTS OF CREDITORS TEST -- Nonconsensual Confirmation." The appropriate Ballots, together with either the Proxy Statement/Prospectus or Exchange Restructuring Prospectus, as applicable, are being distributed to all Holders of Class 3 Senior Note Claims and Class 6 Old Common Stock Interests, the only Holders who are entitled to vote on the Prepackaged Plan. There is a separate Ballot designated for each Class of Claims and Interests in order to facilitate vote tabulation; however, all Ballots are substantially similar in form and substance and the term "Ballot" is used without intended reference to the Ballot of any specific Class of Claims or Interests. WHO MAY VOTE Under the Prepackaged Plan, the Claims against and the Interests in the Company are divided into seven Classes. Pursuant to the Bankruptcy Code, only Classes of Claims or Interests that are Impaired and are to receive a distribution under the Prepackaged Plan, and which are not deemed to reject the Prepackaged Plan under Section 1126(g) of the Bankruptcy Code, are entitled to vote on the Prepackaged Plan. Claims or Interests in the following Classes are Impaired under the Prepackaged Plan and are entitled under the terms and provisions of the Bankruptcy Code to vote on the Prepackaged Plan: Class 3: Senior Note Claims. Class 6: Old Common Stock Interests. Only beneficial owners of Senior Notes and Old Common Stock (the "Old Securities") on the Voting Record Date, or their authorized signatories, are eligible to vote on the Prepackaged Plan. The Voting Record Date is [______]. PROCEDURES FOR HOLDERS OF OLD SECURITIES TO VOTE ON PREPACKAGED PLAN If you are a registered Holder of Old Securities (i.e., Senior Notes or Old Common Stock), you will receive the Ballot relating to the securities you hold of record. Registered Holders may include brokerage firms, commercial banks, trust companies or other nominees. If such Entities do not hold Old Securities for their own account, they should provide copies of this Proxy Statement/Prospectus and an appropriate Ballot to their customers and to beneficial owners. Any beneficial owner who has not received a Proxy Statement/Prospectus or Ballot should contact their brokerage firm, nominee or the Information Agent. All votes to accept or reject the Prepackaged Plan must be cast by using the Ballot or, in the case of a brokerage firm or other nominee holding Old Securities in its own name on behalf of a beneficial owner, the Master Ballot, enclosed with this Proxy Statement/Prospectus (or original, manually executed facsimiles thereof). Brokerage firms or other nominees holding Old Securities for the account of only one beneficial owner may use a Ballot. Purported votes which are cast in any other manner will not be counted. Ballots and Master Ballots must be received by the voting agent (the "Voting Agent") at its address set forth on the applicable Ballot no later than 5:00 p.m., New York City time, on [________] (the "Voting Deadline"), which may be extended at the Company's discretion. You may receive a Ballot relating to Old Securities that you did not beneficially own on the applicable Voting Record Date. You should complete only the Ballot corresponding to each class of Old Securities which you beneficially owned on the Voting Record Date. Holders who purchase or whose purchase is registered after the Record Date, and who wish to vote on the Prepackaged Plan must arrange with their seller to receive a proxy from the Holder of record on such Voting Record Date, a form of which is provided with each Ballot and Master Ballot. Holders of Old Securities who elect to vote on the Prepackaged Plan should complete and sign the Ballot in accordance with the instructions thereon being sure to check the appropriate box entitled "Accept the Prepackaged Plan" or "Reject the Prepackaged Plan." Holders may not split their vote on the Prepackaged Plan with respect to a particular class of Old Securities. A Holder must vote all securities beneficially owned in a particular class in the same way (i.e., all "accept" or all "reject") even if such Old Securities are owned through more than one broker or bank. Delivery of all documents must be made to the Voting Agent at its address set forth on the applicable Ballot. The method of such delivery is at the election and risk of the Holder. If such delivery is by mail, it is recommended that Holders use an air courier with a guaranteed next day delivery or registered mail, properly insured, with return receipt requested. In all cases, sufficient time should be allowed to assure timely delivery. YOU MAY RECEIVE MULTIPLE MAILINGS OF THIS PROXY STATEMENT/PROSPECTUS, ESPECIALLY IF YOU OWN YOUR OLD SECURITIES THROUGH MORE THAN ONE BROKER OR BANK. IF YOU SUBMIT MORE THAN ONE BALLOT FOR A CLASS OR ISSUE OF OLD SECURITIES BECAUSE YOU BENEFICIALLY OWN SUCH OLD SECURITIES THROUGH MORE THAN ONE BROKER OR BANK, BE SURE TO INDICATE IN ITEM __ OF THE BALLOT(S), THE NAME OF ALL BROKER DEALERS OR OTHER INTERMEDIATES WHO HOLD OLD SECURITIES FOR YOU. BENEFICIAL OWNERS OF OLD SECURITIES Section 1126(b) of the Bankruptcy Code has been interpreted to require that a solicitation for acceptances prior to filing a plan of reorganization must include the beneficial owners of securities, regardless of whether such beneficial owners are the holders of record. Accordingly, a beneficial owner of Old Securities on the Voting Record Date is eligible to vote on the Prepackaged Plan, whether the Old Securities were held on the Voting Record Date in such beneficial owner's name or in the name of a brokerage firm, commercial bank, trust company or other nominee. Any beneficial owner holding Old Securities in its own name can vote by completing and signing the enclosed Ballot and returning it directly to the Voting Agent using the enclosed pre-addressed stamped envelope. A beneficial owner holding Old Securities in "street name" (i.e., through a brokerage firm, bank, trust company or other nominee) or a beneficial owner's authorized signatory (a broker or other intermediary having power of attorney to vote on behalf of a beneficial owner) can vote by following the instructions set forth below: 1. Review the enclosed Ballot Instructions and the certification set forth in the Ballot Instructions. 2. Sign the enclosed Ballot (unless it has already been signed by the bank, trust company or other nominee). 3. Return the Ballot to the addressee in the preaddressed, stamped envelope enclosed with the form. If no envelope was enclosed, contact the Information Agent (identified below) or the Voting Agent identified on the applicable Ballot Instructions. Authorized signatories voting on behalf of more than one beneficial owner must complete a separate Ballot for each such beneficial owner. Any Ballot submitted to a brokerage firm or proxy intermediary will not be counted until such brokerage firm or proxy intermediary (i) properly executes and delivers such Ballot to the Voting Agent or (ii) properly completes and delivers a corresponding Master Ballot to the Voting Agent. By submitting a vote for or against the Prepackaged Plan, you are certifying that you are the beneficial owner of the Old Securities being voted or an authorized signatory for such a beneficial owner. Your submission of a Ballot will also constitute a request that you (or in the case of an authorized signatory, the beneficial owner) be treated as the record holder of such securities for purposes of voting on the Prepackaged Plan. BROKERAGE FIRMS, BANKS AND OTHER NOMINEES A brokerage firm, commercial bank, trust company or other nominee which is the registered holder of an Old Security for a beneficial owner, or is a participant in a securities clearing agency and is authorized to vote in the name of such securities clearing agency pursuant to an omnibus proxy (as described below) and is acting for a beneficial owner, can vote on behalf of such beneficial owner by (i) distributing a copy of this Proxy Statement/Prospectus and all appropriate Ballots (either in blank or prevalidated in accordance with the Master Ballot Instructions) to such owner, (ii) collecting all such Ballots, (iii) completing a Master Ballot in accordance with the Master Ballot Instructions compiling the votes and other information from the Ballots collected, and (iv) transmitting such completed Master Ballot to the Voting Agent. A proxy intermediary acting on behalf of a brokerage firm or bank may follow the procedures outlined in the preceding sentence to vote on behalf of such beneficial owner. A brokerage firm, commercial bank, trust company or other nominee which is the registered holder of an Old Security for only one beneficial owner also may arrange for such beneficial owner to vote by executing the appropriate Ballot and by distributing a copy of this Proxy Statement/Prospectus and such executed Ballot to such beneficial owner for voting and returning such Ballot to the Voting Agent at the address set forth on the applicable Ballot. SECURITIES CLEARING AGENT Any nominee holder of Old Securities will execute an omnibus proxy in favor of its respective participants. As a result of the omnibus proxy, each such participant will be authorized to vote the securities owned by it and held in the name of such securities clearing agency. IMPORTANCE OF PROPER AND TIMELY SUBMISSION OF COMPLETED BALLOTS It is important that all Holders of Class 3 Senior Note Claims and Class 6 Old Common Stock Interest's vote to accept or to reject the Prepackaged Plan, because under the Bankruptcy Code, for purposes of determining whether the requisite acceptances have been received from an Impaired Class of Claims or Interests, the vote will be tabulated based on the ratio of (i) Allowed Claims or Interests with respect to which a vote to accept was received to (ii) all Allowed Claims or Interests of such Impaired Class with respect to which any valid vote was received. Therefore, it is possible that the Prepackaged Plan could be approved with the affirmative vote of significantly less than two-thirds in amount and one-half in number of the entire Class of Senior Note Claims, or by Class 6 Old Common Stock Interests with the affirmative vote of significantly less than two-thirds in amount of the entire Class of Old Common Stock Interests. Failure by a Holder of an Impaired Class 3 Senior Note Claim or an Impaired Class 6 Old Common Stock Interest to submit a properly executed Ballot or Master Ballot (as appropriate) or to indicate acceptance or rejection of the Prepackaged Plan in accordance with the instructions set forth in the Ballot Instructions and the procedures set forth herein shall be deemed to not constitute a vote either to accept or reject the Prepackaged Plan. The failure to submit a properly executed Ballot or Master Ballot (when appropriate) or failing to indicate a vote either for acceptance or rejection of the Prepackaged Plan will not be counted as votes for or against the Prepackaged Plan. The Company, in its sole discretion, may waive any defect in any Ballot or Master Ballot at any time, either before or after the close of voting, and without notice. EXCEPT AS OTHERWISE ORDERED BY THE BANKRUPTCY COURT, A BALLOT OR, WHERE APPROPRIATE, MASTER BALLOT, WHICH IS EITHER (i) NOT TIMELY SUBMITTED TO THE VOTING AGENT AT THE ADDRESS SET FORTH ON THE APPLICABLE BALLOT INSTRUCTIONS, (ii) SUBMITTED TO SUCH VOTING AGENT WITHOUT PROPER EXECUTION OR (iii) EXECUTED AND SUBMITTED TO SUCH VOTING AGENT WITHOUT PROPERLY INDICATING ACCEPTANCE OR REJECTION OF THE PREPACKAGED PLAN WILL NOT CONSTITUTE EITHER AN ACCEPTANCE OR REJECTION OF THE PREPACKAGED PLAN UNDER SECTION 1126 OF THE BANKRUPTCY CODE. SUBMISSION OF PROXIES IN CONNECTION WITH THE EXCHANGE RESTRUCTURING DOES NOT AND WILL NOT CONSTITUTE A VOTE IN RESPECT OF THE PREPACKAGED PLAN. A HOLDER OF AN IMPAIRED CLAIM OR INTEREST ENTITLED TO VOTE ON THE PREPACKAGED PLAN MUST PROPERLY AND TIMELY COMPLETE AND RETURN A BALLOT IN ORDER FOR SUCH HOLDER'S VOTE IN RESPECT OF THE PREPACKAGED PLAN TO BE COUNTED. VOTING DEADLINE AND EXTENSIONS In order to be counted for purposes of voting on the Prepackaged Plan, all of the information requested on the applicable Ballot must be provided by the Voting Deadline. THE VOTING DEADLINE IS [_______________], 5:00 P.M., NEW YORK CITY TIME. Ballots must be received by the Voting Agent at its address set forth on the applicable Ballot. The Company reserves the right, in its sole discretion, to extend the Voting Deadline, in which case the term "Voting Deadline" shall mean the latest date on which a Ballot will be accepted. To extend the Voting Deadline, the Company will make an announcement thereof, prior to 9:00 p.m., New York City time, not later than the next business day immediately following the previously scheduled Voting Deadline. Such announcement may state that the Company is extending the Voting Deadline for a specified period of time or on a daily basis until 5:00 p.m., New York City time, on the date on which sufficient acceptances required to seek confirmation of the Prepackaged Plan have been received. WITHDRAWAL OF VOTES ON THE PREPACKAGED PLAN The Solicitation of acceptances of the Prepackaged Plan will expire on the Voting Deadline. Any voter who has delivered a valid Ballot or Master Ballot may withdraw its vote by delivering a written notice of withdrawal to the Voting Agent before the Voting Deadline. To be valid, the notice of withdrawal must (a) describe the claim or equity interest to which it relates, (b) be signed by the party who signed the Ballot or Master Ballot to be revoked, and (c) be received by the Voting Agent before the Voting Deadline. The Company may contest the validity of any withdrawals. Any holder who has delivered a valid Ballot or Master Ballot may change its vote by delivering to the Voting Agent a properly completed subsequent Ballot or Master Ballot so as to be received before the Voting Deadline. In the case where more than one timely, properly completed Ballot or Master Ballot is received, only the Ballot or Master Ballot that bears the latest date will be counted. After the Chapter 11 Case is commenced, a properly submitted Ballot may be withdrawn only with the approval of the Bankruptcy Court. INFORMATION AGENT [_____________] has been appointed as Information Agent for the Prepackaged Plan. Questions and requests for assistance may be directed to the Information Agent. Requests for additional copies of this Proxy Statement/Prospectus, the Ballots or the Master Ballots should be directed to the Information Agent. Such requests should be addressed to the Information Agent as follows: [TO COME]. MARKET AND TRADING INFORMATION The Old Common Stock is currently traded on the NYSE and is quoted under the symbol "SLT." On March 2, 1998, the day immediately prior to the date that the Company announced its intention to pursue the Restructuring, the closing sale price for the Old Common Stock was $1.6875 per share. On __________, the closing sale price for the Old Common Stock was $[ ] per share. See "MARKET FOR OLD COMMON STOCK AND RELATED STOCKHOLDER MATTERS," and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION--Liquidity and Capital Resources." The Company intends to use its best efforts to maintain its status as a reporting company under the Exchange Act and has filed its registration on Form S-4 under the Securities Act with respect to the New Common Stock. Such registration under the Securities Act will facilitate the trading of the New Common Stock on the NYSE. Pursuant to the Restructuring, the Company will use its best efforts to effectuate such listing for the New Common Stock on the NYSE as of the Exchange Restructuring Date. However, there is no assurance that the Company will maintain its status as a reporting company under the Exchange Act or that efforts to list the New Common Stock on the NYSE will be successful. See "DISCUSSION OF RISK FACTORS--Lack of Trading Market for Warrants and New Common Stock; Volatility; Potential De-Listing of New Common Stock." The Company has fallen below the continued listing criteria of the NYSE for net tangible assets available to common stock together with average net income after taxes for the past three years. However, the NYSE has reviewed the terms and conditions of the Restructuring set forth herein and has informed the Company that it will continue to list the Company's common stock during the period prior to consummation of the Restructuring and intends to list the Company's common stock from and after the Restructuring Date. However, the NYSE has advised the Company that after consummation of the Restructuring, the NYSE intends to monitor the performance of the Company based upon the Projections set forth herein to ensure compliance with the NYSE's original listing standards in respect of the New Common Stock. The Company believes that as a result of the consummation of the Restructuring, following the Restructuring Date, the Company will be able to return to compliance with the original listing standards in respect of the New Common Stock and the Warrants and the New Common Stock and the Warrants will continue to be listed for trading on the NYSE. However, the NYSE has advised the Company that the Company's failure to meet the Projections following the Restructuring could result in the suspension from trading and subsequent delisting of the New Common Stock. MARKET FOR OLD COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Old Common Stock is traded on the New York Stock Exchange (the "NYSE") under the trading symbol SLT. The high and low sale prices per share of Old Common Stock (based upon the NYSE composite tape as reported in published financial sources) for each quarter of 1996 and 1997 are set forth below. The Company did not declare or pay any dividends during such years. The indenture governing the Senior Notes and the Credit Agreement requires the satisfaction of certain net worth tests prior to the payment of any cash dividends by the Company. As of January 3, 1998, the Company was prohibited from paying cash dividends under the most restrictive of these provisions. High and Low Sale Prices Per Share of the Old Common Stock Quarter High Low 1998 First $1 13/16 $ 3/8 1997 Fourth $3 3/8 $1 9/16 Third 3 1 15/16 Second 4 1/4 2 7/8 First 5 3/8 3 1996 Fourth $3 7/8 $3 1/8 Third 4 2 3/4 Second 4 7/8 3 1/2 First 5 3/4 3 1/8 On March 2, 1998, the day immediately prior to the date the Company announced its intention to pursue the Restructuring, the closing market price of the Old Common Stock was $1.6875 per share. On ____________, 1998, there were _____ holders of record of shares of Old Common Stock, and the closing market price was $______ per share. The following chart indicates the effect of the Prepackaged Restructuring on the amount and percentage of the holdings of the Company's common equity owned beneficially by (i) each person (including any group as that term is used in section 13(d)(3) of the Exchange Act) who is known to the Company to be the beneficial owner of more than 5% of the Old Common Stock, (ii) each current director and each Board nominee and (iii) all directors and officers as a group.
New Common Stock Issuable with Old Common Stock Beneficially Respect to Such Holdings of Owned as of March 16, 1988 Old Common Stock Upon the -------------------------- Effective Date of Prepackaged Plan** ------------------------------------ Holder No. Of Shares(a) % of Class(b) No. Of Shares % of Class ------ ---------------- ------------- ------------- ---------- Apollo Apparel 5,924,352 39.6% 592,435 2.9% Partners, L.P. DDJ Capital 1,615,730(c) 10.8% 161,573 * Management, LLC Robert Falk 5,925,652(d) 39.6% 592,565 2.9% Ann Dibble Jordan 2,200(e) * 220 * Robert Katz 5,925,952(f) 39.6% 592,595 2.9% Harold Leppo 2,200(g) * 220 * Jerald S. Politzer 145,000(h) 1.0% 14,500 * Bruce F. Roberts 6,200(i) * 620 * John S. Rogers 433,787(j) 2.9% 43,379 * Marvin Schiller 16,134(k) * 1,613 * Edward M. Yorke 5,926,552(l) 39.6% 592,655 2.9% All directors and executive 6,535,277(m) 43.6% 653,528 3.2% officers as a group (14 persons) - ------------------------ * Represents less than one percent. ** Exclusive of any shares of New Common Stock issuable upon exercise of any Warrants distributed to such holders in connection with the Restructuring. (a) For purposes of this table, a person or group of persons is deemed to have "beneficial ownership" of any shares of Old Common Stock which such person has the right to acquire within 60 days following March 16, 1998. (b) As of March 16, 1998, there were 14,964,608 shares outstanding, excluding those shares held by or for the account of the Company. For purposes of computing the percentage of outstanding shares of Old Common Stock held by each person or group of persons named above, any security which such person or persons has the right to acquire within 60 days following March 16, 1998 is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. (c) This amount reflects Old Common Stock beneficially owned by DDJ Capital Management, LLC as of April 20, 1998. (d) This amount includes 5,924,352 shares beneficially owned by Apollo and 1,300 shares issuable upon the exercise of stock options. The general partner of Apollo is AIF II, L.P., the managing general partner of which is Apollo Advisors, L.P. Mr. Falk is a principal of Apollo Advisors, L.P. He disclaims beneficial ownership of any shares of Old Common Stock held by Apollo. (e) This amount represents 2,200 shares issuable upon the exercise of stock options. (f) This amount includes 5,924,352 shares beneficially owned by Apollo and 1,600 shares issuable upon the exercise of stock options. The general partner of Apollo is AIF II, L.P., the managing general partner of which is Apollo Advisors, L.P. Mr. Katz is an officer of Apollo Advisors, L.P. He disclaims beneficial ownership of any shares of Old Common Stock held by Apollo. (g) This amount represents 2,200 shares issuable upon the exercise of stock options. (h) This amount includes 45,000 shares held directly and 100,000 shares issuable upon the exercise of stock options. (i) This amount includes 4,000 shares held directly and 2,200 shares issuable upon the exercise of stock options. (j) This amount includes 424,280 shares held directly by Mr. Rodgers, 1,300 shares issuable upon the exercise of stock options, 2,284 shares held through the Company's Long Term Savings and Investment Plan (the "Savings Plan") and 5,923 shares held by the Margaret S. Vickery Trust, of which Mr. Rodgers is a co-trustee. As to the shares held by the Margaret S. Vickery Trust, Mr. Rodgers shares voting and investment power with a co-trustee. He disclaims beneficial ownership with respect to the shares held by the Trust. (k) This amount includes 11,234 shares held directly and 5,200 shares issuable upon the exercise of stock options. (l) This amount includes 5,924,352 shares beneficially owned by Apollo and 2,200 shares issuable upon the exercise of stock options. The general partner of Apollo is AIF II, L.P., the managing partner of which is Apollo Advisors, L.P. Mr. Yorke is an officer of Apollo Advisors, L.P. He disclaims beneficial ownership of any shares of Old Common Stock held by Apollo. (m) The 6,607,773 shares held by all directors and executive officers of the Company as a group counts the 5,924,352 shares held by Apollo (discussed in notes (d), (f) and (l) above) once. Such 6,607,773 shares include (i) 6,419,789 shares held directly by, or attributable to, directors and executive officers, (ii) 2,284 shares held through the Savings Plan by executive officers, and (iii) 185,700 shares issuable upon the exercise of stock options held by all directors and executive officers that are exercisable on, or may become exercisable within sixty days of, March 16, 1997.
All of the outstanding voting securities of the Company's subsidiaries are owned beneficially and (except for shares of certain foreign subsidiaries of the Company owned of record by others to satisfy local laws) of record by the Company. The Company has never declared or paid and does not expect to declare or pay dividends on the outstanding Old Common Stock. Restrictions contained in the instruments governing the outstanding indebtedness of the Company restrict its ability to provide funds that might otherwise be used by the Company for the payment of dividends on the Old Common Stock. The Company has fallen below the continued listing criteria of the NYSE for net tangible assets available to common stock together with average net income after taxes for the past three years. However, the NYSE has reviewed the terms and conditions of the Restructuring set forth herein and has informed the Company that it will continue to list the Company's common stock during the period prior to consummation of the Restructuring and intends to list the Company's common stock from and after the Restructuring Date. However, the NYSE has advised the Company that after consummation of the Restructuring, the NYSE intends to monitor the performance of the Company based upon the Projections set forth herein to ensure compliance with the NYSE's original listing standards in respect of the New Common Stock. The Company believes that as a result of the consummation of the Restructuring, following the Restructuring Date, the Company will be able to return to compliance with the original listing standards in respect of the New Common Stock and the Warrants and the New Common Stock and the Warrants will continue to be listed for trading on the NYSE. However, the NYSE has advised the Company that the Company's failure to meet the Projections following the Restructuring could result in the suspension from trading and subsequent delisting of the New Common Stock. MARKET PRICES OF THE SENIOR NOTES The Senior Notes are traded in the over-the-counter market by certain dealers who from time to time are willing to make a market in such securities. Trading of the Senior Notes is, however, extremely limited. Prices and trading volume of the Senior Notes in the over-the-counter market are not reported and are difficult to monitor. To the extent that Senior Notes are traded, prices may fluctuate widely depending on, among other things, the trading volume and the balance between buy and sell orders. OTHER INFORMATION REGARDING THE EXISTING BOARD During Fiscal 1997, there were eight meetings of the Board. Directors who are not employees of the Company are paid an annual retainer of $13,000 and an additional fee of $600 for attendance at each meeting of the Board or of a committee of the Board (other than the Executive Committee) as well as $5,000 per year for service on the Executive Committee, $3,000 per year for service on the Audit Committee, $2,000 per year for service on the Compensation Committee, $2,000 per year for service on the Qualified Plan Committee and $1,000 per year for service on the Nominating Committee. In addition, the Chairman of each Committee is paid an annual fee of $1,000. During Fiscal 1997, none of the directors attended fewer than 75 percent of the aggregate number of meetings held by (i) the Board during the period that he or she served as a director, with the exception of Messrs. Cogut and Falk and (ii) the Committees of which he or she was a member during the period that he or she served on these Committees. The Board has established five standing committees to assist it in the discharge of its responsibilities. The Executive Committee met three times during Fiscal 1997. The members of the Committee are Messrs. Politzer, Schiller and Yorke, and prior to May 13, 1997, Mr. DiPaolo. The Committee, to the extent permitted by law, may exercise all the power of the Board during intervals between meetings of the Board. The Audit Committee met two times during Fiscal 1997. The members of the Committee are Messrs. Katz, Leppo and Roberts. The Committee meets independently with the Director of the Internal Audit Department, representatives of the Company's independent auditors and the Company's Chief Financial Officer and reviews the general scope of the audit, the annual financial statements of the Company and the related audit report, the fees charged by the independent auditors and matters relating to internal control systems. The Committee is responsible for reviewing and monitoring the performance of non-audit services by the Company's independent auditors and for recommending to the Board the selection of the Company's independent auditors. The Compensation and Stock Plan Committees met eight times during Fiscal 1997. The members of the Committees are Messrs. Leppo, Schiller and Yorke. The Committees are responsible for reviewing and recommending to the Board compensation for officers and certain other management employees and for administering and granting awards under the Company's stock plans. The Nominating Committee met once during Fiscal 1997. The members of the Committee were Ms. Dibble Jordan and Mr. Roberts and prior to November 24, 1997, Mr. Cogut. The Committee is responsible for proposing nominees for director for election by the Stockholders at each Annual Meeting and proposing candidates to fill any vacancies on the Board. The Qualified Plan Committee met twice during Fiscal 1997. The members of the Committee are Ms. Dibble Jordan and Messrs. Roberts, Rodgers and Kahn. The Committee is responsible for overseeing the administration of the Company's pension and savings plan. EXECUTIVE OFFICERS The following table sets forth certain information, as of January 3, 1998 with respect to the executive officers of the Company:
NAME AGE POSITIONS AND OFFICES OFFICER OF SALANT SINCE - ---- --- --------------------- ----------------------- Jerald S. Politzer.........52 Chief Executive April 1997 Officer and Chairman of the Board Philip Franzel.............50 Executive Vice August 1997 President and Chief Financial Officer Todd Kahn..................34 Executive Vice June 1993 President, General Counsel and Secretary
For a summary of the business experience for the past five years of Messrs. Politzer, Franzel and Kahn, see "MANAGEMENT" herein. Each of the executive officers of the Company was elected at a meeting of the Board of Directors and will serve until the next Annual Meeting of the Board or until his successor has been duly elected and qualified. SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS The following table sets forth certain information as of April 20, 1998, with respect to each person who is known to the Company to be the "beneficial owner" (as defined in regulations of the Commission) of more than 5% of the outstanding shares of Common Stock. BENEFICIAL OWNERS OF MORE THAN 5% OF THE OUTSTANDING SHARES OF SALANT COMMON STOCK NAME AND ADDRESS OF AMOUNT AND NATURE OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS(a) - ---------------- -------------------- ------------------- Apollo Apparel Partners, L.P. 5,924,352 39.6% c/o Apollo Advisors, L.P. Two Manhattanville Road Purchase, New York 10577 DDJ Capital Management, LLC 1,615,730 10.8% 141 Linden Street, Suite 4 Wellesley, MA 02181 - ---------------------------- (a) This percentage is calculated on the basis of 14,964,608 shares outstanding as of March 16, 1998, excluding those shares held by or for the account of the Company. SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth certain information as of March 16, 1998 with respect to the beneficial ownership of Old Common Stock by each of the directors of the Company, the Chief Executive Officer and each of the four most highly compensated other executives of the Company (the "Named Executive Officers") and all directors and executive officers of the Company as a group. Beneficial Ownership of Salant Common Stock by Directors and Executive Officers of the Company AMOUNT AND NATURE OF BENEFICIAL PERCENT OF NAME OF BENEFICIAL OWNER OWNERSHIP (a) CLASS (b) - ----------------------------------- -------------------------- -------------- Nicholas P. DiPaolo............... 0 * Robert H. Falk.................... 5,925,652 (c) 39.6% Philip A. Franzel................. 1,000 (d) * Ann Dibble Jordan.................. 2,200 (e) * Todd Kahn.......................... 71,500 (f) * Robert Katz........................ 5,925,952 (g) 39.6% Harold Leppo....................... 2,200 (h) * Michael A. Lubin.................. 0 * Jerald S. Politzer................ 145,000 (i) 1.0% Richard P. Randall................ 0 * Bruce F. Roberts.................. 6,200 (j) * John S. Rodgers................... 433,787 (k) 2.9% Marvin Schiller.................... 16,134 (l) * Edward M. Yorke................... 5,926,552 (m) 39.6% All directors and executive officers as a 6,607,773 (n) 43.6% group (14 persons)............... - ------------------------ * Represents less than one percent. (a) For purposes of this table, a person or group of persons is deemed to have "beneficial ownership" of any shares of Old Common Stock which such person has the right to acquire within 60 days following March 16, 1998. (b) As of March 16, 1998, there were 14,964,608 shares outstanding, excluding those shares held by or for the account of the Company. For purposes of computing the percentage of outstanding shares of Old Common Stock held by each person or group of persons named above, any security which such person or persons has the right to acquire within 60 days following March 16, 1998 is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. (c) This amount includes 5,924,352 shares beneficially owned by Apollo and 1,300 shares issuable upon the exercise of stock options. The general partner of Apollo is AIF II, L.P., the managing general partner of which is Apollo Advisors, L.P. Mr. Falk is a principal of Apollo Advisors, L.P. He disclaims beneficial ownership of any shares of Old Common Stock held by Apollo. (d) This amount represents 1,000 shares held directly by Mr. Franzel. (e) This amount represents 2,200 shares issuable upon the exercise of stock options. (f) This amount includes 4,000 shares held directly and 67,500 shares issuable upon the exercise of stock options. (g) This amount includes 5,924,352 shares beneficially owned by Apollo and 1,600 shares issuable upon the exercise of stock options. The general partner of Apollo is AIF II, L.P., the managing general partner of which is Apollo Advisors, L.P. Mr. Katz is an officer of Apollo Advisors, L.P. He disclaims beneficial ownership of any shares of Old Common Stock held by Apollo. (h) This amount represents 2,200 shares issuable upon the exercise of stock options. (i) This amount includes 45,000 shares held directly and 100,000 shares issuable upon the exercise of stock options. (j) This amount includes 4,000 shares held directly and 2,200 shares issuable upon the exercise of stock options. (k) This amount includes 424,280 shares held directly by Mr. Rodgers, 1,300 shares issuable upon the exercise of stock options, 2,284 shares held through the Company's Long Term Savings and Investment Plan (the "Savings Plan") and 5,923 shares held by the Margaret S. Vickery Trust, of which Mr. Rodgers is a co-trustee. As to the shares held by the Margaret S. Vickery Trust, Mr. Rodgers shares voting and investment power with a co-trustee. He disclaims beneficial ownership with respect to the shares held by the Trust. (l) This amount includes 11,234 shares held directly and 5,200 shares issuable upon the exercise of stock options. (m) This amount includes 5,924,352 shares beneficially owned by Apollo and 2,200 shares issuable upon the exercise of stock options. The general partner of Apollo is AIF II, L.P., the managing partner of which is Apollo Advisors, L.P. Mr. Yorke is an officer of Apollo Advisors, L.P. He disclaims beneficial ownership of any shares of Old Common Stock held by Apollo. (n) The 6,607,773 shares held by all directors and executive officers of the Company as a group counts the 5,924,352 shares held by Apollo (discussed in notes (c), (g) and (m) above) once. Such 6,607,773 shares include (i) 6,419,789 shares held directly by, or attributable to, directors and executive officers, (ii) 2,284 shares held through the Savings Plan by executive officers, and (iii) 185,700 shares issuable upon the exercise of stock options held by all directors and executive officers that are exercisable on, or may become exercisable within sixty days of, March 16, 1998. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Each of the executive officers of the Company was elected at a meeting of the Board and will serve until the next Annual Meeting of the Board or until his successor has been duly elected and qualified. Section 16(a) of the Exchange Act requires the Company's directors and executive officers and holders or more than 10% of the Old Common Stock to file with the Commission reports of ownership and changes in beneficial ownership of Old Common Stock and other equity securities of the Company of Forms 3, 4 and 5. Based on written representations of the reporting persons, the Company believes that during Fiscal 1997, such persons complied with all applicable Section 16(a) filing requirements. See "MANAGEMENT." EXECUTIVE COMPENSATION The following table sets forth all compensation paid or accrued by the Company for fiscal years 1995 through 1997 for services in all capacities to the Company by the Chief Executive Officer and certain other of its executive officers (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE Annual Compensation(a) Long Term Compensation -------------------------------------- ------------------------------------------- Awards Payout ------------------------- ---------------- NUMBER OTHER OF ANNUAL RESTRICTED SECURITIES LONG-TERM ALL OTHER PRINCIPAL SALARY BONUS COMPEN- STOCK UNDERLYING INCENTIVE COMPENSATION NAME POSITION YEAR ($) ($) SATION AWARDS OPTIONS PAYOUTS ($) - ---------------------- --------------- -------- ------- ---------- ---------- ---------- ----------- --------- ------------ Jerald S. Politzer Chief Executive Officer(b) 1997 487,500 650,000(c) 0 0 400,000 0 29,644(d) Philip A. Franzel Executive Vice President And Chief Financial Officer(e) 1997 109,615 150,000(c) 0 0 75,000 0 Todd Kahn Executive Vice President, General Counsel, and Secretary (f) 1997 258,077 75,000 0 0 65,000 0 1,900(g) Vice President, General Counsel and Secretary 1996 201,923 0 0 0 0 0 792 Vice President, General Counsel, and Secretary 1995 167,827 0 0 0 15,000 0 762 Nicholas P. DiPaolo Chairman, President and Chief Executive Officer(h) 1997 632,211 0 0 0 0 0 22,339(i) Chairman, President and Chief Executive Officer 1996 625,000 0 0 0 0 0 22,339 Chairman, President and Chief Executive Officer 1995 602,885 0 0 0 0 0 22,339 Michael A. Lubin Executive Vice President and Chief Operating Officer (j) 1997 236,923(k) 0 0 0 162,500 0 1,900(g) Executive Vice President and Chief Operating 1996 400,000 0 0 0 0 0 0 Officer Executive Vice President and Chief Operating 1995 90,769 0 0 0 0 0 0 Officer Richard P. Randall Senior Vice President And Chief Financial 1997 240,000 0 0 0 0 0 1,900(g) Officer (l) Senior Vice President And Chief Financial 1996 320,000 0 0 0 0 0 1,800 Officer Senior Vice President, Treasurer and Chief Financial 1995 283,077 0 0 0 0 0 1,800 Officer - ------------------------ (a) Includes amounts earned in fiscal year, whether or not deferred. (b) Mr. Politzer joined the Company and was elected Chief Executive Officer on April 1, 1997. (c) Reflects a one-time minimum cash bonus for 1997 in lieu of a sign-up bonus. (d) Housing allowance of $21,000 and pre-employment expense reimbursement of $8,644. (e) Mr. Franzel joined the Company and was elected Chief Financial Officer on August 18, 1997. (f) Mr. Kahn was elected Executive Vice President on May 13, 1997. (g) Matching contributions under the Company's Long Term Savings and investment Plans. (h) Effective May 13, 1997, Mr. DiPaolo resigned from his positions with the Company. (i) Consists of (i) premiums of $20,439 under a life insurance/salary continuation plan and (ii) matching contributions of $1,900 under the Savings Plan. (j) Effective July 31, 1997, Mr. Lubin resigned from his positions with the Company. (k) Excludes monthly retainer to Lubin Delano of $8,333.33 and one-time lump sum payment of $368,149 to Lubin Delano pursuant to a letter agreement dated July 18, 1997 (the "Lubin Agreement"). For a summary of the Lubin Delano Consulting Agreement with the Company, see "Certain Relationships and Related Transactions" herein. (l) Effective April 1, 1997, Mr. Randall resigned from his positions with the Company.
OPTION GRANTS FOR FISCAL 1997 The following table sets forth information with respect to grants to the Named Executive Officers of options to purchase Old Common Stock in the last fiscal year.
Potential Realizable Value at Assumed Annual Rates of Stock Price Individual Grants Appreciation for Option Term(a) ---------------------------------------------------- ---------------------------------------- Number of % of Total Securities Options Underlying Granted to Options Employees in Expiration Name Granted Fiscal Year Option Price Date 5% 10% - --------------------- ------------ -------------- ------------- ------------ ---------- ----------- Jerald Politzer 400,000 30.4298 $4.1250 3/24/07 $1,037,676 $2,629,675 Philip A. Franzel 75,000 5.7056 $2.34 8/18/07 $110,829 $280,431 Todd Kahn 65,000 4.9448 $4.00 04/14/07 $163,671 $414,625 Nicholas P. DiPaolo 0 0 0 - 0 0 Michael Lubin 162,500 12.3621 $4.00 02/11/07 $408,781 $1,035,932 Richard P. Randall 0 0 0 - 0 - ----------------------- (a) The dollar amounts under the 5% and 10% columns are the result of calculations required under the Commission's rules and are not intended to forecast future appreciation in the price of the Old Common Stock.
OPTION EXERCISES AND VALUES FOR FISCAL 1997 The following table sets forth as of January 3, 1998 for each of the Named Executive Officers certain information concerning the aggregate number of options exercised and the number and value of all unexercised options. The Company has not issued any stock appreciation rights.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES Total Value of Number of Securities Unexercised Underlying In-the-Money Options Unexercised Options Held at Fiscal at Fiscal Year-End Year-End (a) ---------------------------------- ------------------------------ Number of Shares Acquired Value Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - --------------------- -------------- ---------- -------------- -------------- ------------- -------------- Jerald S. Politzer 0 0 0 400,000 0 0 Philip A. Franzel 0 0 0 75,000 0 0 Todd Kahn 0 0 30,000 70,000 0 0 Nicholas P. DiPaolo 65,000 $38,750 0 0 0 0 Michael A. Lubin 0 0 0 0 0 0 Richard P. Randall 0 0 0 0 0 0 - ------------------------ (a) The closing price of the Common Stock on January 2, 1998, the last trading day of Fiscal 1997, was $1.75 per share.
THE COMPANY'S RETIREMENT PLAN The Company sponsors the Salant Corporation Retirement Plan (the "Retirement Plan"), a noncontributory, final average pay, defined benefit plan. A participant becomes vested upon completion of 5 years of service. The Retirement Plan provides pension benefits and benefits to surviving spouses of participants who die prior to retirement. At normal retirement, a member receives an annual pension benefit for life equal to the greater of (a) the sum of 0.65% of his/her average final annual compensation for the highest 5 consecutive years of last 15 years preceding retirement ("final average compensation") not in excess of 140% of the average Social Security wage base for the 35-year period ending with retirement ("covered compensation") plus 1.25% of final average compensation in excess of covered compensation multiplied by the number of years of his/her credited service not in excess of 35, or (b) $96 multiplied by the number of years of his/her credited service, but not to exceed $2,880. A participant may elect an actuarially reduced benefit at his/her early retirement. The benefit formula of the Retirement Plan was amended in October 1991 effective as of December 1, 1989. A participant's benefit under the Retirement Plan will never be less than the greater of his/her accrued benefit under the terms of such plan prior to (a) the effective date of the amendment or (b) January 1, 1994. The benefit formula prior to amendment was 1 1/4% of a participant's average final annual compensation for the highest 5 consecutive years of the last 15 years preceding retirement multiplied by the number of years his/her credited service not in excess of 30, minus up to 50% of primary social security, prorated for fewer than 30 years of service. The following table shows the annual pension benefits which would be payable to members of the Retirement Plan at normal retirement after specific periods of service at selected salary levels, assuming the continuance of the Retirement Plan. NUMBER OF YEARS OF SERVICE(b) AVERAGE ANNUAL COMPENSATION IN HIGHEST FIVE CONSECUTIVE YEARS OF THE LAST 15 YEARS PRECEDING RETIREMENT(a) 10 20 25 30 35 $ 60,000............... $ 5,038 $ 10,077 $ 12,596 $ 15,115 $ 17,635 80,000............... 7,538 15,077 18,846 22,615 26,385 100,000................ 10,038 20,077 25,096 30,115 35,135 120,000................ 12,538 25,077 31,346 37,615 43,885 150,000................ 16,288 32,577 40,721 48,865 57,010 180,000................ 17,538 35,077 43,846 52,615 61,385 200,000................ 17,538 35,077 43,846 52,615 61,385 - ------------------------- (a) Effective from 1989 through 1993, no more than $200,000 of compensation (adjusted for inflation) may be recognized for the purpose of computing average annual compensation. Subsequent to 1993, no more than 150,000 of compensation (adjusted for inflation) may be recognized for such purpose. (b) Messrs. Kahn, DiPaolo, Lubin and Randall have, respectively, 4 years, 12 years, 1 year and 6 years of credited service under the Retirement Plan. Mr. DiPaolo was a participant in the Manhattan Industries, Inc. Employees Benefit Plan (the "Manhattan Plan"), which was merged into the Retirement Plan as of March 1, 1992. His years of service as a participant in the Manhattan Plan will be considered in determining his benefits under the Retirement Plan. Furthermore, his benefits under the Retirement Plan will never be less than his accrued benefits under the terms of the Manhattan Plan determined as of January 31, 1989. The benefit formula of the Manhattan Plan was the product of (a) the sum of (i) 0.50% of the participant's average annual compensation for any 36-consecutive month period of his employment ("final average compensation") in excess of his covered compensation plus (ii) 1.00% of his final average compensation in excess of covered compensation multiplied by (b) the number of his years of service. PERFORMANCE GRAPH The following table compares the cumulative total shareholder return on Old Common Stock with the cumulative total shareholder returns of (x) the S&P 500 Textile - Apparel Manufacturers Index and (y) the Wilshire 5000 index from December 1992 to December 1997. The return on the indices is calculated assuming the investment of $100 on December 31, 1992 and the reinvestment of dividends. Comparison of Five-Year Cumulative Total Shareholder Return* Salant Corporation, Wilshire 5000, and S&P Textile Industry Index - --------------------------------------------------------------------------- [GRAPH OMITTED] Date Salant Wilshire 5000 S&P Textile - ------------------------------------------------------------- December 1992 $100.00 $100.00 $100.00 December 1993 $ 80.78 $111.29 $ 75.61 December 1994 $ 62.98 $111.22 $ 74.08 December 1995 $ 42.45 $151.77 $ 83.15 December 1996 $ 34.23 $183.97 $114.23 December 1997 $ 19.17 $241.53 $123.17 - ------------------------------------------------------------- * Total return assumes reinvestment of dividends on a quarterly basis. MANAGEMENT The following table sets forth certain information with respect to the persons who are members of the Board or executive officers of the Company. The Board consists of ten members, divided into three classes, the first class consists of three members, the second class consists of two members and the third class consists of four members. DIRECTORS Presently there is one vacancy on the Board. The term of office of Class One will expire at the 2000 Annual Meeting; the term of office of Class Two will expire at the 1999 Annual Meeting; and the term of office of Class Three will expire at the 2001 Annual Meeting. DIRECTOR/OFFICER OF NAME AGE POSITIONS AND OFFICES SALANT SINCE ---- --- --------------------- ------------------- Jerald S. Politzer.. 52 Director - Class One, Chairman April 1997 of the Board and Chief Executive Officer Harold Leppo......... 61 Director - Class One September 1993 Edward M. Yorke..... 39 Director - Class One September 1993 Bruce F. Roberts.... 74 Director - Class Two September 1993 Marvin Schiller...... 64 Director - Class Two May 1983 Robert H. Falk....... 59 Director - Class Three May 1996 Ann Dibble Jordan.... 63 Director - Class Three September 1993 Robert Katz.......... 31 Director - Class Three August 1995 John S. Rodgers..... 68 Director - Class Three March 1973 Philip A. Franzel... 50 Executive Vice President and August 1997 Chief Financial Officer Todd Kahn............ 34 Executive Vice President, June 1993 General Counsel and Secretary No arrangement or understanding exists between any director or officer and any other person or persons pursuant to which any such person was or is to be selected as a director or officer. None of the directors or officers has any family relationship between them. The business experience, principal occupations and employment during the past five years of each of the directors, together with their periods of service as directors and executive officers of the Company, as applicable, are set forth below. Jerald S. Politzer, age 52, joined the Company as a director on March 24, 1997, Chief Executive Officer commencing April 1, 1997 and Chairman of the Board on May 13, 1997. From July 1989 to November 1996 he had been Executive Vice President of Melville Corporation, a diversified retailer. Mr. Politzer is a director of Norton McNaughton, Inc., a manufacturer of women's apparel. Harold Leppo, age 61, has been an independent retail consultant for more than the past five years. Mr. Leppo is a director of Filene's Basement, an operator of retail clothing stores; Napier Co., a jewelry manufacturer; and Royce Hosiery Mills, Inc., a hosiery manufacturer. Mr. Leppo has served as a director of the Company since September 1993. Edward M. Yorke, age 39, has been an officer, since 1992, of Apollo Advisors, L.P., which, together with an affiliate, serves as managing general partner of Apollo Investment Fund, L.P., AIF II, L.P. and Apollo Investment Fund III, L.P., private securities investment funds. AIF II, L.P. is the general partner of Apollo, the largest stockholder of the Company. From 1990 to 1992, Mr. Yorke was a vice president in the high yield capital markets group of BT Securities Corp. Mr. Yorke is a director of Aris Industries, Inc., an apparel manufacturer; Big Flower Press, Inc., a commercial printer; and Telemundo Group, Inc., an operator of television stations. Mr. Yorke has served as a director of the Company since September 1993. Robert H. Falk, age 59, has been a principal, since April 1992, of Apollo Advisors, L.P., which, together with an affiliate, serves as managing general partner of Apollo Investment Fund, L.P., AIF II, L.P. and Apollo Investment Fund III, L.P., private securities investment funds. AIF II, L.P. is the general partner of Apollo, the largest stockholder of the Company. Mr. Falk is a director of Converse, Inc., a manufacturer of athletic and leisure footwear; Culligan Water Technologies, Inc., a manufacturer of water purification and treatment products; and Samsonite Corporation, a luggage manufacturer. Mr. Falk has served as a director of the Company since May 1996. Ann Dibble Jordan, age 63, has been an independent consultant for the last five years. Ms. Dibble Jordan is a director of Johnson & Johnson Corporation, a manufacturer and marketer of consumer healthcare products; The Travelers Corporation, a financial services and insurance firm; The Hechinger Company, a retailer of home improvement products; and Automatic Data Processing, Inc., a computer services company. Ms. Dibble Jordan has served as a director of the Company since September 1993. Robert Katz, age 31, has been associated since 1990 with and is an officer of Apollo Advisors, L.P., which, together with an affiliate, serves as managing general partner of Apollo Investment Fund, L.P., AIF II, L.P. and Apollo Investment Fund III, L.P., private securities investment funds. AIF II, L.P. is the general partner of Apollo, the largest stockholder of the Company. Mr. Katz is a director of Alliance Imaging, Inc., a medical imaging company; Aris Industries, Inc., an apparel manufacturer; and Vail Resorts Inc., a resort operator. Mr. Katz has served as a director of the Company since August 1995. John S. Rodgers, age 68, is an independent consultant. From September 1993 until July 1995, Mr. Rodgers was Executive Vice President, Secretary and Senior Counsel of the Company. Prior to that time, Mr. Rodgers was Chairman of the Board of the Company since March 1991. Prior to June 1993, Mr. Rodgers had been General Counsel for more than the previous five years and prior to August 1995 he had been Secretary for more than the previous five years. Mr. Rodgers has served as a director of the Company since 1973. Bruce F. Roberts, age 74, has been Executive Director of the Textile Distributors Association, a trade association, from September 1990. Prior to that time, Mr. Roberts was Senior Vice President--Corporate Relations at Spring Industries, a textile manufacturer. Mr. Roberts has served as a director of the Company since September 1993. Marvin Schiller, age 64, was Managing Director of A.T. Kearney, Inc., a management consulting firm, from May 1983 until his retirement as of January 1995. Dr. Schiller is a director of LePercq-Istel Fund, Inc., a mutual fund; Strategic Agricultural Management Corp., a software developer and marketer; and Tutor Time Learning Systems Inc., a childcare and educational company. Dr. Schiller has served as a director of the Company since May 1983. Mr. Franzel, age 50, was elected Executive Vice President and Chief Financial Officer on August 18, 1997. From June 1993 until joining the Company, Mr. Franzel was Executive Vice President and Chief Financial Officer for Ermenegildo Zegna Corp., a leading international manufacturer and marketer of men's apparel. Prior to June 1993, Mr. Franzel was Group Chief Financial Officer for GJM International, Inc. Mr. Kahn, age 34, was elected Vice President and General Counsel on June 1, 1993, Assistant Secretary on September 22, 1993, Secretary on August 15, 1995 and Executive Vice President on May 13, 1997. Prior to June 1993, Mr. Kahn was an attorney with the law firm of Fried, Frank, Harris, Shriver & Jacobson, outside counsel to the Company. EXECUTIVE OFFICERS Executive officers of the Company are elected by and serve at the discretion of the Board. For a brief description of the business experience for the previous five years of all executive officers who are directors see "Directors" above. MANAGEMENT COMPENSATION EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL ARRANGEMENTS Mr. Politzer is a party to an agreement (the "Politzer Agreement"), dated as of March 24, 1997, which provides for his employment as Chief Executive Officer of the Company effective April 1, 1997 through March 31, 2000. The Politzer Agreement provides for the payment of a base salary in the amount of $650,000 per annum for the first twelve months of his employment, $700,000 per annum for the second twelve months of his employment and $750,000 for the third twelve months of his employment. Under the terms of the Politzer Agreement, Mr. Politzer is paid a cash bonus equal to 50% of his then current base salary if the Company generates actual pre-tax income for a year equal to at least 90% of the pre-tax income provided in the Company's annual business plan for such year. If the Company's actual pre-tax income for a year equals 100% of its annual business plan, then he receives a cash bonus equal to 100% of his then current base salary. Actual pre-tax income in excess of the annual business plan for such year increases Mr. Politzer's incentive bonus by 1% of his then current base salary for each 1% increment of increased actual pre-tax income for the year. Pursuant to the Politzer Agreement, Mr. Politzer will receive a minimum cash bonus for Fiscal 1997, and no other fiscal year thereafter, in the amount of $650,000. If Mr. Politzer's employment is terminated by him for "good reason" (as defined in the Politzer Agreement) or by the Company without cause, Mr. Politzer will receive (i) his base salary at the annualized rate on the date his employment ends for a period ending on the later of (x) the Employment Period (as defined in the Politzer Agreement) or (y) twelve months following termination, (ii) any pro-rata bonus earned in the year his employment ends and (iii) the right to exercise any stock options (whether or not then vested) for six months from the date his employment ends. If Mr. Politzer's employment ends as a result of death or Disability (as defined in the Politzer Agreement) he will receive (i) his base salary through the date of death or Disability and any bonus for any fiscal year earned but not yet paid, (ii) any pro-rata bonus earned in the year his employment ends, (iii) in the case of death only, a lump sum payment equal to three months base salary and (iv) the right to exercise any stock option (whether or not then vested) for a one year period. Mr. Franzel is a party to an agreement (the "Franzel Agreement"), dated as of August 18, 1997, which provides for his employment as Executive Vice President, and Chief Financial Officer of the Company effective August 18, 1997 through December 31, 1999. The Franzel Agreement provides for the payment of a base salary in the amount of $300,000 per year. Commencing in August of 1998, Mr. Franzel's base salary will be reviewed for increase, and in no event shall the base salary be less than $300,000 per year. Under the terms of the Franzel Agreement, Mr. Franzel shall receive a minimum cash bonus of $150,000 for Fiscal 1997 payable to Mr. Franzel within ninety (90) days after the end of the fiscal year. Under the terms of the Franzel Agreement, Mr. Franzel is entitled to receive a cash bonus equal to 40% of his then current base salary if the Company generates actual pre-tax income for a year equal to or greater than 90% and less than 100% of the pre-tax income provided in the Company's annual business plan for such year. If the Company's actual pre-tax income for a year is equal to or greater than 100% of its annual business plan for such year, then he receives a cash bonus equal to 50% of his then current base salary. Actual pre-tax income in excess of the annual business plan increases Mr. Franzel's incentive bonus by 5% of his then current base salary for each 5% increment of increased pre-tax income for the year. If Mr. Franzel's employment is terminated by him for "good reason" (as defined in the Franzel Agreement) or by the Company without cause, Mr. Franzel will receive (i) his base salary at the annualized rate on the date his employment ends for a period ending on the later of (x) the Employment Period (as defined in the Franzel Agreement) or (y) twelve months following termination, (ii) any pro-rata bonus earned in the year his employment ends and (iii) the right to exercise any stock options (whether or not then vested) for six months from the date his employment ends. If Mr. Franzel's employment ends as a result of death or Disability (as defined in the Franzel Agreement) he will receive (i) his base salary through the date of death or Disability and any bonus for any fiscal year earned but not yet paid, (ii) any pro-rata bonus earned through the date of death or Disability, (iii) in the case of death only, a lump sum payment equal to three months salary, and (iv) the right to exercise any stock option (whether or not vested) for a one year period. Pursuant to the Franzel Agreement, all stock options outstanding will immediately vest upon a "Change of Control" (as defined in the Franzel Agreement). Mr. Kahn is a party to an agreement (the "Kahn Agreement"), dated as of May 1, 1997, which provides for his employment as Executive Vice President, General Counsel and Secretary of the Company, effective May 1, 1997 through December 31, 1999. The Kahn Agreement provides for the payment of a base salary in the amount of $275,000 per year. Commencing in March of 1998, Mr. Kahn's base salary will be reviewed for increase, and in no event shall his base salary be less than $275,000 per year. Under the terms of the Kahn Agreement, Mr. Kahn is entitled to receive a cash bonus equal to 40% of his then current base salary if the Company generates actual pre-tax income for a year equal to or greater than 90% and less than 100% of the pre-tax income provided in the Company's annual business plan for such year. If the Company's actual pre-tax income for a year is equal to or greater than 100% of its annual business plan, then he receives a cash bonus equal to 50% of his then current annual salary. Actual pre-tax income in excess of the annual business plan for a year increases Mr. Kahn's incentive bonus by 5% of his then current base salary for each 5% increment of increased actual pre-tax income for the year. If Mr. Kahn's employment is terminated by him for "good reason" (as defined in the Kahn Agreement) or by the Company without cause, Mr. Kahn will receive (i) his base salary at the annualized rate on the date his employment ends for a period ending on the later of (x) the Employment Period (as defined in the Kahn Agreement) or (y) twelve months following termination, (ii) any pro-rata bonus earned in the year his employment ends, and (iii) the right to exercise any stock options (whether or not then vested) for six months from the date his employment ends. If Mr. Kahn's employment ends as a result of death or Disability (as defined in the Kahn Agreement) he will receive (i) his base salary through the date of death or Disability and any bonus for any fiscal year earned but not yet paid, (ii) any pro-rata bonus earned through the date of death or Disability, and (iii) in the case of death only, a lump sum payment equal to three months salary and (iv) the right to exercise any stock option (whether or not vested) for a one year period. Pursuant to the Kahn Agreement, all stock options outstanding will immediately vest upon a "Change of Control" (as defined in the Kahn Agreement). Mr. DiPaolo is party to an agreement (the "DiPaolo Agreement"), dated as of January 1, 1997, which provided for his employment as Chairman of the Board, President and Chief Executive Officer of the Company through December 31, 1997. The DiPaolo Agreement provided for the payment of a base salary in the amount of $625,000 from January 1, 1997 to December 31, 1997. If Mr. DiPaolo's employment is terminated by him for "good reason" (as defined in the DiPaolo Agreement) or by the Company without cause, Mr. DiPaolo will receive (i) a lump sum amount equal to his monthly salary multiplied by the number of full months in the Separation Period (as defined in the DiPaolo Agreement) up to six months and if the Separation Period is greater than six months, bi-weekly payments of $24,038.16 commencing at the end of the first six months of the Separation Period and continuing until the end of the Separation Period and (ii) any pro-rata bonus earned in the year his employment ends. On May 13, 1997, Mr. DiPaolo exercised his right to terminate the agreement for "good reason." In addition to the foregoing, pursuant to the DiPaolo Agreement, the Company assigned to Mr. DiPaolo three insurance policies on his life owned by the Company, with an aggregate current cash surrender value of approximately $228,253. Mr. Lubin is party to an agreement (the "Lubin Agreement"), dated as of July 18, 1997. Pursuant to the Lubin Agreement, effective as of July 31, 1997, Mr. Lubin resigned as President and Chief Operating Officer of the Company and his employment with the Company ended as of that date. The Lubin Agreement provided for salary continuation and payment to Lubin Delano of its consulting fee pursuant to the Lubin Delano Agreement through July 31, 1997 (For a discussion of the Lubin Delano Agreement, see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" below). Additionally, the Lubin Agreement provided for a one-time lump sum payment of $368,149.00 to Lubin Delano. Mr. Randall is party to an agreement (the "Randall Agreement"), dated as of February 24, 1997. Pursuant to the Randall Agreement, effective as of April 1, 1997, Mr. Randall resigned as Senior Vice President and Chief Financial Officer of the Company and his employment with the Company ended as of that date. The Randall Agreement provided for a severance period beginning April 1, 1997 and ending on the earlier of (i) the day Mr. Randall commences Full Time Employment (as defined in the Randall Agreement) or (ii) six (6) months from April 1, 1997. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Company's Compensation and Stock Plan Committee are Messrs. Leppo, Schiller and Yorke, none of whom were (i) during Fiscal 1997, an officer of the Company or any of its subsidiaries or (ii) formerly an officer of the Company or any of its subsidiaries. JOINT REPORT OF THE COMPENSATION AND STOCK PLAN COMMITTEES ON EXECUTIVE COMPENSATION This report sets forth the compensation policies that guide decisions of the Compensation and Stock Plan Committees with respect to the compensation of the Company's executive officers. This report also reviews the rationale for pay decisions that affected Mr. Politzer during Fiscal 1997, and, in that regard, offers additional insight into the figures that appear in the compensation tables which are an integral part of the overall disclosure of executive compensation. Any consideration of pay-related actions that may become effective in future fiscal years are not reported in this statement. COMMITTEE RESPONSIBILITY. The central responsibility of the Compensation Committee is to oversee compensation practices for the Company's executive officers. In this capacity, it reviews salaries, benefits, and other compensation paid to the Company's executive officers and recommends actions to the full Board with respect to these matters. The Stock Plan Committees administer the Company's 1987, 1988, 1993 and 1996 Stock Plans and, in this role, are responsible for granting stock options to all of the company's eligible employees, including its officers. STATEMENT OF COMPENSATION POLICY. In the context of their oversight roles, the Compensation and Stock Plan Committees are dedicated to ensuring that the Company's financial resources are used effectively to support the achievement of its short-term and long-term business objectives. In general, it is the policy of the Company that executive compensation (a) reflect relevant market standards for individuals with superior capabilities so as to ensure that the Company is effectively positioned to recruit and retain high-performing management talent; (b) be driven substantially by the Company's performance as measured by the achievement of internally generated earnings targets; and (c) correlate with share price appreciation, thereby coordinating the interests of management and shareholders. Percentile objectives are not specified in setting executive compensation. The members of the Compensation and Stock Plan Committees believes that the Company's executive compensation program is well structured to achieve its objectives. These objectives are satisfied within the context of an overall executive pay system that is comprised of a market driven base salary, variable incentive compensation and options to purchase the Company's Common Stock. DESCRIPTION OF COMPENSATION PRACTICES. It is the Company's practice to enter into employment agreements with its executive officers. These agreements specify the various components of compensation, including, among others, base salary and incentive compensation. BASE SALARY. Base salaries for the Company's executive officers are defined in their respective employment agreements, and, in the view of the Compensation Committee, reflect base pay levels that generally are being commanded by high-quality management in the marketplace. The Compensation Committee's normal practice is to review each executive officer's salary at the time of contract renewal, at which point adjustments are recommended to ensure consistency with pay expectations in the apparel industry and to reflect the extent of the executive's contribution to corporate performance over time. Mr. Politzer's base salary for 1997 was established pursuant to an agreement, dated as of March 24, 1997. Mr. Politzer's compensation represents a negotiated rate that reflects market prices for executives of his caliber and experience. INCENTIVE COMPENSATION. Incentive compensation payments to executive officers are based on the Company's performance and are intended to motivate the Company's executive officers to maximize their efforts to meet and exceed key earnings goals. The specific terms of each incentive arrangement are individually negotiated, but, in general, executive officers can earn incremental cash compensation based on the extent to which the Company achieves and exceeds annual earnings targets. Ordinarily, executive officers are paid a fixed cash award in years when actual pre-tax income (before amortization of intangibles and after any reserve for contingencies) equals 100% of the annual business plan. Smaller awards are paid when earnings fall below plan levels, and greater payments are made when results exceed plan. There is no limit on the overall incentive opportunity; however, in a year in which operating income falls below 90% of the annual business plan, no incentive compensation payments are made. Mr. Politzer's incentive compensation is designed to align his bonus, if any, with the performance of the Company. STOCK PLANS. The Company reinforces the importance of producing attractive returns to shareholders over the long term through the operation of its 1987, 1988, 1993 and 1996 Stock Plans. Stock options granted pursuant to the Stock Plans provide recipients with the opportunity to acquire an equity interest in the Company and to participate in the increase in shareholder value reflected in an increase in the price of Company shares. Exercise prices of options are ordinarily equal to 100% of the fair market value of the Company's shares on the date of grant of the option. This ensures that executives will derive benefits as shareholders realize corresponding gains. To encourage a long-term perspective, options are assigned a 10-year term, and most options become exercisable in equal installments on the first, second and third anniversaries of the date of grant. Stock options granted to executive officers typically are considered when employment agreements are initiated or renewed. In recent years, the Stock Plan Committees have based their decisions to grant stock options on competitive factors, their understanding of current industry compensation practices and their assessment of individual potential and performance. By granting stock options, the Committees are not only addressing market demands with respect to total compensation opportunities, but are also effectively reinforcing the Company's policy of encouraging executive stock ownership in support of building shareholder value. Mr. Politzer has been granted stock options which vest at the rate of 25% on the first and second anniversaries of the grant date and 50% on the third anniversary of the grant date to incentivize Mr. Politzer to promote long-term shareholder value. DEDUCTIBILITY OF EXECUTIVE COMPENSATION. Section 162(m) of the Tax Code ("Section 162(m)") generally disallows a federal income tax deduction to any publicly-held corporation for compensation paid in excess of $1 million in any taxable year to the chief executive officer or any of the four other most highly compensated executive officers who are employed by the Company on the last day of the taxable year. In Fiscal 1997, Section 162(m) will only affect the tax deductibility of a portion of the compensation paid to Mr. Politzer, the Company's current chief executive officer. SUMMARY. The Compensation and Stock Plan Committees are responsible for a variety of compensation recommendations and decisions affecting the Company's executive officers. By conducting their decision-making within the context of a highly integrated, multicomponent framework, the Committees ensure that the overall compensation offered to executive officers is consistent with the Company's interest in providing competitive pay opportunities which reflect its pay-for-performance orientation and support its short-term and long-term business mission. The Compensation and Stock Plan Committees will continue to actively monitor the effectiveness of the Company's executive compensation plans and assess the appropriateness of executive pay levels to assure prudent application of the Company's resources. Marvin Schiller, Chairman Harold Leppo Edward M. Yorke CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Except as described below, no transactions have occurred since December 31, 1996 to which the Company was or is to be a party and in which directors, executive officers or control persons of the Company, or their associates, had or are to have a direct or indirect material interest. Pursuant to an agreement, dated December 1, 1995 (the "Lubin Delano Agreement"), the Company has retained Lubin Delano to render certain financial advisory and investment banking services to the Company for a monthly retainer of $8,333.33. Under the Lubin Delano Agreement, Lubin Delano may receive a bonus equal to 100% of its annual retainer if the Company's pre-tax income for the year equals 100% of the pre-tax income provided in the Company's annual business plan. Actual pre-tax income in excess of the annual business plan increases Lubin Delano's bonus by 20% of its retainer for each full five percentage point increment of increased pre-tax income for the year. The term of Lubin Delano's engagement is coterminous with the employment of Michael A. Lubin by the Company. Effective with Mr. Lubin's resignation on July 31, 1997 the Lubin Delano Agreement was terminated, and pursuant to the Lubin Agreement, a one-time lump sum payment of $368,149 was made to Lubin Delano. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS: STOCKHOLDERS The following summary of certain Federal income tax consequences of the Restructuring to the Stockholders and the Company, insofar as it makes statements of law, reflects the opinion of Fried, Frank, Harris, Shriver & Jacobson. This summary is based on the Federal income tax law now in effect, which is subject to change, possibly retroactively. This summary does not discuss all aspects of Federal income taxation which may be important to particular Stockholders in light of their individual investment circumstances or to Stockholders subject to special tax rules (e.g., financial institutions, broker-dealers, insurance companies, tax-exempt organizations and foreign taxpayers). In addition, this summary does not address state, local or foreign tax consequences. This summary assumes that Stockholders hold their Old Common Stock, as "capital assets" (generally, property held for investment) under the Tax Code. No rulings have been or will be requested from the Internal Revenue Service with respect to any of the matters discussed herein. Stockholders are urged to consult their tax advisors regarding the specific Federal, state, local and foreign income and other tax consequences of the Restructuring. FEDERAL INCOME TAX CONSEQUENCES TO STOCKHOLDERS General. In general, the receipt of New Common Stock and Warrants by Stockholders pursuant to the Restructuring will not be a taxable event, except that Stockholders will recognize gain or loss to the extent of any cash received in lieu of a fractional share or fractional warrant. Stockholders will generally be required to allocate the tax basis in their Old Common Stock (reduced by any basis apportionable to any fractional share or fractional warrant settled in cash as described above) between the New Common Stock and the Warrants on the basis of their respective fair market values on the date of distribution. The holding period of the New Common Stock and the Warrants will include the holding period of the Old Common Stock. Disposition. Upon a sale, exchange, or other disposition of the New Common Stock or Warrants, a Stockholder will recognize a capital gain or loss in an amount equal to the difference between the amount realized and the Stockholder's adjusted tax basis in such stock or Warrants. Such gain or loss will be long-term (and, in the case of individual Stockholders, subject to tax at a lower rate) if the stock or Warrants have been held for more than one year. Exercise or Lapse of Warrants. Upon the exercise of a Warrant, a Stockholder will not recognize gain or loss and will have a tax basis in the Warrant Shares received equal to the tax basis in such holder's Warrant plus the exercise price thereof. The holding period for the Warrant Shares received pursuant to the exercise of the Warrant will begin on the day following the date of exercise and will not include the period that the holder held such Warrant. In the event that a Warrant lapses unexercised, a Stockholder will recognize a capital loss in an amount equal to the tax basis in the Warrant. Adjustment to Exercise Price. If at any time the Company makes a distribution of property to shareholders that would be taxable to such shareholders as a dividend for Federal income tax purposes and, in accordance with the antidilution provisions of the Warrants, the Exercise Price is decreased, the amount of such decrease may be deemed to be the payment of a taxable dividend to holders of the Warrants. For example, a decrease in the Exercise Price in the event of distributions of cash or indebtedness of the Company will generally result in deemed dividend treatment to holders, but generally a decrease in the event of stock dividends or the distribution of rights to subscribe for shares of New Common Stock will not. FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY Cancellation of Indebtedness Income. The Company will realize cancellation of indebtedness ("COI") income, for Federal income tax purposes, in an amount equal to the excess, if any, of the adjusted issue price of the Senior Notes (including any accrued but unpaid interest) over the fair market value of the New Common Stock received by Noteholders pursuant to the Restructuring. The Company has approximately $55 million of operating losses and net operating loss carryovers ("NOLs") which are available to offset any COI income that may be recognized. If (i) COI income is realized in a case under the Bankruptcy Code (i.e., pursuant to the Prepackaged Restructuring), or (ii) if the Company is insolvent on the Exchange Restructuring Date, to the extent of the insolvency, under section 108 of the Tax Code such COI income would not be included in the Company's gross income. In such event, the Company would be required, however, to reduce certain of its tax attributes, such as its NOLs, certain tax credits, and the basis of its assets, by the amount of the COI income that is not recognized. Limitation on Net Operating Loss Carryovers. As a result of the receipt by Noteholders of New Common Stock in exchange for the Senior Notes pursuant to the Restructuring, the Company will undergo an "ownership change" (generally, a 50% change in ownership) for purposes of Section 382 of the Tax Code and, accordingly, the Company will be limited in its ability to use its NOLs and certain tax credit carryforwards (the "Section 382 Limitation") to offset future taxable income. The Section 382 Limitation will generally be determined by multiplying the value of the Company's equity before the ownership change by the long-term tax-exempt rate (currently 5.02%). This is likely to limit significantly the Company's use of its NOLs in any one year (including for this purpose any deductions attributable to any "recognized built-in-loss" within the meaning of Section 382(h) of the Code, which could include deductions for depreciation and amortization of the Company's assets, which existed at the time of the Restructuring). If an ownership change occurs in a case under the Bankruptcy Code, the value of a corporation's equity for purposes of determining the Section 382 Limitation would be adjusted to reflect any increase in such value arising from the cancellation of debt as a result of the ownership change. Because the Company anticipates that the value of its equity would be increased as a result of the cancellation of the Senior Notes, the Company's ability to use its NOLs would be significantly greater under the Prepackaged Restructuring than under the Exchange Restructuring. INFORMATION REGARDING NOMINEES If the Exchange Restructuring is consummated and the Restructuring Proposal with respect to the Election of the New Board is approved and implemented, the existing members of the Board will resign, effective as of the Exchange Restructuring Date and [ ] new Board members will be elected at the Annual Meeting, subject to the occurrence of the Exchange Restructuring Date. Each of the existing members of the Board have delivered to the Company a resignation letter resigning from the Board effective as of the Exchange Restructuring Date. In accordance with the Company's Certificate of Incorporation, by resolution of the Board, the number of directors has been fixed at [ ] effective as of the Exchange Restructuring Date. As provided for in the Letter Agreement, the new Board will consist of: (i) Mr. Jerald Politzer, as the Chairman of the Board, (ii) [_____] members nominated by Magten, subject to consultation with the Company and with other Noteholders who may come forward prior to the commencement of the Solicitation, and (iii) one member designated by the current Board. As described above, as contemplated by the Letter Agreement, it is expected that Magten will provide the Company with its Board nominees prior to the commencement of the Solicitation. In addition, the current Board has designated Marvin Schiller to be the current Board's nominee to the new Board. If any nominee should be unavailable for election at the Stockholders' Meeting, the proxies will be voted for the election of such other person as may be recommended by the Board. The names, principal occupations and other information concerning nominees proposed for election to the Board are presented below. Proxies will be voted for all such nominees, unless marked to the contrary. The Company believes that each nominee will serve as a director, but should any such nominee be unable to serve as a director or withdraw from nomination, proxies will be voted for the election of such substitute nominee as the Board may propose. Jerald S. Politzer, age 52, joined the Company as a director on March 24, 1997 and Chief Executive Officer commencing April 1, 1997. From July 1989 to November 1996 he had been Executive Vice President of Melville Corporation, a diversified retailer. Mr. Politzer is a director of Norton McNaughton, Inc., a manufacturer of women's apparel. Marvin Schiller, age 64, was Managing Director of A.T. Kearney, Inc., a management consulting firm, from May 1983 until his retirement as of January 1995. Dr. Schiller is a director of LePercq-Istel Fund, Inc., a mutual fund; Strategic Agricultural Management Corp., a software developer and marketer; and Tutor Time Learning Systems Inc., a childcare and educational company. Dr. Schiller has served as a director of the Company since May 1983. Information regarding the remaining Board nominees will be provided once Magten has advised the Company of its Board nominees. POST RESTRUCTURING STOCK OPTION GRANTS Exchange Restructuring In the event that each of the Restructuring Proposals is approved by the Stockholders, the Minimum Tender Condition is satisfied and the Exchange Restructuring is consummated, all options to purchase shares of Old Common Stock outstanding granted under the Old Plans and held by directors, officers, and employees of the Company (the "Old Options") will not be terminated but will continue to remain outstanding, subject to adjustment (the "Adjustment") as provided for in each of the Old Plans. Such Adjustment is intended to reflect the effect of the Reverse Split on the Old Options. As of April 9, 1998, there were outstanding Old Options which, in the aggregate, related to 1,823,443 shares of Old Common Stock (or 12% of the issued and outstanding shares of Old Common Stock as of such date). Pursuant to the Exchange Restructuring, after giving effect to the Adjustment, all of the outstanding Old Options, in the aggregate, will relate to 182,344 shares of New Common Stock (or approximately 1% of the issued and outstanding shares of New Common Stock as of the Exchange Restructuring Date, exclusive of the Warrant Shares). In connection with the Adjustment, the exercise price applicable to the Old Options will be appropriately adjusted. In addition, under the Stock Award and Incentive Plan, directors, officers and employees of the Company will become eligible to receive additional options to purchase shares of New Common Stock as determined by the new Board after the Restructuring Date, subject to the approval by the stockholders of the Company. See "DISCUSSION OF THE PROPOSALS--Stock Award And Incentive Plan." Prepackaged Restructuring In the event that each of the Restructuring Proposals is not approved by the Stockholders or the Minimum Tender Condition is not satisfied or waived, but the Company receives sufficient acceptances of the Prepackaged Plan to obtain confirmation thereof by the Bankruptcy Court and the Company files the Prepackaged Plan with the Bankruptcy Court, pursuant to the Prepackaged Plan all Old Options held by directors, officers and employees of the Company to purchase shares of Old Common Stock outstanding as of the commencement of the Chapter 11 case granted under the Old Plans will be terminated and of no further force or effect as of the consummation of the Prepackaged Plan. In addition, each of the Old Plans shall be terminated and of no further force or effect as of the consummation of the Prepackaged Plan. The Stock Award and Incentive Plan will remain in effect after the consummation of the Prepackaged Plan; provided, that, if the Stock Award and Incentive Plan has not been approved by the Stockholders prior to the commencement of the Chapter 11 Case, any awards granted thereunder shall be subject to the subsequent approval of the stockholders of the Company. It is the Company's intention that certain directors, officers and employees of the Company will be granted new options to purchase shares of New Common Stock under the Stock Award and Incentive Plan. The persons to receive such grants, the number of shares of New Common Stock subject to such grants, and such other terms and conditions applicable to such grants, shall be determined by the Board of Reorganized Salant in its sole discretion, except for automatic stock option grant to certain non-employee directors of the Company. PAYMENTS TO MANAGEMENT In accordance with the terms and conditions of the Letter Agreement, no payments will be made to the members of management under existing severance, employment and/or change-in-control agreements or any other arrangements solely by reason of the consummation of the Restructuring. ADVISORS AND REPRESENTATIVES Pursuant to an agreement effective as of December 18, 1997, between E&Y and the Company (the "E&Y Agreement"), the Company has engaged E&Y to act as its financial advisor in connection with the Restructuring. Pursuant to the E&Y Agreement, the Company has agreed to pay E&Y a monthly advisory fee in the amount of $125,000, consisting of two components: (i) $95,000 per month, and (ii) $90,000 at the end of every three month period (representing $30,000 per month for the prior three months). The Company has also agreed to pay E&Y its reasonable out-of-pocket costs. To date, the Company has paid approximately $600,000 to E&Y in respect of its services under the E&Y Agreement. The E&Y Agreement may be terminated by either party at any time. Pursuant to the E&Y Agreement, E&Y performed certain valuation services in connection with the Restructuring at the request of the Company. In connection with those services, E&Y has been paid $100,000 by the Company. Since E&Y's retention by the Company, Michael Gries has served as the individual at E&Y principally involved in this matter. On April 1, 1998, Mr. Gries withdrew as a partner at E&Y and is currently a member of the financial advisory firm of Conway, Delgenio, Gries & Co., LLC ("CDG"). Since that time, Mr. Gries has continued to advise the Company and is being compensated for such services pursuant to an agreement between E&Y and CDG. In connection with the rendering the E&Y Fairness Opinion, the Company separately engaged E&Y pursuant to a letter agreement, dated March 25, 1998 (the "E&Y Opinion Agreement"). Pursuant to the E&Y Opinion Agreement, the Company agreed to pay E&Y: (i) a fee of $75,000 payable in cash upon execution of the E&Y Opinion Agreement; and (ii) $75,000 payable in cash on the date that E&Y informs the Company that they were prepared to deliver the E&Y Fairness Opinion. The Company also agreed to reimburse E&Y for its reasonable out-of-pocket expenses. Payment of such fees and expenses are in no way contingent or dependent upon the results of E&Y analyses or any conclusions it may reach or the consummation of the Restructuring. Additionally, the Company agreed to indemnify E&Y and certain related persons for certain liabilities related to or arising out of its engagement, including liabilities under Federal securities laws. To date, the Company has paid $150,000 to E&Y in respect of its services pursuant to the E&Y Opinion Agreement. Pursuant to a fee agreement (the "H & G Agreement") effective as of January 6, 1998, between the Company and Hebb & Gitlin, a Professional Corporation ("H & G"), the Company agreed to retain H & G as special legal counsel to Magten in connection with the Restructuring. Pursuant to the H & G Agreement, the Company agreed to pay H & G's fees (based on certain hourly rates) and disbursements incurred in rendering services in connection with the Restructuring. Pursuant to the H & G Agreement, the Company also paid H & G a $100,000 fee reserve. For services rendered through March 31, 1998, the Company has paid $37,013.66 to H & G in respect of its services under the H & G Agreement. Pursuant to a fee agreement (the "Allen Agreement") effective as of January 1, 1998, between the Company, Allen and Company Incorporated ("Allen & Co."), Magten and H & G, Allen & Co. was retained as financial advisor to H & G in connection with the Restructuring until consummation of the Restructuring unless otherwise earlier terminated by any party. Pursuant to the Allen Agreement, the Company agreed to pay Allen & Co. financial advisory fees of $100,000 per month until the Allen Agreement is terminated. Pursuant to the Allen Agreement, the Company also paid Allen & Co. a $100,000 retainer fee, and has agreed to pay its reasonable out-of-pocket costs. To date, the Company has paid $[_____] to Allen & Co. in respect of its services under the Allen Agreement. Under the Allen Agreement, the Company agreed to indemnify Allen & Co. and its affiliates from and against all claims, liabilities, losses, damages, and expenses relating to its services to H & G as set forth in the Allen Agreement, except, among other things, for any claims, liabilities, losses, damages or expenses that result from Allen & Co.'s willful misconduct or gross negligence or lack of good faith. If the Company proceeds with the Prepackaged Restructuring, the Company intends to assume the H&G Agreement and the Allen Agreement pursuant to the Prepackaged Plan. [ ] has been appointed as Information Agent in connection with the Exchange Offer and as Voting Agent for the solicitation of acceptances of the Prepackaged Plan. Any questions regarding how to tender in the Exchange Offer or how to vote on the Prepackaged Plan and any requests for additional copies of this Proxy Statement/Prospectus, Letters of Transmittal, Proxies, Ballots or Master Ballots should be directed to the Information Agent at its address and telephone number set forth on the back cover of this Proxy Statement/Prospectus. See "ADVISORS AND REPRESENTATIVES." [ ] has been appointed as Depositary with respect to the Old Common Stock for the Restructuring and as Voting Agent for the tabulation of Proxies with respect to the Stockholders' Meeting and Ballots and Master Ballots from the Stockholders with respect to the Prepackaged Plan and as Warrant Agent with respect to Warrants. Questions and requests for assistance may be directed to the Depositary at one of its addresses and telephone numbers set forth on the back cover of this Proxy Statement/Prospectus. ESTIMATED FEES AND EXPENSES The Company estimates that fees and expenses incurred in connection with the Restructuring will be approximately $[ ], including financial advisory fees, commitment fees, legal fees, printing fees, accounting fees, Depositary fees, Information Agent fees, out-of-pocket expenses, retention payments and other fees and expenses. The Company will also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of this Proxy Statement Prospectus, and related documents to the beneficial owners of the Senior Notes and Old Common Stock and in handling or forwarding tenders of their customers. Below is a breakdown of the estimated fees and expenses related to the Restructuring (in thousands): Bank Fees and Expenses.................................... Financial Advisory Services............................... Legal Services............................................ Accounting Services....................................... Other Fees and Expenses................................... Total.................................................. ========= As of ____ __, 1998, approximately $[ ] million of such fees and expenses had been accrued by the Company. The Company intends to pay the fees and expenses with cash from operations, cash on hand and additional borrowings as necessary. LEGAL MATTERS Certain legal matters in connection with the New Common Stock (including the Warrant Shares) and the Warrants offered hereby will be passed upon by Fried, Frank, Harris, Shriver & Jacobson, special counsel to the Company. EXPERTS The Company's consolidated financial statements as of January 3, 1998 and December 28, 1996 and for the years ended January 3, 1998, December 28, 1996 and December 30, 1995 and the related financial statement schedule included in this Proxy Statement/Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and incorporated by reference in the Registration Statement, and have been so included herein in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING Any proposal of a stockholder to be presented at the Stockholders' Meeting must be received by the Secretary of the Company at its principal offices, prior to 5:00 p.m., New York City time, on ________, 1998, in order to be considered for inclusion in the Company's proxy materials. Any such proposal must be in writing and signed by the stockholder. OTHER MATTERS The Board does not know of any other matters which may properly be presented for consideration at the Stockholders' Meeting. If any business not described herein should come before the Stockholders' Meeting, the persons named in the enclosed Proxy will vote on those matters in accordance with their best judgment. GLOSSARY OF CERTAIN DEFINED TERMS As used in this Proxy Statement/Prospectus, the following are the meanings for the terms set forth below: "Administrative Expense"......means (a) any cost or expense of of administration of the Chapter 11 Case (including, without limitation, professional fees and expenses) allowed under Section 503(b) of the Bankruptcy Code and (b) any fees or charges assessed against the Company's estate under title 28, United States Code, Section 1930. "Affiliate"...................means "affiliate" as defined in Section 101 of the Bankruptcy Code. "Allowed".....................means with respect to Claims and Interests, (a) any Claim against, or Interest in, the Company, proof of which is timely filed or by order of the Bankruptcy Court is not or will not be required to be filed, (b) any Claim or Interest that has been or is hereafter listed in the Schedules as liquidated in amount and not disputed or contingent or (c) any Claim allowed pursuant to the Prepackaged Plan and, in each such case in (a) and (b) above, as to which either (i) no objection to the allowance thereof has been interposed within the applicable period of time fixed by the Prepackaged Plan, the Bankruptcy Code, the Bankruptcy Rules or the Bankruptcy Court or (ii) such an objection is so interposed and the Claim or Interest shall have been allowed by a Final Order (but only to the extent so allowed). "Apollo"......................means Apollo Apparel Partners, L.P., a Delaware limited partnership, in its capacity as the beneficial owner of 5,924,352 shares of the Old Common Stock. "Apollo Shares"...............means the shares of Old Common Stock beneficially held by Apollo. "Awards Committee"............means the committee of the Board of the Company from and after the Restructuring Date which will grant Awards (as defined in the Stock Award and Incentive Plan) pursuant to the Stock Award and Incentive Plan. "Ballots".....................means the forms to be distributed to vote on the Prepackaged Plan, included herewith. "Bankruptcy Code".............means title 11 of the United States Code, as amended from time to time. "Bankruptcy Court"............means the United States Bankruptcy Court for the Southern District of New York, or any other court having jurisdiction over the Chapter 11 Case. "Bankruptcy Rules"............means the Federal Rules of Bankruptcy Procedure, as amended, promulgated under Section 2075 of title 28 of the United States Code and the Local Rules of the Bankruptcy Court, as applicable from time to time during the Chapter 11 Case. "Board".......................means the Board of Directors of the Company or Reorganized Salant as applicable. "By-Laws".....................means the By-Laws, as amended, of the Company. "Canceled Security"...........means a security, note or other instrument evidencing a Claim or Interest outstanding immediately prior to the Effective Date, which security, note or other instrument represents a Claim or Interest that is Impaired under the Prepackaged Plan. "Cash"........................means currency, a certified check, a cashier's check or a wire transfer of good funds from any source, or a check drawn on a domestic bank from the Company, Reorganized Salant or other Entity making any distribution under the Prepackaged Plan. "Cause of Action".............means any and all actions, causes of action, suits, accounts, controversies, agreements, promises, rights to legal remedies, rights to equitable remedies, rights to payment, and claims, whether known or unknown, reduced to judgment, not reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, secured, unsecured and whether asserted or assertable directly or derivatively, in law, equity or otherwise. "Certificate of Incorporation"................means the Amended and Restated Certificate of Incorporation of the Company in effect on the date hereof. "Chapter 11 Case".............means the case under Chapter 11 of the Bankruptcy Code concerning the Company to be commenced on the Filing Date. "Charter Amendment"...........means the proposed Certificate of Amendment to the Certificate of Incorporation. "CIT".........................means The CIT Group/Commercial Services, Inc., a New York corporation, the lender under the Credit Agreement. "CIT Claim"...................means any and all Claims in respect of all or any portion of the aggregate outstanding and unpaid amount of principal and interest due and owing under, and subject to the terms and provisions of, the Credit Agreement and all other Financing Agreements (as defined in the Credit Agreement), including, without limitation, any and all interest, costs, attorney's fees and other expenses owed by the Company or for which the Company may be liable in connection therewith. "CIT Commitment Letter".......means that certain commitment letter, dated dated June 1, 1998, between the Company and CIT, pursuant to which CIT agreed to enter into a new working capital facility with the Company on the Restructuring Date, and filed as Exhibit 10.54 to the Company's Registration Statement of which this Proxy Statement/Prospectus is a part. "Claim".......................means any right to (a) payment from the Company, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured or (b) an equitable remedy for breach of performance if such breach gives rise to a right to payment from the Company, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured. "Class".......................means a class of Claims or Interests designated pursuant to the Prepackaged Plan. "Commission"..................means the Securities and Exchange Commission. "Company".....................means, unless the context otherwise requires, Salant Corporation, a Delaware corporation, and its wholly owned subsidiaries. "Confirmation Date"...........means the date on which the Confirmation Order shall be entered on the docket maintained by the Clerk of the Bankruptcy Court with respect to the Chapter 11 Case. "Confirmation Hearing"........means the hearing before the Bankruptcy Court regarding the confirmation of the Prepackaged Plan pursuant to Section 1129 of the Bankruptcy Code. "Confirmation Order"..........means the order of the Bankruptcy Court confirming the Prepackaged Plan. "Credit Agreement"............means the Revolving Credit, Factoring and Security Agreement, dated as of September 20, 1993, as amended, modified or supplemented from time to time, between the Company and CIT. "Creditors' Committee"........Any official committee of unsecured creditors appointed in the Chapter 11 Case pursuant to Section 1102(a) of the Bankruptcy Code, as the same may be constituted from time to time. "Deloitte & Touche"...........means Deloitte & Touche LLP, independent auditors to the Company. "Depositary"..................means __________, the entity which will act as agent for the tendering Noteholders for the purposes of receiving New Common Stock from the Company and transmitting such New Common Stock to tendering Noteholders. "Disputed"....................means with respect to Claims, any Claim that is not Allowed. "Distribution Record Date"....means the date or dates fixed by the Bankruptcy Court for determining the Noteholders and Stockholders, respectively, who are entitled to receive distributions under the Prepackaged Plan, or if the Bankruptcy Court does not fix such date or dates, the Plan Record Date. "Effective Date"..............means the date which is 11 days after the Confirmation Date, or, if such date is not a Business Day, the next succeeding Business Day, or such earlier date after the Confirmation Date as agreed to in writing between the Company and Magten so long as no stay of the Confirmation Order is in effect on such date; provided, however, that if, on or prior to such date, all conditions to the Effective Date set forth in Article Thirteen of the Prepackaged Plan have not been satisfied, or waived, then the Effective Date shall be the first Business Day following the day on which all such conditions to the Effective Date have been satisfied or waived. "Election of the New Board"...means the election of new directors to the Board as of the Restructuring Date. "Entity"......................means any individual, corporation, limited or general partnership, limited liability company, joint venture, association, joint stock company, estate, entity, trust, trustee, United States trustee, unincorporated organization, government, governmental unit (as defined in the Bankruptcy Code), agency or political subdivision thereof. "Exchange Act"................means the Securities Exchange Act of 1934, as amended. "Exchange Offer" means the Company's offer to exchange shares of New Common Stock for the Senior Notes pursuant to the terms of the Exchange Restructuring. "Exchange Restructuring"......means the proposed out-of-court financial restructuring of the Company in connection with the Exchange Offer. "Exchange Restructuring Date" means the date of consummation of the Exchange Restructuring. "Exchange Restructuring Prospectus"...................means the Exchange Offer Prospectus and Disclosure Statement to be delivered to the Noteholders in connection with the Exchange Offer and the Prepackaged Plan. "Exercise Price"..............means $6.2648 per share, subject to adjustment. "Existing Equity-Based Plans" means all of the Company's existing equity or equity-based plans. "Expiration Date".............means, with respect to the Exchange Offer and the solicitation of acceptances of the Prepackaged Plan, 5:00 p.m., New York City time, on ______ __, 1998, unless the Company, in its sole discretion, extends the Exchange Offer or solicitation period, in which case the term "Expiration Date" for the Exchange Offer or solicitation period shall mean the last time and date to which the Exchange Offer or solicitation period is extended. "E&Y".........................means Ernst & Young LLP, financial advisor to the Company in connection with the Restructuring. "Filing Date".................means the date on which the Company files its files its voluntary petition for relief commencing a Chapter 11 case to effectuate the Restructuring and files the Prepackaged Plan with the Bankruptcy Court. "Final Decree"................means a final decree closing the Chapter 11 Case as described in Bankruptcy Rule 3022. "Final Order".................means an order, ruling or judgment that: (i) is in full force and effect; (ii) is not stayed; and (iii) is no longer subject to review, reversal, modification or amendment, by appeal or writ of certiorari. "Fiscal 1997".................means the fiscal year of the Company for accounting purposes which ended on January 3, 1998. "GAAP"........................means generally accepted accounting principles. "General Unsecured Claim".....means any Claim against the Company (other than the CIT Claim, a Miscellaneous Secured Claim, a Senior Note Claim, a Priority Claim, a Priority Tax Claim, or an Administrative Expense). "Holder"......................means any Entity that holds a Claim or Interest. Where the identity of the Holder of a Claim or Interest is set forth on a register or other record maintained by or at the direction of the Company, the Holder of such Claim or Interest shall be deemed to be the Holder as identified on such register or record unless the Company is otherwise notified in a writing authorized by such Holder. "Impaired"....................means any Class of Claims or Interests that is impaired within the meaning of Section 1124 of the Bankruptcy Code. "Indenture"...................means the Indenture, dated September 20, 1993, as amended, between the Company and Bankers Trust Company, as Trustee, pursuant to which the Senior Notes were issued. "Instrument"..................means any share of stock security, promissory note or other "Instrument" within the meaning of that term, as defined in Section 9-105(1)(i) of the UCC. "Interests"...................means the equity interests in the Company, including, but not limited to, shares of common stock and shares of preferred stock of the Company and any rights, options, warrants, calls, subscriptions or other similar rights or agreements, commitments or outstanding securities obligating the Company to issue, transfer or sell any shares of capital stock of the Company. "Issuance"....................means the issuance of (i) the shares of New Common Stock to the Noteholders in Exchange for the Senior Notes and to Stockholders in exchange for their Old Common Stock; (ii) the Warrants; and (iii) the shares of New Common Stock to holders of Warrants upon exercise of their Warrants, pursuant to the Exchange Restructuring. "Letter Agreement"............means that certain letter agreement, dated March 2, 1998, among Magten, Apollo and the Company, as amended from time to time, regarding the basic terms and conditions of the Restructuring, and filed as Exhibit 10.42 to the Company's Registration Statement. "Letter Agreement Amendments".means collectively those certain letter agreements, June 1, 1998 and July 8, 1998, among Magten, Apollo and the Company, amending certain provisions of the Letter Agreement, and filed as Exhibits 10.55 and 10.56, respectively, to the Company's Registration Statement. "Letter of Transmittal".......means the letter of transmittal mailed to the Stockholders with the Proxy Statement/Prospectus or to the Noteholders with the Exchange Restructuring Prospectus, as applicable. "Magten"......................means Magten Asset Management Corp., a New York corporation, in its capacity as the beneficial owner, or the investment manager on behalf of the beneficial owners, of approximately $74 million in aggregate principal face amount of the Senior Notes. "Magten Notes"................means the Senior Notes beneficially held by Magten. "Market Rate".................means the rate of interest per annum (rounded upward, if necessary, to the nearest whole 1/100 of 1%) equal to the yield equivalent (as determined by the Secretary of the Treasury) of the average accepted auction price for the last auction of one-year United States Treasury bills settled at least fifteen days prior to the Effective Date. "Master Ballots"..............means ballots to be voted on behalf of beneficial owners of Old Common Stock with respect to the Prepackaged Plan by such beneficial owners' broker or other record holder of such shares. "Minimum Tender Condition"....means the condition to the Exchange Offer requiring 100% of the aggregate principal amount of the Senior Notes to be validly tendered and not withdrawn prior to the Expiration Date. "Miscellaneous Secured Claim"........................means any Claim, other than the CIT Claim, a Senior Note Claim, or an Administrative Expense, that is a secured claim within the meaning of, and to the extent provided in, Section 506 of the Bankruptcy Code. "NASD"........................means the National Association of Securities Dealers, Inc. "New Common Stock"............means the new shares of common stock of the Company, par value $1.00 per share, to be issued by the Company in accordance with and pursuant to the Restructuring. "New CIT Credit Agreement"....means the agreement in respect of a new working capital facility to be entered into by the Company and CIT on the Restructuring Date, on the terms and conditions set forth in the CIT Commitment Letter, and which will replace the Company's current working capital facility under the Credit Agreement. "New Credit Agreement"........means the agreement in respect of a new working capital facility to be entered into by the Company and either CIT or another working capital lender on the Restructuring Date, and which will replace the Company's current working capital facility under the Credit Agreement. "Noteholders".................means the holders of the Senior Notes. "NYSE"........................means the New York Stock Exchange, Inc. "Old Common Stock"............means the issued and outstanding common stock, par value $1.00 per share, of the Company authorized prior to the Restructuring. "Old Common Stock Interest"...means any Interest evidenced by Old Common Stock. "Old Plans"...................means the Company's 1987 Stock Plan, 1988 Stock Plan, 1993 Stock Plan and 1996 Stock Plan. "Other Interest"..............means any Interest other than an Old Common Stock Interest. "Plan Proposal"...............means the proposal to approve the adoption of the Stock Award and Incentive Plan. "Plan Record Date"............means ___________, 1998. "Prepackaged Plan"............means the prepackaged plan of reorganization of the Company under Chapter 11 of the Bankruptcy Code contemplated by the Prepackaged Restructuring, a copy of which is attached hereto as Annex II. "Prepackaged Restructuring"...means the proposed financial restructuring of the Company pursuant to the Prepackaged Plan. "Priority Claim"..............means any Claim, other than a Priority Tax Claim or an Administrative Expense, which is entitled to priority of payment under Section 507(a) of the Bankruptcy Code. "Priority Tax Claim"..........means any Claim which is entitled to priority of payment under Section 507(a)(8) of the Bankruptcy Code. "Proposals"...................means collectively, connection with the Exchange Restructuring, the (A) proposal to ratify Deloitte & Touche as independent auditors, (B) the Plan Proposal, and (C) the Restructuring Proposals. "Proxy".......................means, in connection with the Exchange Restructuring, the proxy card mailed to Stockholders together with the Proxy Statement/Prospectus which also serves as a Letter of Transmittal for the Stockholder. "Proxy Statement/Prospectus" means the Proxy Statement/Prospectus and Disclosure Statement of the Company to be delivered to Stockholders in connection with the Stockholders' Meeting and the solicitation of acceptances of the Prepackaged Plan. "Record Date".................means _____ __, 1998. "Registration Rights Agreement"....................means a registration rights agreement to be entered into on the Restructuring Date by and among Reorganized Salant and certain holders of the New Common Stock as of the Restructuring Date and included as Exhibit 10.51 to the Company's Registration Statement. "Registration Statement"......means the Registration Statement on Form S-4, as amended, that the Company filed with the Commission under the Securities Act, with respect to the securities offered hereby. "Related Documents"...........means the Prepackaged Plan, this Proxy Statement/Prospectus and all documents necessary to consummate the transactions contemplated by the Prepackaged Plan. "Reorganized Salant"..........means Salant Corporation, from and after consummation of the Prepackaged Restructuring. "Reorganized Salant By-Laws"..means the by-laws of Reorganized Salant, as amended and restated pursuant to the Prepackaged Plan, to be filed with the Bankruptcy Court at least 10 days prior to the Confirmation Date. "Reorganized Salant Certificate of Incorporation"................means the certificate of incorporation of Reorganized Salant, as amended and restated pursuant to the Prepackaged Plan, in substantially the form annexed to the Prepackaged Plan as Exhibit F, to be filed with the Bankruptcy Court at least 10 days prior to the Confirmation Date. "Restructuring"...............means the financial restructuring of the Company pursuant to either the Exchange Restructuring or the Prepackaged Restructuring, as the case may be. "Restructuring Date"..........means the date of consummation of the Restructuring, by means of the Prepackaged Plan or the Exchange Offer. "Restructuring Proposals".....means, in connection with the Exchange Restructuring, the proposals of the Board that are described herein (A) to approve the Charter Amendment, (B) to approve the Issuance, and (C) to elect new directors pursuant to the Election of the New Board. "Reverse Split"...............means, with respect to the Exchange Restructuring, the ten-to-one reverse stock split of the Company's common stock to be effected pursuant to the Charter Amendment. "Rights Plan".................means the shareholder rights plan between the Company and Chase Manhattan Bank, N.A., as rights agent dated December 8, 1987, as amended. "Salant"......................means Salant Corporation, a Delaware corporation. "Schedules"...................means the schedules of assets and liabilities to be filed by the Company with the Bankruptcy Court in accordance with Section 521(1) of the Bankruptcy Code, and any supplements and amendments thereto. "Securities Act"..............means the Securities Act of 1933, as amended. "Senior Notes"................means the 10-1/2% Senior Secured Notes due December 31, 1998 of Salant that were issued pursuant to the Indenture. "Senior Note Claims"..........means any and all Claims in respect of all or any portion of the aggregate outstanding and unpaid amount of principal and interest due and owing under, and subject to the terms and provisions of, the Senior Notes, and any other indebtedness of the Company due and owing under the Indenture or the Senior Notes (including, without limitation, any and all interest, costs, attorneys' fees and other expenses owed by the Company or for which the Company may be liable in connection therewith). "Series A Preferred Stock"....means the 50,000 shares of preferred stock designated as "Series A Junior Participating Preferred Stock" authorized pursuant to a resolution adopted by the Board on December 8, 1987, in connection with the Rights Plan. "Solicitation"................means the solicitation of Stockholders' acceptances of the Restructuring Proposals and the Prepackaged Plan as contemplated under the Proxy Statement/Prospectus, or the solicitation of tenders in the Exchange Offer and acceptances of the Prepackaged Plan as contemplated under the Exchange Restructuring Prospectus. "Stock Award and Incentive Plan"...............means the Company's proposed 1998 Stock Award and Incentive Plan, and included as Exhibit 10.50 to the Company's Registration Statement. "Stockholders"................means the holders of Old Common Stock. "Stockholders' Meeting".......means the Annual Meeting of Stockholders of the Company to be held on _____ __, 1998 at __:__ _.m., New York City time, at Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York 10004. "Tax Code"....................means the Internal Revenue Code of 1986, as amended. "Thirteenth Amendment"........means the Thirteenth Amendment and Forbearance Agreement, dated as of June 1, 1998, by and between the Company and CIT. "Three-Year Business Plan"....means the Company's Three-Year Operating Plan for 1998-2000. "Trustee".....................means Bankers Trust Company, as trustee under the Indenture, or its duly appointed successor, if any. "Twelfth Amendment"...........means the Twelfth Amendment and Forbearance Agreement, dated as of March 2, 1998, by and between the Company and CIT, and included as Exhibit 10.43 to the Company's Registration Statement. "UCC".........................means the Uniform Commercial Code, from time to time in effect in the State of New York. "Unimpaired"..................means any Class of Claims or Interests that is not Impaired. "Warrants"....................means warrants exercisable for shares of New Common Stock and issued in connection with the Restructuring and in accordance with the Warrant Agreement. "Warrant Agreement"...........means the Warrant Agreement pursuant to which the Warrants will be issued and included as Exhibit 10.52 to the Company's Registration Statement. "Warrant Shares"..............means shares of New Common Stock issued to holders of Warrants upon exercise of their Warrants. FINANCIAL INFORMATION INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Salant Corporation: We have audited the accompanying consolidated balance sheets of Salant Corporation and subsidiaries as of January 3, 1998 and December 28, 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended January 3, 1998, December 28, 1996 and December 30, 1995. Our audits also included the financial statement schedule listed in the index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Salant Corporation and subsidiaries as of January 3, 1998 and December 28, 1996, the results of their operations and their cash flows for the years ended January 3, 1998, December 28, 1996 and December 30, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, as of January 3, 1998, the Company had a working capital deficiency of approximately $37 million, resulting from the classification of the Company's $104.9 million of 10 1/2 % Senior Secured Notes, due December 31, 1998, as a current liability. This matter raises substantial doubt about the Company's ability to continue as a going concern. See Note 1 to the consolidated financial statements for a discussion of the Company's agreement with the largest holders of its Senior Secured Notes and its 39.6% shareholder, whereby such holders of the Senior Secured Notes will convert their Senior Secured Notes to common equity, subject to, among other things, the remaining noteholders agreeing to convert their holdings to common equity and the approval by the holders of a majority of common equity. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Deloitte & Touche LLP March 6, 1998 (April 8, 1998, as to Notes 1 and 9) New York, New York SALANT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended ---------- Jan. 3, 1998 Dec. 28, 1996 Dec. 30, 1995 ------------ ------------- ------------- Net sales $ 396,832 $ 417,711 $ 485,825 Cost of goods sold 312,358 322,798 385,196 --------- --------- --------- Gross profit 84,474 94,913 100,629 Selling, general and administrative expenses (80,593) (83,148) (82,578) Royalty income 5,596 6,154 6,606 Goodwill amortization (1,881) (2,227) (2,430) Other income, net 575 2,642 244 Division restructuring costs (Note 3) (2,066) (11,730) (3,550) --------- --------- --------- Income from continuing operations before interest, income taxes and extraordinary gain 6,105 6,604 18,921 Interest expense, net (Notes 9 and 10) 16,660 15,459 18,965 --------- --------- --------- Income/(loss) from continuing operations before income taxes and extraordinary gain (10,555) (8,855) (44) Income taxes (Note 12) 167 103 318 --------- --------- --------- Income/(loss) from continuing operations before extraordinary gain (10,722) (8,958) (362) Discontinued operations (Note 17): Loss from operations (8,136) (365) (136) Estimated loss on disposal (1,330) -- -- Extraordinary gain (Note 4) 2,100 -- 1,000 --------- --------- Net income/(loss) $ (18,088) $ (9,323) $ 502 ========= ========= ========= Basic earnings/(loss) per share: Earnings/(loss) per share from continuing operations before extraordinary gain $ (0.71) $ (0.60) $ (0.02) Loss per share from discontinued operations (0.62) (0.02) (0.01) Extraordinary gain 0.14 -- 0.06 --------- --------- Basic earnings/(loss) per share $ (1.19) $ (0.62) $ 0.03 ========= ========= ========= Weighted average common stock outstanding 15,139 15,078 15,008 ========= ========= ========= SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SALANT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Jan. 3, 1998 Dec. 28, 1996 ------------ ------------- ASSETS Current assets: Cash and cash equivalents $ 2,215 $ 1,498 Accounts receivable - net of allowance for doubtful accounts of $2,094 in 1997 and $2,806 in 1996 (Notes 9 and 10) 45,828 40,133 Inventories (Notes 5 and 9) 96,638 98,497 Prepaid expenses and other current assets 4,218 3,869 Net assets of discontinued operations (Note 17) -- 6,989 --------- --------- Total current assets 148,899 150,986 Property, plant and equipment, net (Notes 6 and 9) 26,439 25,173 Other assets (Notes 7, 10 and 12) 58,039 59,092 --------- --------- $ 233,377 $ 235,251 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Loans payable (Note 9) $ 33,800 $ 7,677 Accounts payable 27,746 27,562 Reserve for business restructuring (Note 3) 2,764 2,969 Accrued salaries, wages and other liabilities (Note 8) 16,503 17,986 Current portion of long term debt (Note 10) 104,879 3,372 --------- --------- Total current liabilities 185,692 59,566 Long term debt (Note 10) -- 106,231 Deferred liabilities (Note 15) 5,382 8,863 Commitments and contingencies (Notes 9, 10, 13, 14 and 16) Shareholders' equity (Note 14): Preferred stock, par value $2 per share: Authorized 5,000 shares; none issued -- -- Common stock, par value $1 per share: Authorized 30,000 shares; 15,405 15,328 issued and issuable - 15,405 shares in 1997; issued and issuable - 15,328 shares in 1996 Additional paid-in capital 107,249 107,130 Deficit (75,235) (57,147) Excess of additional pension liability over unrecognized prior service cost adjustment (Note 13) (3,508) (3,182) Accumulated foreign currency translation adjustment 6 76 Less - treasury stock, at cost - 234 shares (1,614) (1,614) --------- --------- Total shareholders' equity 42,303 60,591 --------- --------- $ 233,377 $ 235,251 ========= ========= SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SALANT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (AMOUNTS IN THOUSANDS)
Excess of Additional Pension Liability Over Cumulative Treasury Stock Common Stock Unrecognized Foreign ============== Total ================ Add'l Prior Currency Number Share- Number Paid-In Service Translation of holders' of Shares Amount Capital Deficit Cost Adjustment Shares Amount Equity --------- ------ ------- ------- ------------ ----------- ------ ------ -------- Balance at December 31, 1994 15,242 15,242 $107,017 $(48,326) $(773) $120 234 $(1,614) $71,666 Stock options exercised 33 33 54 87 Net income 502 502 Excess of additional pension liability over unrecognized prior service cost adjustment (1,412) (1,412) Foreign currency translation adjustments 10 10 ------ ------ -------- -------- ----- ---- --- ------- ------- Balance at December 30, 1995 15,275 15,275 107,071 (47,824) (2,185) 130 234 (1,614) 70,853 Stock options exercised 53 53 59 112 Net loss (9,323) (9,323) Excess of additional pension liability over unrecognized prior service cost adjustment (997) (997) Foreign currency translation adjustments (54) (54) ------ ------ -------- -------- ----- ---- --- ------- ------- Balance at December 28, 1996 15,328 15,328 107,130 (57,147) (3,182) 76 234 (1,614) 60,591 Stock options exercised 77 77 119 196 Net loss (18,088) (18,088) Excess of additional pension liability over unrecognized prior service cost adjustment (326) (326) Foreign currency translation adjustments (70) (70) ------ ------ -------- -------- ----- ---- --- ------- ------- Balance at January 3, 1998 15,405 $15,405 $107,249 $(75,235) $(3,508) $ 6 234 $(1,614) $42,303 ====== ====== ======== ======== ===== ==== === ======= ======= SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SALANT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
Year Ended ---------- Jan. 3, 1998 Dec. 28, 1996 Dec. 30, 1995 ------------ ------------- ------------- Cash Flows from Operating Activities - ------------------------------------ Income/(loss) from continuing operations $(10,722) $ (8,958) $ (362) Adjustments to reconcile income from continuing operations to net cash (used in)/provided by operating activities: Depreciation 6,402 5,975 5,528 Amortization of intangibles 2,512 2,228 2,430 Write-down of fixed assets 1,274 263 1,850 Write-down of other assets -- 6,264 -- Loss on sale of fixed assets -- 17 132 Changes in operating assets and liabilities: Accounts receivable (5,695) (5,256) 1,364 Inventories 1,859 16,868 6,747 Prepaid expenses and other current assets 539 1,038 257 Other assets (242) (760) 916 Accounts payable 184 2,529 (2,653) Accrued salaries, wages and other liabilities (3,463) (2,403) (66) Reserve for business restructuring (205) 1,400 1,569 Deferred liabilities (2,203) (2,148) (598) -------- -------- -------- Net cash (used in)/provided by continuing operating activities (9,760) 17,057 17,114 Cash used in discontinued operations (2,217) (469) (1,138) -------- -------- -------- Net cash (used in)/provided by operations (11,977) 16,588 15,976 -------- -------- -------- Cash Flows from Investing Activities Capital expenditures, net of disposals (7,061) (7,103) (4,286) Store fixture expenditures (3,122) (3,855) (2,988) Acquisition -- (694) -- Proceeds from sale of assets -- 1,854 122 -------- -------- -------- Net cash used in investing activities (10,183) (9,798) (7,152) -------- -------- -------- Cash Flows from Financing Activities Net short-term borrowings/(repayments) 26,123 (6,745) (9,484) Retirement of long-term debt (3,372) -- -- Exercise of stock options 196 112 87 Other, net (70) (54) 10 -------- -------- -------- Net cash provided by/(used in) financing activities 22,877 (6,687) (9,387) -------- -------- -------- Net increase/(decrease) in cash and cash equivalents 717 103 (563) Cash and cash equivalents - beginning of year 1,498 1,395 1,958 -------- -------- -------- Cash and cash equivalents - end of year $ 2,215 $ 1,498 $ 1,395 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 16,479 $ 16,307 $ 20,280 ======== ======== ======== Income taxes $ 201 $ 189 $ 331 ======== ======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SALANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA) NOTE 1. FINANCIAL RESTRUCTURING The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. At January 3, 1998, the 10 1/2% Senior Secured Notes due December 31, 1998 (the "Senior Secured Notes") in the amount of $104,879 have been classified as a current liability and the Company's current liabilities exceeded its current assets by $36,793. This factor may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. On March 3, 1998, the Company announced that it had reached an agreement in principle (the "Restructuring Agreement") with its major note and equity holders to convert its existing indebtedness under the Senior Secured Notes into common equity (the "Debt Restructuring"), as further described in Note 10. This agreement is subject to the approval of the remaining noteholders and stockholders. However, there can be no assurance that such transaction will be consummated. If the Company is not able to consummate this transaction, it will be unable to continue its normal operations without pursuing alternative financing or restructuring strategies. In contemplation of the Debt Restructuring, the Company elected not to pay the interest payment of approximately $5,500 that was due and payable under the Senior Secured Notes on March 2, 1998, subject to a 30 day grace period. Because the Company elected not to pay the interest due on the Senior Secured Notes by the expiration of the applicable grace period, an event of default has occurred with respect to the Senior Secured Notes entitling the holders to accelerate the maturity thereof. On April 8, 1998, the Trustee under the indenture governing the Senior Secured Notes (the "Indenture") issued a Notice of Default stating that as a result of the Company's failure to make the interest payment due on the Senior Secured Notes, an event of default under the Indenture had occurred on April 1, 1998. If holders of at least 25% in aggregate principal face amount of the Senior Secured Notes accelerate all outstanding indebtedness under the Senior Secured Notes pursuant to the terms of the Indenture, such an acceleration of the outstanding indebtedness under the Senior Secured Notes, or the failure of the Debt Restructuring to be consummated for any other reason, could result in the Company becoming subject to a proceeding under the Federal bankruptcy laws. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Consolidation - --------------------------------------- The Consolidated Financial Statements include the accounts of Salant Corporation ("Salant") and subsidiaries. (As used herein, the "Company" includes Salant and its subsidiaries but excludes Salant's Made in the Shade and Vera Scarf divisions.) In June 1997, the Company discontinued the operations of the Made in the Shade division, which produced and marketed women's junior sportswear. In February 1995, Salant discontinued its Vera Scarf division. As further described in Note 17, the Consolidated Financial Statements and the Notes thereto reflect the Made in the Shade and Vera Scarf divisions as discontinued operations. Significant intercompany balances and transactions are eliminated in consolidation. 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 preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities (such as accounts receivable, inventories, restructuring reserves and valuation allowances for income taxes), disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On June 27, 1990 (the "Filing Date"), Salant and one of its subsidiaries, Denton Mills, Inc. ("Denton Mills"), filed separate voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). On July 30, 1993, the Bankruptcy Court issued an order confirming the Third Amended Joint Plan of Reorganization of Salant and Denton Mills, Inc. (the "Reorganization Plan"). The Reorganization Plan was consummated on September 20, 1993 (the "Consummation Date"), as further described in Note 18. Fiscal Year - ----------- The Company's fiscal year ends on the Saturday closest to December 31. The 1997 fiscal year was comprised of 53 weeks. The 1995 and 1996 fiscal years were each comprised of 52 weeks. Reclassifications - ----------------- Certain reclassifications were made to the 1995 and 1996 Consolidated Financial Statements to conform with the 1997 presentation. Cash and Cash Equivalents - ------------------------- The Company treats cash on hand, deposits in banks and certificates of deposit with original maturities of less than 3 months as cash and cash equivalents for the purposes of the statements of cash flows. Accounts Receivable - ------------------- The Company is a party to an agreement with a factor, as further described in Note 9, whereby it sells, without recourse, certain eligible accounts receivable. The credit risk for such accounts is thereby transferred to the factor. The amounts due from the factor have been offset against advances from the factor in the accompanying balance sheets in accordance with the Company's factoring agreement. The amounts which have been offset were $12,827 at January 3, 1998 and $16,355 at December 28, 1996. Inventories - ----------- Inventories are stated at the lower of cost (principally determined on a first-in, first-out basis for apparel operations and the retail inventory method on a first-in, first-out basis for outlet store operations) or market. Property, Plant and Equipment - ----------------------------- Property, plant and equipment are stated at cost and are depreciated or amortized over their estimated useful lives, or for leasehold improvements, the lease term, if shorter. Depreciation and amortization are computed principally by the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes. The annual depreciation rates used are as follows: Buildings and improvements 2.5% - 10.0% Machinery, equipment and autos 6.7% - 33.3% Furniture and fixtures 10.0% - 50.0% Leasehold improvements Over the life of the asset or the term of the lease, whichever is shorter Other Assets - ------------ Intangible assets are being amortized on a straight-line basis over their respective useful lives, ranging from 25 to 40 years. Costs in excess of fair value of net assets acquired, which relate to the acquisition of the net assets of Manhattan Industries, Inc. ("Manhattan") are assessed for recoverability on a periodic basis. In evaluating the value and future benefits of these intangible assets, their carrying value would be reduced by the excess, if any, of the intangibles over management's best estimate of undiscounted future operating income of the acquired businesses before amortization of the related intangible assets over the remaining amortization period. Income Taxes - ------------ Deferred income taxes are provided to reflect the tax effect of temporary differences between financial statement income and taxable income in accordance with the provisions of Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes". Fair Value of Financial Instruments - ----------------------------------- For financial instruments, including cash and cash equivalents, accounts receivable and payable, and accruals, the carrying amounts approximated fair value because of their short maturity. Long-term debt, which was issued at a market rate of interest, traded on a national exchange at approximately 80% and 93% of principal amount, at January 3, 1998 and December 28, 1996, respectively. In addition, deferred liabilities have carrying amounts approximating fair value, except for deferred pension obligations which are not practicable to estimate due to various actuarial assumptions used in their determination. Earnings/(Loss) Per Share - ------------------------- The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", for the period ended January 3, 1998, which establishes standards for computing and presenting earnings per share ("EPS") and simplifies the standards for computing EPS currently found in Accounting Principles Board ("APB") Opinion No. 15 ("Earnings Per Share"). Common stock equivalents under APB No. 15 are no longer included in the calculation of primary, or basic, EPS. Under SFAS No. 128, contingently issuable shares (shares issuable for little or no cash consideration) are still included in the calculation of basic EPS. Earnings/(loss) per share is based on the weighted average number of common shares (including, as of January 3, 1998 and December 28, 1996, 205,854 and 324,810 shares, respectively, issuable in connection with the 1990 Chapter 11 Case) and common stock equivalents outstanding, if applicable. Loss per share for 1997 and 1996 did not include common stock equivalents, inasmuch as their effect would have been anti-dilutive. In 1997, 1996 and 1995, earnings per share did not include 1,343,393, 837,240 and 969,073 stock options, respectively, which would not have had a dilutive effect. Foreign Currency - ---------------- The Company entered into forward foreign exchange contracts, relating to 80% of its projected 1998 Mexican peso needs, to fix its cost of acquiring pesos and diminish the risk of currency fluctuations. Gains and losses on foreign currency contracts are included in income and offset the gains and losses on the underlying transactions. On January 3, 1998, the outstanding foreign currency contracts had a cost of approximately $8,900 and a year end market value of approximately $10,000. Revenue Recognition - ------------------- Sales are recognized at the time the merchandise is shipped. Retail outlet store revenues are recognized at the time of sale. The Company receives royalty income as the licensor under certain licensing agreements. Such royalty income is recognized as earned. New Accounting Standards - ------------------------ The Company is required to adopt SFAS No. 130, "Reporting Comprehensive Income", during the year ending January 2, 1999. SFAS 130 establishes standards for reporting comprehensive income and its components in a full set of general-purpose financial statements. This Statement requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement, and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Adoption of this statement will require the Company to report changes in the excess of additional pension liability over unrecognized prior service cost and foreign currency translation adjustment accounts, currently shown in the stockholder's equity section of the balance sheet, as an increase or decrease to reported net income in arriving at comprehensive income. The Company is required to adopt SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" during the year ending January 2, 1999. The Statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement supersedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise", but retains the requirement to report information about major customers. It amends FASB Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries", to remove the special disclosure requirements for previously unconsolidated subsidiaries. The Company is currently considering what effect adoption of this statement will have on the Company. The Company is required to adopt SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", for the period ended January 2, 1999. This statement revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer as useful. The statement is effective for fiscal year ending January 2, 1999. Restatement of disclosures for earlier periods provided for comparative purposes is required. The Company has not yet determined the impact the adoption of this statement will have on the Company's financial statements. NOTE 3. RESTRUCTURING COSTS At January 3, 1998, $2,764 remained in the business restructuring reserve, primarily related to guaranteed minimum royalty payments for discontinued Grant product lines and severance benefits for the closure of all retail outlet stores other than Perry Ellis outlet stores. In 1997, the Company recorded a provision for restructuring of $2,066, consisting of (i) $3,530 related to the decision in the fourth quarter to close all retail outlet stores other than Perry Ellis outlet stores consisting primarily of asset write-offs, future payment related to non-cancelable operating leases and severance benefits, offset by a $1,464 reversal of previously recorded restructuring reserves. In 1997, the Company incurred approximately $2,148 in operating losses related to the closed retail stores. In the fourth quarter of 1997, the Company reversed a previously recorded restructuring provision by $300, primarily related to the reversal of excess 1996 restructuring employee severance costs in connection with the closing of a manufacturing and distribution facility in Thomson, Georgia. In the second quarter of 1997, the Company reversed a previously recorded restructuring provision by $410, primarily related to the reversal of excess 1996 restructuring noncancelable lease costs in connection with the closure of the Americus, Georgia manufacturing facility. In the first quarter of 1997, the Company reversed a previously recorded restructuring provision by $754, primarily related to the reversal of excess 1996 restructuring costs in connection with the write-down of other assets relating to the JJ. Farmer division. In 1996, the Company recorded a provision for restructuring of $11,730, 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 Grant dress shirt and accessories product lines, and the accrual of a portion of the future minimum royalties under the Grant 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. The initiatives outlined in the restructuring charge in 1996 affected the employment of approximately 206 union and 20 non-union employees at the Americus, Georgia plant and 217 union and 91 non-union employees employed by the Thomas division. In the fourth quarter of 1995, the Company recorded a $3,550 restructuring provision, which included (i) $2,400 related to fixed asset write-downs at locations to be closed and (ii) $1,150 related to inventory markdowns for discontinued product lines. The following table represents a summary of business restructuring activities for the fiscal year 1995 through 1997:
SEVERANCE FIXED LEASES AND OTHER OTHER MARKDOWNS BENEFITS ASSETS CONTRACTS ASSETS COSTS TOTALS --------- --------- --------- --------- --------- --------- --------- 1995 ACTIVITY Provision 1,150 -- 1,850 180 -- 370 3,550 Activity (131) -- (1,850) -- -- -- (1,981) --------- --------- --------- --------- --------- --------- --------- Balance at 12/30/95 1,019 -- -- 180 -- 370 1,569 --------- --------- --------- --------- --------- --------- --------- 1996 ACTIVITY Provisions -- 3,452 89 2,858 5,141 190 11,730 Activity (1,019) (2,174) (52) (2,027) (5,141) -- (10,413) Reclassification -- -- -- -- -- 83 83 --------- --------- --------- --------- --------- --------- --------- Balance at 12/28/96 -- 1,278 37 1,011 -- 643 2,969 --------- --------- --------- --------- --------- --------- --------- 1997 ACTIVITY Provision -- 344 1,256 1,859 -- 71 3,530 --------- --------- --------- --------- --------- --------- --------- Activity -- (1,011) (1,293) (223) -- (484) (3,011) Reclassification -- -- -- -- (740) -- 740 --------- --------- --------- --------- --------- --------- --------- Reversal -- (308) -- (385) (740) (31) (1,464) Balance at 1/3/98 -- 303 -- 2,262 -- 199 2,764 ========= ========= ========= ========= ========= ========= =========
NOTE 4. EXTRAORDINARY GAINS In 1997, the Company recorded an extraordinary gain of $2,100, including $1,500 in the fourth quarter. In the fourth quarter of 1995, the Company recorded an extraordinary gain of $1,000. These gains related to the reversal of excess liabilities previously provided for the anticipated settlement of claims arising from the chapter 11 proceeding. During the year ended January 1, 1994, the Company recorded a $24.7 million extraordinary gain related to the extinguishment of liabilities in connection with its Chapter 11 reorganization. Subsequent to that date, the Company reversed liabilities existing at the date of the reorganization as follows: 1995 - $1.0 million 1996 - $2.1 million These liabilities related to unresolved litigation claims. As of the date of each reversal, a specific claim was settled for an amount less than the original liability. The elimination of, the excess liability was recognized as an extraordinary item consistent with the original extraordinary gain accounting treatment. NOTE 5. INVENTORIES JAN. 3, 1998 DEC. 28, 1996 ------------ ------------- Finished goods $52,010 $57,826 Work-in-process 21,405 14,801 Raw materials and supplies 23,223 25,870 ------- ------- $96,638 $98,497 ======= ======= Finished goods inventory includes in transit merchandise of $4,428 and $5,400 at January 3, 1998 and December 28, 1996, respectively. NOTE 6. PROPERTY, PLANT AND EQUIPMENT JAN. 3, 1998 DEC. 28, 1996 ------------ ------------- Land and buildings $16,574 $14,975 Machinery, equipment, furniture and fixtures 32,197 30,551 Leasehold improvements 7,505 6,852 Property held under capital leases 583 117 ------- ------- 56,859 52,495 Less accumulated depreciation and amortization 30,420 27,322 ------- ------- $26,439 $25,173 ======= ======= NOTE 7. OTHER ASSETS JAN. 3, 1998 DEC. 28, 1996 ------------ ------------- Excess of cost over net assets acquired, net of accumulated amortization of $13,240 in 1997 and $11,805 in 1996 $39,042 $40,477 Trademarks and license agreements, net of accumulated amortization of $4,064 in 1997 and $3,619 in 1996 13,498 13,943 Other 5,499 4,672 ------- ------- $58,039 $59,092 ======= ======= In June 1996, the company wrote-off other assets of $4,325 which consisted of $4,075 for the unamortized portion of the excess of cost over net assets acquired related to the JJ. Farmer division and $250 related to the license agreements for the Gant product lines. In November 1996, the Company sold its leasehold interest in a closed facility in Glen Rock, New Jersey, resulting in a gain of $2,712, which is included in other income. NOTE 8. ACCRUED SALARIES, WAGES AND OTHER LIABILITIES JAN. 3, 1998 DEC. 28, 1996 ------------ ------------- Accrued salaries and wages $ 4,002 $ 1,765 Accrued pension and retirement benefits 2,757 4,080 Accrued royalties 482 1,959 Accrued interest 3,897 3,716 Other accrued liabilities 5,365 6,466 ------- ------- $16,503 $17,986 ======= ======= NOTE 9. FINANCING AND FACTORING AGREEMENTS The Company is a party to a Revolving Credit, Factoring and Security Agreement, dated September 20, 1993, as amended (the "Credit Agreement"), with The CIT Group/Commercial Services, Inc. ("CIT") which provides the Company with seasonal working capital financing, consisting of direct borrowings and letters of credit, of up to $120,000 (the "Maximum Credit"), subject to an asset based borrowing formula. As collateral for borrowings under the Credit Agreement, the Company has granted to CIT a security interest in substantially all of the assets of the Company. On March 2, 1998, in connection with the Debt Restructuring (as defined in Note 10), the Company and CIT executed the Twelfth Amendment and Forbearance Agreement (the "Amendment") to the Credit Agreement. The Amendment (i) provides a waiver, as of January 3, 1998, to the Company for not meeting the financial covenants for stockholders equity and maximum loss, as set forth in the Credit Agreement, (ii) provides for CIT to forbear from exercising any of its rights and remedies arising from the Company's decision not to pay interest on the Senior Secured Notes, payable on March 2, 1998, as further discussed in Note 10, (iii) provides that, subject to the terms and conditions of the Credit Agreement, as modified by the Amendment, CIT will continue making loans, advances and other financial accommodations to the Company, (iv) increases the borrowings allowed against eligible inventory to 60%, (v) provides the Company with a discretionary $3,000 seasonal overadvance, (vi) reduces the Maximum Credit from $135,000 to $120,000 and (vii) modifies the financial covenants the Company is required to maintain. Under the Amendment, to the extent that the Company fails to maintain certain levels of borrowing availability under its asset-based borrowing formula, the Company is required to maintain a certain minimum interest coverage ratio and is subject to a covenant limiting the maximum loss the Company may incur over any twelve consecutive calendar months. In consideration for CIT's agreement to enter into the Forbearance Agreement, pursuant thereto, the Company agreed to pay CIT a forbearance and waiver fee in the amount of $150,000, which will be expensed as incurred. In addition, in consideration of a New Credit Agreement proposed by CIT, the Company agreed to pay CIT a non-refundable and fully earned fee of $1,050,000, payable in three equal installments of $350,000 each on April 1, May 1 and June 1, 1998. This fee is non-refundable in whole or in part, provided, however, that notwithstanding the foregoing, (a) if the Company does execute a New Credit Agreement with CIT, such fee will be applied to satisfy any and all closing fees and facility fees under such New Credit Agreement, or (b) if CIT does not extend a New Credit Agreement to the Company because CIT's Executive Credit Committee fails to give credit approval for such facility, then $600,000 of such fee shall be refunded to the Company. In the event that CIT becomes the lender under the New Credit Agreement or under a debtor-in-possession working capital facility, if the Prepackaged Restructuring is pursued, no other closing fee or facility fee shall be due and payable in connection with any such replacement credit facility provided by CIT. The $1,050,000 fee paid by the Company to CIT was agreed to by the Company and will be offset against Stockholders' equity, as a direct cost of the Debt Restructuring. On January 3, 1998, direct borrowings and letters of credit outstanding under the Credit Agreement were $33,800 and $23,239, respectively, and the Company had unused availability of $17,486. On December 28, 1996, direct borrowings and letters of credit outstanding under the Credit Agreement were $7,677 and $33,640, and the Company had unused availability of $23,561. The weighted average interest rate on borrowings under the Credit Agreement for the years ended January 3, 1998 and December 28, 1996 was 9.3% and 9.4%, respectively. In addition to the financial covenants discussed above, the Credit Agreement contains a number of other 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. NOTE 10. LONG-TERM DEBT On September 20, 1993, Salant issued $111,851 principal amount of Senior Secured Notes. The Senior Secured Notes may be redeemed at any time prior to maturity, in whole or in part, at the option of the Company, at a premium to the principal amount thereof plus accrued interest. The Senior Secured Notes are secured by a first lien (subordinated to the lien securing borrowings under the Credit Agreement to the extent of $15,000) on certain accounts receivable, certain intangible assets, the capital stock of Salant's subsidiaries and certain real property of the Company, and by a second lien on substantially all of the other assets of the Company. Under the Restructuring Agreement, as discussed in Note 1, the Company will convert the entire $104,879 outstanding aggregate principal amount of, and all accrued and unpaid interest on, its Senior Secured Notes into the Company's common stock. The Restructuring Agreement was entered into by the Company and Magten Asset Management Corp. ("Magten"), the beneficial owner of, or the investment manager on behalf of the beneficial owners of, approximately 67% of the aggregate principal amount of the Senior Secured Notes. Apollo Apparel Partners, L.P. ("Apollo"), the beneficial owner of approximately 39.6% of the Company's issued and outstanding common stock, is also a party to the Restructuring Agreement and has agreed to vote all of its shares of common stock in favor of the Debt Restructuring. The Restructuring Agreement provides, among other things, that (i) the entire principal amount of the Senior Secured Notes, plus all accrued and unpaid interest thereon, will be converted into 92.5% of the Company's common stock, and (ii) the Company's existing stockholders will retain 7.5% of the Company's common stock and will receive seven-year warrants to purchase up to 10% of the Company's common stock on a fully diluted basis. Stockholder and noteholder approval will be required in order to consummate the Debt Restructuring. The Restructuring Agreement also provides for a reverse stock split, which will require the approval of the Company's stockholders. Because of the treatment of accrued interest on the Senior Secured Notes under the proposed restructuring agreement, the Company did not pay the $5,500 of interest on the Senior Secured Notes that became payable on March 2, 1998, subject to a 30 day grace period. Consummation of the Debt Restructuring is subject to the satisfaction of a number of conditions precedent, including stockholder and noteholder approval and the negotiation and execution of definitive documentation. However, there can be no assurances that the Debt Restructuring will be consummated. Implementation of the Debt Restructuring will result in the elimination of $11,000 of annual interest expense to the Company. The proposed transactions under the Restructuring Agreement will be accounted for as a troubled debt restructuring as the Noteholders will be granting a concession to the Company to exchange debt for equity. The Company will be exchanging equity to settle fully the long term debt and accrued interest thereon which will be recorded by the Company at the date of the exchange. The Indenture contains various restrictions pertaining to the incurrence of indebtedness, the purchase of capital stock and the payment of dividends. Under the most restrictive of these provisions, the Company currently may not purchase or redeem any shares of its capital stock, or declare or pay cash dividends. In contemplation of the Debt Restructuring, the Company elected not to pay the interest payment of approximately $5,500 that was due and payable under the Senior Secured Notes on March 2, 1998, subject to a 30 day grace period. Because the Company did not pay the interest due on the Senior Secured Notes by the expiration of the applicable grace period, an event of default occurred with respect to the Senior Secured Notes, entitling the holders to accelerate the maturity thereof. In accordance with the terms of the Restructuring Agreement, Magten has provided a written direction to the trustee to forbear during the term of the Restructuring Agreement from taking any action under the Indenture in connection with the failure by the Company to make the interest payment on the Senior Secured Notes that was due and payable on March 2, 1998. However, there is no assurance that the holders of 25% or more of the principal amount of the Senior Secured Notes will not decide to accelerate the outstanding indebtedness under the Senior Secured Notes prior to consummation of the Debt Restructuring. In addition, the Company's working capital lender, CIT, agreed to forbear until July 1, 1998, subject to certain conditions, from exercising any of its rights or remedies under the Credit Agreement, arising by virtue of the Company's failure to pay such interest on the Senior Secured Notes. Failure to consummate the Debt Restructuring could result in the acceleration of all of the indebtedness under the Senior Secured Notes and/or the Credit Agreement. On October 28, 1996, the Company completed the sale of a leasehold interest in a facility located in Glen Rock, New Jersey. The cash proceeds, net of certain expenses, of such sale were $3,372. Such amount was included in current liabilities at December 28, 1996. Pursuant to the Indenture, on December 30, 1996, the Company repurchased Senior Secured Notes in a principal amount equal to the net cash proceeds at 100% of the principal amount thereof. NOTE 11. SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS 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. As an adjunct to its apparel manufacturing operations, the Company operates 17 factory outlet stores in various parts of the United States. Foreign operations, other than sourcing, are not significant. The Company's products have been classified in the following industry segments: (i) men's apparel, (ii) children's sleepwear and underwear and (iii) retail factory outlet store operations. Information concerning the Company's business segments in 1997, 1996 and 1995 is as follows: 1997 1996 1995 ---- ---- ---- NET SALES Men's $ 325,845 $ 344,763 $ 416,659 Children's 49,165 45,754 39,936 Retail Outlet Stores 21,822 27,194 29,230 --------- --------- --------- Total net sales $ 396,832 $ 417,711 $ 485,825 ========= ========= ========= OPERATING INCOME Men's $ 19,483 $ 6,197 $ 19,596 Children's (278) 5,401 5,177 Retail Outlet Stores (8,381) (4,195) (2,674) --------- --------- --------- 10,824 7,403 22,099 Corporate expenses (9,269) (5,790) (8,801) Licensing division income 4,550 4,991 5,623 Interest expense, net (16,660) (15,459) (18,965) --------- --------- --------- Income/(loss) from continuing operations before income taxes and extraordinary gain $ (10,555) $ (8,855) $ (44) ========= ========= ========= IDENTIFIABLE ASSETS Men's $ 150,177 $ 137,968 $ 170,203 Children's 22,284 20,709 16,349 Retail Outlet Stores 3,694 10,176 11,991 Corporate 57,222 66,398 55,427 --------- --------- --------- Total identifiable assets $ 233,377 $ 235,251 $ 253,970 ========= ========= ========= CAPITAL EXPENDITURES Men's $ 2,972 $ 4,046 $ 1,389 Children's 1,959 546 492 Retail Outlet Stores 252 439 584 Corporate 1,878 2,072 1,821 --------- --------- --------- Total capital expenditures $ 7,061 $ 7,103 $ 4,286 ========= ========= ========= DEPRECIATION AND AMORTIZATION Men's $ 4,640 $ 3,669 $ 2,961 Children's 455 399 345 Retail Outlet Stores 321 478 459 Corporate 3,498 3,657 4,193 --------- --------- --------- Total depreciation and amortization $ 8,914 $ 8,203 $ 7,958 ========= ========= ========= In 1997, approximately 17% of the Company's net sales were made to Sears, approximately 11% of the Company's net sales were made to Federated Department Stores, Inc. ("Federated") and approximately 10% of the Company's net sales were made to TJX Corporation ("TJX"). In 1996, approximately 13% of the Company's net sales were made to Sears. In 1996 and 1995, net sales to Federated represented approximately 11% and 12% of the Company's net sales, respectively. In 1995, approximately 11% of the Company's net sales were made to TJX. In 1995, approximately 13% of the Children's Group's net sales were made to Dayton Hudson Corporation. No other customer accounted for more than 10% of the net sales of the Company or any of its business segments during 1997, 1996 or 1995. NOTE 12. INCOME TAXES The provision for income taxes consists of the following: JAN. 3, 1998 DEC. 28, 1996 DEC. 30, 1995 ------------ ------------- ------------- Current: Federal $ (34) $ (106) $ 100 State -- -- -- Foreign 201 209 218 ------------ ------------ ------------ $ 167 $ 103 $ 318 ============ ============ ============ The components of income (loss) from continuing operations before income taxes and extraordinary gain are as follows (in thousands): 1997 1996 1995 ------------ ------------- ------------- Domestic Operations $ (12,638) $ (10,761) $ (2,098) Foreign Operation 2,083 1,906 2,054 ------------- ------------- ------------- Total $ (10,555) $ (8,855) $ (44) ============= ============= ============= 1997 1996 1995 ------------ ------------- ------------- The following is a reconciliation of the tax provision/(benefit) at the statutory Federal income tax rate to the actual income tax provision: Income tax benefit, at 34% $ (3,589) $ (3,135) $ (61) Loss producing no current tax benefit 3,589 3,135 61 Alternative minimum tax 100 Tax refunds from prior years (34) (106) Foreign taxes 201 209 218 ------------ ------------ ------------ Income tax provision $ 167 $ 103 $ 318 ============ ============ ============ The following are the tax effects of significant items comprising the Company's net deferred tax asset: JAN. 3, 1998 DEC. 28, 1996 ------------ ------------- Deferred tax liabilities: Differences between book and tax basis of property $ (3,575) $ (3,659) ------------ ------------ Deferred tax assets: Reserves not currently deductible 12,700 13,983 Operating loss carryforwards 51,844 45,041 Tax credit carryforwards 2,958 2,958 Expenses capitalized into inventory 4,925 4,657 ------------ ------------ 72,427 66,639 ------------ ------------ Net deferred asset 68,852 62,980 Valuation allowance (68,852) (62,980) ------------ ------------ Net deferred tax asset $ -- $ -- ============ ============ At January 3, 1998, the Company had net operating loss carryforwards ("NOLs") for income tax purposes of approximately $133,000, expiring from 1999 to the year 2012, which can be used to offset future taxable income. Approximately $51,000 of these NOLs arose from the acquisition of Manhattan in April 1988, and will offset goodwill when utilized. The implementation of the Reorganization Plan and transactions that have occurred within the three-year period preceding the Consummation Date have caused an "ownership change" for federal income tax purposes as of the Consummation Date. As a result of such ownership change, the use of the NOLs to offset future taxable income is limited by the requirements of section 382 of the Internal Revenue Code of 1986, as amended ("Section 382"). The $133,000 of NOLs reflected above is the maximum the Company may use to offset future taxable income. Of the $133,000 of NOLs, $102,000 is subject to annual usage limitations under Section 382 of approximately $7,200. In addition, at January 3, 1998, the Company had available tax credit carryforwards of $2,958 which expire between 1998 and 1999. Of these tax credits, $1,986 will reduce goodwill and the balance will reduce income tax expense when utilized. Utilization of these credits may be limited in the same manner as the NOLs, as described above. Additionally, if the Debt Restructuring, as outlined in the Restructuring Agreement, is consummated, a second ownership change under Section 382 will occur. As a result, the utilization of the NOLs and tax credit carryforwards would likely be subject to additional limitations, which could significantly reduce their use. NOTE 13. EMPLOYEE BENEFIT PLANS Pension and Retirement Plans - ---------------------------- The Company has several defined benefit plans for virtually all full-time salaried employees and certain nonunion hourly employees. The Company's funding policy for its plans is to fund the minimum annual contribution required by applicable regulations. The Company also has a nonqualified supplemental retirement and death benefit plan covering certain employees. The funding for this plan is based on premium costs of related insurance contracts. Pension expense includes the following components: 1997 1996 1995 ------------ ------------ ------------ Service cost-benefit earned during the period $ 1,050 $ 1,270 $ 1,029 Interest cost on projected benefit obligation 3,272 2,912 2,714 Loss/(return) on assets (4,435) (4,126) (4,697) Net amortization 1,602 1,564 2,286 ------------ ------------ ------------ Net periodic pension cost $ 1,489 $ 1,620 $ 1,332 ============ ============ ============ The reconciliation of the funded status of the plans at January 3, 1998 and December 28, 1996 is as follows: Jan. 3, 1998 Dec. 28, 1996 Accumulated Accumulated Plan Plan Benefits Benefits Exceed Exceed Plan Assets Plan Assets ------------ ------------ Actuarial present value of benefit obligation Vested benefit obligation $ (45,503) $ (41,578) Nonvested benefit obligation (539) (661) ------------ ------------ Accumulated benefit obligation $ (46,042) $ (42,239) ============ ============ Projected benefit obligation $ (49,862) $ (46,811) Plan assets at fair value 42,295 35,980 ------------ ------------ Projected benefit obligation in excess of plan assets (7,567) (10,831) Unrecognized net obligation at date of initial application, amortized over 15 years 552 624 Unrecognized net loss 7,307 7,188 Unrecognized prior service cost (1,111) (1,222) Recognition of minimum liability under SFAS No. 87 (3,633) (3,332) ------------ ------------ Accrued pension cost $ (4,452) $ (7,573) ============ ============ Assumptions used in accounting for defined benefit pension plans are as follows:
1997 1997 1996 1996 1995 1995 ---- ---- ---- ---- ---- ---- Non- Qualified Non- Qualified Non- Qualified Qualified Plans Qualified Plans Qualified Plans Plan Plan Plan Discount rate 7.0% 7.0% 7.25% 7.25% 7.0% 7.0% Rate of increase in compensation levels N/A 5.0% N/A 5.0% N/A 5.0% Expected long-term rate of return on assets 8.0% 8.5% 8.0% 8.5% 8.0% 8.5%
Assets of the Company's qualified plans are invested in directed trusts. Assets in the directed trusts are invested in common and preferred stocks, corporate bonds, money market funds and U.S. government obligations. The nonqualified supplemental plan assets consist of the cash surrender value of certain insurance contracts. The Company also contributes to certain union retirement and insurance funds established to provide retirement benefits and group life, health and accident insurance for eligible employees. The total cost of these contributions was $3,839, $4,095 and $4,263 in 1997, 1996 and 1995, respectively. The actuarial present value of accumulated plan benefits and net assets available for benefits for employees in the union administered plans are not determinable from information available to the Company. Long Term Savings and Investment Plan - ------------------------------------- Salant sponsors the Long Term Savings and Investment Plan, under which eligible salaried employees may contribute up to 15% of their annual compensation, subject to certain limitations, to a money market mutual fund, a fixed income fund and/or three equity mutual funds. Salant contributes a minimum matching amount of 20% of the first 6% of a participant's annual compensation and may contribute an additional discretionary amount in cash or in the Company's common stock. In 1997, 1996 and 1995 Salant's aggregate contributions to the Long Term Savings and Investment Plan amounted to $218, $229 and $239, respectively. NOTE 14. STOCK OPTIONS AND SHAREHOLDER RIGHTS The Company's stock plans provide for grants of stock options or stock awards aggregating 2,400,000 shares of Salant common stock to officers, key employees and, in certain cases, to directors. The Company's stock plans authorized such grants (subject to certain restrictions applicable to certain stock options granted to directors) at such prices and pursuant to such other terms and conditions as the Stock Plan Committee may determine. Options may be nonqualified stock options or incentive stock options and may include stock appreciation rights. Exercise prices of options are equal to 100% of the fair market value of the Company's shares on the date of grant of the options. Options expire no later than ten years from the date of grant and become exercisable in varying amounts over periods ranging from the date of grant to five years from the date of grant. The Restructuring Agreement provides that Salant will reserve 10% of the outstanding common stock, on a fully diluted basis, as of the consummation of the Debt Restructuring, (the "Effective Date"), in order to create new employee stock and stock option plans for the benefit of the members of management and the other employees of Salant. In addition, the Restructuring Agreement provides that, on the Effective Date, a management stock option plan will be authorized pursuant to which options to acquire a certain percentage of such 10% reserve will be granted to (i) the directors of Salant and (ii) those members of management of Salant selected by management and approved by the non-management members of the board of directors of Salant. The Restructuring Agreement also provides that the decision to grant any additional stock options from the balance of the 10% reserve referred to above, and the administration of the stock plans, will be at the discretion of the non-management members of the board of directors of Salant. In addition, the Restructuring Agreement provides that by agreement between Salant and its employees, all existing employee stock options and other equity based plans will be adjusted so that such options and equity based plans will be part of the above-referenced new employee stock and/or stock option plans (i.e., subsumed within the 10%) as agreed upon between Apollo and Salant, subject to consultation with Magten. The following table summarizes stock option transactions during 1995, 1996 and 1997: WEIGHTED AVERAGE EXERCISE SHARES PRICE RANGE PRICE ---------- -------------- ------------- Options outstanding at December 31, 1994 1,157,208 $1.00-15.125 Options granted during 1995 205,300 $3.3125-5.1875 Options exercised during 1995 (33,334) $ 2.625 Options surrendered or canceled during 1995 (65,601) $3.00-12.00 ---------- Options outstanding at December 30, 1995 1,263,573 $ 1.00-15.125 $ 6.50 Options granted during 1996 51,600 $3.32-3.94 $ 3.42 Options exercised during 1996 (53,000) $1.00-2.00 $ 1.94 Options surrendered or canceled during 1996 (228,433) $ 2.75-12.00 $ 6.63 ---------- Options outstanding at December 28, 1996 1,033,740 $ 1.625-15.125 $ 6.56 Options granted during 1997 1,316,900 $ 2.0625-4.125 $ 3.65 Options exercised during 1997 (76,500) $ 1.625-2.625 $ 2.56 Options surrendered or cancelled during 1997 (930,747) $ 2.625-15.125 $ 6.54 ---------- Options outstanding at January 3, 1998 1,343,393 $2.0625-12.875 $ 3.95 ========== Options exercisable at January 3, 1998 191,392 $ 2.41-12.875 $ 6.02 ========== Options exercisable at December 28, 1996 910,028 $ 1.625-15.125 $ 6.88 ========== The following tables summarize information about outstanding stock options as of January 3, 1998 and December 28, 1996:
Options Outstanding Options Exercisable ------------------- ------------------- Weighted Weighted Weighted Number Average Average Number Average Range of Outstanding Remaining Exercise Exercisable Exercise Exercise Price at 1/3/98 Contractual Life Price at 1/3/98 Price ------------- --------- ---------------- ----- --------- ----- $2.0625 -$2.75 305,300 9.55 $2.508 5,300 $2.731 $2.813 - $4.00 492,900 9.13 3.861 40,899 3.588 $4.125 400,000 9.22 4.125 0 0 $4.25 - $8.19 131,567 5.43 6.346 131,567 6.346 $9.82 - $12.875 13,626 2.33 11.393 13,626 11.393 $2.0625 - $12.875 1,343,393 8.82 3.952 191,392 6.016
Weighted Weighted Weighted Number Average Average Number Average Range of Outstanding Remaining Exercise Exercisable Exercise Exercise Price at 12/28/96 Contractual Life Price at 12/28/96 Price ------------- ----------- ---------------- ----- ----------- ----- $1.625 - $2.625 191,500 4.43 2.598 191,500 2.598 $2.75 - $4.94 129,150 8.77 3.923 45,064 4.159 $5.125 - $5.875 279,884 6.96 5.370 243,592 5.397 $6.32 - $8.82 232,113 6.57 7.615 228,779 7.634 $9.82 - $15.125 201,093 1.90 12.484 201,093 12.484 $1.625 - $15.125 1,033,740 5.65 6.564 910,028 6.875
The Company has a shareholder rights plan (the "Rights Plan"), which provides for a dividend distribution of one right for each share of Salant common stock to holders of record of the Company's common stock at the close of business on December 23, 1987. The rights will expire on December 23, 2002. With certain exceptions, the rights will become exercisable only in the event that an acquiring party accumulates 20 percent or more of the Company's voting stock, or if a party announces an offer to acquire 30 percent or more of such voting stock. Each right, when exercisable, will entitle the holder to buy one one-hundredth of a share of a new series of cumulative preferred stock at a price of $30 per right or, upon the occurrence of certain events, to purchase either Salant common stock or shares in an "acquiring entity" at half the market value thereof. The Company will generally be entitled to redeem the rights at three cents per right at any time until the 10th day following the acquisition of a 20 percent position in its voting stock. In July 1993, the Rights Plan was amended to provide that an acquisition or offer by Apollo, or any of its subsidiaries will not cause the rights to become exercisable. The Restructuring Agreement provides that Salant's Rights Plan will be amended to permit the consummation of the Debt Restructuring without causing any of the Rights to become exercisable. In summary, as of January 3, 1998, there were 1,343,392 shares of Common Stock reserved for the exercise of stock options and 567,022 shares of Common Stock reserved for future grants of stock options or awards. All stock options are granted at fair market value of the Common Stock at the grant date. The weighted average fair value of the stock options granted during 1997 and 1996 was $3.65 and $3.42, respectively. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1997: risk-free interest rate of 5.75%; expected dividend yield of 0%; expected life of 4.46 years; and expected volatility of 211%. The outstanding stock options at January 3, 1998 have a weighted average contractual life of 8.82 years. The Company accounts for the stock plans in accordance with Accounting Principles Board Opinion No. 25 ("APB #25"), under which no compensation cost is recognized for stock option awards. Had compensation cost been determined consistent with Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the Company's pro forma net income/(loss) for 1997, 1996 and 1995 would have been $(19,951), $(9,692) and $192, respectively. The Company's pro forma net income/(loss) per share for 1997, 1996 and 1995 would have been $(1.32), $(0.64) and $0.01, respectively. Because the SFAS 123 method of accounting has not been applied to options granted prior to 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. In connection with the Debt Restructuring, the number and exercise price of the Old Options will be adjusted for the proposed reverse stock split. Such adjustments will have no accounting effect. NOTE 15. DEFERRED LIABILITIES JAN. 3, 1998 DEC. 28, 1996 ------------ ------------- Lease obligations $ 196 $ 93 Deferred pension obligations 3,634 4,865 Liability for settlement of chapter 11 claims 1,552 3,905 ------------ ------------ $ 5,382 $ 8,863 ============ ============ NOTE 16. COMMITMENTS AND CONTINGENCIES (a) Lease Commitments ----------------- The Company conducts a portion of its operations in premises occupied under leases expiring at various dates through 2012. Certain of the leases contain renewal options. Rental payments under certain leases may be adjusted for increases in taxes and operating expenses above specified amounts. In addition, certain of the leases for outlet stores contain provisions for additional rent based upon sales. In 1997, 1996 and 1995, rental expense was $7,689, $7,563 and $7,265, respectively. As of January 3, 1998, future minimum rental payments under noncancelable operating leases (exclusive of renewal options, percentage rentals, and adjustments for property taxes and operating expenses) were as follows: FISCAL YEAR ----------- 1998 $ 5,144 1999 4,210 2000 3,759 2001 3,475 2002 2,805 Thereafter 27,967 ------------ Total $ 47,360 ============ (b) Employment Agreements --------------------- The Company has employment agreements with certain executives, which provide for the payment of compensation aggregating approximately $2,500 in 1998, $2,300 in 1999 and $400 in 2000. In addition, such employment agreements provide for incentive compensation based on various performance criteria. NOTE 17. 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 in 1997 was $8,136, which included a charge of $4,459 for the write-off of goodwill. Net sales of the division were $2,822, $20,408 and $15,696 in 1997, 1996 and 1995, respectively. Additionally, in 1997, the Company recorded a charge of $1,330 to accrue for expected operating losses during the phase-out period which ended in March 1998. No income tax benefits have been allocated to the division's 1997, 1996 and 1995 losses. In February 1995, the Company discontinued the operations of the Vera Scarf division, which imported and marketed women's scarves. The loss from operations of the division in 1994 was $9,639, which included a fourth quarter charge of $9,004 for the write-off of goodwill and other intangible assets. Net sales of the division were $1,673 and $5,087 in 1995 and 1994, respectively. Additionally, in 1994 the Company recorded a fourth quarter charge of $1,796 to accrue for expected operating losses during the phase-out period through June 1995. No income tax benefits have been allocated to the division's 1994 loss. Similar to the discontinuance of the Company's Made in the Shade operations, the Vera Scarf operations were phased out through June 1995. In each case, there were no proceeds received by the Company as a result of such discontinuance. Each discontinuance consumed cash as disclosed in the Company's statement of cash flows. In 1997, the net liabilities of discontinued operations have been included in accrued liabilities. In 1996, the net assets of the discontinued operations consist principally of accounts receivable, inventory, goodwill and accounts payable. NOTE 18. CONSUMMATION OF THE PLAN OF REORGANIZATION From the Consummation Date through January 3, 1998, pursuant to the Reorganization Plan, the Company made cash payments of $9,656, issued $111,851 of new 10-1/2% senior secured notes and issued 11.1 million shares of common stock to creditors in settlement of certain claims in the chapter 11 proceedings. Salant anticipates that an additional $1,805 in cash and an additional 206,000 shares of common stock ultimately will have been distributed to creditors upon the final resolution of all remaining claims. Provisions for such distributions had previously been made in the consolidated financial statements. NOTE 19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) FISCAL YEAR ENDED JANUARY 3, 1998
TOTAL 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. ----- -------- -------- -------- -------- Net sales $ 396,832 $ 116,360 $ 110,871 $ 81,391 $ 88,210 Gross profit 84,474 20,886 27,236 16,567 19,785 Net income/(loss) (18,088) (5,646) 5,212 (14,144) (3,510) Basic earnings/(loss) per share(a) $ (1.19) $ (0.37) $ 0.34 $ (0.94) $ (0.23)
FISCAL YEAR ENDED DECEMBER 28, 1996
TOTAL 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. ----- -------- -------- -------- -------- Net sales $ 417,711 $ 115,117 $ 117,159 $ 91,889 $ 93,546 Gross profit 94,913 27,048 29,059 17,164 21,642 Net income/(loss) (9,323) 6,116 6,335 (18,862) (2,912) Basic earnings/(loss) per share(a) $ (0.62) $ 0.40 $ 0.42 $ (1.25) $ (0.19)
Reference is made to Notes 3, 4 and 5 concerning fourth quarter adjustments during the years ended January 3, 1998 and December 28, 1996. (a) Income/(loss) per share of common stock is computed separately for each period. The sum of the amounts of income/(loss) per share reported in each period differs from the total for the year due to the issuance of shares and, when appropriate, the inclusion of common stock equivalents. SALANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended ------------------ ---------------- July 4, June 28, July 4, June 28, 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Net sales $ 74,456 $ 81,391 $ 159,343 $ 169,601 Cost of goods sold 57,948 64,824 125,926 133,246 ---------- ---------- ---------- ---------- Gross profit 16,508 16,567 33,417 36,355 Selling, general and administrative expenses (17,218) (20,806) (34,333) (41,360) Royalty income 1,555 1,428 2,676 2,535 Goodwill amortization (470) (470) (940) (940) Reversal of provision for restructuring (Note 6) -- 410 160 1,164 Other income 110 71 171 188 ---------- ---------- ---------- ---------- Income/(loss) from continuing operations before interest, income taxes and extraordinary gain 485 (2,800) 1,151 (2,058) Interest expense, net 4,082 3,941 8,042 7,378 ---------- ---------- ---------- ---------- Loss from continuing operations before income taxes and extraordinary gain (3,597) (6,741) (6,891) (9,436) Income taxes/(benefit) (29) 62 (26) 104 ---------- ---------- ---------- ---------- Loss from continuing operations before extraordinary gain (3,568) (6,803) (6,865) (9,540) Discontinued operations (Note 7): Loss from discontinued operations -- (7,361) -- (8,136) Estimated loss on disposal -- (580) -- (580) Extraordinary gain (Note 8) -- 600 -- 600 ---------- ---------- ---------- ---------- Net loss $ (3,568) $ (14,144) $ (6,865) $ (17,656) ========== ========== ========== ========== Basic and diluted income/(loss) per share: From continuing operations $ (0.24) $ (0.45) $ (0.45) $ (0.63) From discontinued operations -- (0.53) -- (0.58) From extraordinary gain -- 0.04 -- 0.04 ---------- ---------- ---------- ---------- Basic and diluted loss per share $ (0.24) $ (0.94) $ (0.45) $ (1.17) ========== ========== ========== ========== Weighted average common stock outstanding 15,170 15,118 15,170 15,108 ========== ========== ========== ==========
See Notes to Condensed Consolidated Financial Statements. SALANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (AMOUNTS IN THOUSANDS)
Six Months Ended ---------------- July 4, June 28, July 4, June 28, 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Net loss $ (3,568) $ (14,144) $ (6,865) $ (17,656) Other comprehensive income, net of tax: Foreign currency translation adjustments 27 (1) 30 10 ---------- ---------- ---------- ---------- Comprehensive income $ (3,541) $ (14,145) $ (6,835) $ (17,646) ========== ========== ========== ==========
See Notes to Condensed Consolidated Financial Statements. SALANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
July 4, January 3, June 28, 1998 1998 1997 (Unaudited) (*) (Unaudited) ------------ ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 1,160 $ 2,215 $ 1,336 Accounts receivable, net 41,195 45,828 40,391 Inventories (Note 3) 107,143 96,638 123,272 Prepaid expenses and other current assets (Note 4) 9,310 4,218 3,930 ------------ ------------ ------------ Total current assets 158,808 148,899 168,929 Property, plant and equipment, net 27,561 26,439 28,711 Other assets 55,920 58,039 58,995 ------------ ------------ ------------ Total assets $ 242,289 $ 233,377 $ 256,635 ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Loans payable $ 52,176 $ 33,800 $ 53,432 Accounts payable 23,604 27,746 28,453 Accrued liabilities 19,953 16,503 16,961 Current portion of long term debt 104,879 104,879 -- Reserve for business restructuring (Note 6) 869 2,764 1,344 ------------ ------------ ------------ Total current liabilities 201,481 185,692 100,190 Long term debt -- -- 104,879 Deferred liabilities 5,340 5,382 8,453 Shareholders' equity Common stock 15,405 15,405 15,394 Additional paid-in capital 107,249 107,249 107,232 Deficit (82,100) (75,235) (74,803) Accumulated other comprehensive income (Note 5) (3,472) (3,502) (3,096) Less - treasury stock, at cost (1,614) (1,614) (1,614) ------------ ------------ ------------ Total shareholders' equity 35,468 42,303 43,113 ------------ ------------ ------------ Total liabilities and shareholders' equity $ 242,289 $ 233,377 $ 256,635 ============ ============ ============ (*) 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 ---------------- July 4, June 28, 1998 1997 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Loss from continuing operations $ (6,865) $ (9,540) Adjustments to reconcile loss from continuing operations to net cash used in operating activities: Depreciation 2,310 2,225 Amortization of intangibles 2,476 2,134 Change in operating assets and liabilities: Accounts receivable 4,633 (258) Inventories (10,505) (24,775) Prepaid expenses and other current assets (5,092) (61) Other assets 34 -- Accounts payable (4,142) 891 Accrued liabilities and reserve for business restructuring 1,621 (2,913) Deferred liabilities (42) (1,162) ------------ ------------ Net cash used in continuing operating activities (15,572) (33,459) Cash used in discontinued operations (66) (1,420) ------------ ------------ Net cash used in operations (15,638) (34,879) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (3,432) (5,807) Store fixture expenditures (391) (2,037) ------------ ------------ Net cash used in investing activities (3,823) (7,844) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net short-term borrowings 18,376 45,755 Retirement of long-term debt -- (3,372) Exercise of stock options -- 168 Other, net 30 10 ------------ ------------ Net cash provided by financing activities 18,406 42,561 ------------ ------------ Net decrease in cash and cash equivalents (1,055) (162) Cash and cash equivalents - beginning of year 2,215 1,498 ------------ ------------ Cash and cash equivalents - end of quarter $ 1,160 $ 1,336 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 2,522 $ 7,125 ============ ============ Income taxes $ 144 $ 101 ============ ============ See Notes to Condensed Consolidated Financial Statements. SALANT CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Amounts in Thousands of Dollars, Except Share Data) (Unaudited) NOTE 1. FINANCIAL RESTRUCTURING The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. At July 4, 1998 and January 3, 1998, the 10 1/2% Senior Secured Notes due December 31, 1998 (the "Senior Secured Notes") in the amount of $104,879 have been classified as a current liability. At July 4, 1998, the Company's current liabilities exceeded its current assets by $42,673. This factor may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. On March 3, 1998, the Company announced that it had reached an agreement in principle (the "Restructuring Agreement") with its major note and equity holders to convert its existing indebtedness under the Senior Secured Notes into common equity (the "Debt Restructuring"), as further described in the 1997 Annual Report on Form 10-K and the Registration Statement on Form S-4, filed on April 22, 1998, as amended. Consummation of the Debt Restructuring is subject to various conditions, and there can be no assurance that the Debt Restructuring will be consummated. If the Company is not able to consummate the Debt Restructuring, it will be unable to continue its normal operations without obtaining additional financing or pursuing alternative restructuring strategies. In contemplation of the Debt Restructuring, the Company elected not to pay the interest payment of approximately $5,500 that was due and payable under the Senior Secured Notes on March 2, 1998, subject to a 30 day grace period. As of July 4, 1998, interest accrued on the Senior Secured Notes was $9,318. Because the Company elected not to pay the interest due on the Senior Secured Notes by the expiration of the applicable grace period, an event of default has occurred with respect to the Senior Secured Notes, entitling the holders to accelerate the maturity thereof. On April 8, 1998, the Trustee under the indenture governing the Senior Secured Notes (the "Indenture") issued a Notice of Default stating that as a result of the Company's failure to make the interest payment due on the Senior Secured Notes, an event of default under the Indenture had occurred on April 1, 1998. If holders of at least 25% in aggregate principal face amount of the Senior Secured Notes accelerate all outstanding indebtedness under the Senior Secured Notes pursuant to the terms of the Indenture, such an acceleration could result in the Company becoming subject to a proceeding under the Federal bankruptcy laws. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. NOTE 2. BASIS OF PRESENTATION AND CONSOLIDATION The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Salant Corporation ("Salant") and subsidiaries (collectively, the "Company"). The Company's principal business is the designing, manufacturing, importing and marketing of apparel. The Company sells its products to retailers, including department and specialty stores, national chains, major discounters and mass volume retailers, throughout the United States and Canada. The results of operations for the three months ended July 4, 1998 and June 28, 1997 are not necessarily indicative of a full year's operations. In the opinion of management, the accompanying financial statements include all adjustments of a normal recurring nature which are necessary to present fairly such financial statements. Significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's annual report to shareholders for the year ended January 3, 1998. Loss per share is based on the weighted average number of common shares (including, as of July 4, 1998 and June 28, 1997, 205,854 and 323,544 shares, respectively, issuable in connection with the Chapter 11 Case and anticipated to be issued pursuant to the Company's 1993 bankruptcy plan of reorganization). Loss per share does not include common stock equivalents, including for the three and six months ended July 4, 1998, 1,284,667 stock options, and for the three and six months ended June 28, 1997, 1,660,860 and 1,644,860 stock options, respectively, inasmuch as their effect would have been anti-dilutive. NOTE 3. INVENTORIES July 4, January 3, June 28, 1998 1998 1997 ------------ ------------ ------------ Finished goods $ 63,997 $ 52,010 $ 76,150 Work-in-Process 21,034 21,405 22,666 Raw materials and supplies 22,112 23,223 24,456 ------------ ------------ ------------ $ 107,143 $ 96,638 $ 123,272 ============ ============ ============ NOTE 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS As of July 4, 1998, prepaid expenses and other current assets included $4,542 of capitalized costs related to the Debt Restructuring. NOTE 5. ACCUMULATED OTHER COMPREHENSIVE INCOME Foreign Minimum Accumulated Currency Pension other Translation Liability Comprehensive Adjustments Adjustment Income ------------------------------------------------- 1998 Beginning of year balance $ 6 $ (3,508) $ (3,502) Six months ended July 4, 1998 30 -- 30 ------------ ------------ ------------ change End of quarter balance $ 36 $ (3,508) $ (3,472) ============ ============ ============ 1997 Beginning of year balance $ 76 $ (3,182) $ (3,106) Six months ended June 28, 1997 10 -- 10 ------------ ------------ ------------ change End of quarter balance $ 86 $ (3,182) $ (3,096) ============ ============ ============ NOTE 6. DIVISION RESTRUCTURING COSTS As of July 4, 1998, $869 remained in the restructuring reserve, primarily related to guaranteed minimum royalty payments for discontinued product lines. In the first half of 1997, the Company reversed previously recorded restructuring provisions of $1,164, including $410 in the second quarter, primarily resulting from the settlement of liabilities for less than the carrying amount. NOTE 7. DISCONTINUED OPERATIONS In June 1997, the Company discontinued the operations of the Made in the Shade division, which produced and marketed women's junior sportswear. The loss from operations of the division for the three and six months ended June 28, 1997 was $7,361 and $8,136, respectively, which included a second quarter charge of $4,459 for the write-off of goodwill. Net sales of the division were $977 and $2,199 for the three and six months ended June 28, 1997, respectively. Additionally, in 1997, the Company recorded a second quarter charge of $580 to accrue for expected operating losses during the phase-out period through September 1997. No income tax benefits have been allocated to the division's 1997 losses. In 1997, the net liabilities of the discontinued operations have been included in accrued liabilities. NOTE 8. 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. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND HAS BECOME EFFECTIVE. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THAT A POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS EXCHANGE RESTRUCTURING PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION AS OF AUGUST 31, 1998 PROSPECTUS SALANT CORPORATION [LOGO OF SALANT CORPORATION] EXCHANGE OFFER PROSPECTUS AND DISCLOSURE STATEMENT FOR OFFER TO EXCHANGE AND SOLICITATION OF ACCEPTANCES OF PREPACKAGED PLAN OF REORGANIZATION Salant Corporation (the "Company"), upon the terms and subject to the conditions set forth in this Exchange Offer Prospectus and Disclosure Statement (this "Exchange Restructuring Prospectus") and in the accompanying Letter of Transmittal and Ballot, as the same may be amended from time to time, hereby (A) offers to issue the following consideration in exchange for its outstanding 10-1/2% Senior Secured Notes due December 31, 1998 (the "Exchange Offer") and (B) solicits acceptances of a prepackaged plan of reorganization (the "Prepackaged Plan") of the Company under Chapter 11 of title 11 of the United States Code, as amended (the "Bankruptcy Code") from the holders of such securities (the "Noteholders") under which such securities would be exchanged for the same consideration offered in the Exchange Offer: FOR EACH $1,000 THE EXCHANGING NOTEHOLDER WILL RECEIVE: PRINCIPAL AMOUNT (TOGETHER WITH ALL ACCRUED AND UNPAID INTEREST THEREON) OF: The Company's 10-1/2% 175.977555 shares of common stock, par value Senior Secured Notes $1.00 per share (the "New Common Stock"), of the due December 31, 1998 Company or, in the aggregate, up to 18,456,350 (the "Senior Notes") shares of New Common Stock (after giving effect to the ten-to-one reverse split of the Company's common stock (the "Reverse Split")). As a result of the consummation of the restructuring of the Company by means of either the Exchange Offer or the Prepackaged Plan (the "Restructuring"), each Noteholder will receive such Noteholder's pro rata portion (sharing with all other Noteholders) of shares of New Common Stock equivalent to 92.5% of the outstanding New Common Stock issued and outstanding immediately following consummation of the Restructuring, subject to dilution for shares of New Common Stock issued under the Company's proposed 1998 Stock Award and Incentive Plan and upon exercise of the warrants (the "Warrants"), described in more detail below, to be issued to the existing holders of the Company's common stock (the "Stockholders") pursuant to the Restructuring, and in the case of the Restructuring implemented by means of the Exchange Offer only, the shares of New Common Stock issued under the Company's 1987 Stock Plan, 1998 Stock Plan, 1993 Stock Plan and 1996 Stock Plan (the "Old Plans"), based on the number of issued and outstanding shares of common stock, par value $1.00 per share, of the Company (the "Old Common Stock") outstanding as of ____ __, 1998 (the "Record Date"). THE EXCHANGE OFFER AND THE SOLICITATION PERIOD FOR ACCEPTANCES OF THE PREPACKAGED PLAN WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON _____ __, 1998 UNLESS EXTENDED (AS SUCH DATE MAY BE EXTENDED, THE "EXPIRATION DATE"). The proposed financial restructuring of the Company in connection with the Exchange Offer, as described herein, is referred to as the "Exchange Restructuring." The proposed financial restructuring of the Company pursuant to the Prepackaged Plan, as described herein, is referred to as the "Prepackaged Restructuring." The term "Restructuring" as used herein means the financial restructuring of the Company pursuant to either the Exchange Restructuring or the Prepackaged Restructuring. An Annual Meeting of Stockholders of the Company (the "Stockholders' Meeting") will be held on _____ __, 1998 at __: _.m. New York City time, to consider and vote upon proposals (the "Restructuring Proposals") (i) to amend (the "Charter Amendment") the Company's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") in order to effect (A) the Reverse Split of each outstanding share of the Old Common Stock, into one-tenth of a share of New Common Stock and (B) an increase in the number of shares of New Common Stock authorized; (ii) to approve the issuance (the "Issuance") of (A) shares of New Common Stock to Noteholders in exchange for their Senior Notes and to Stockholders in exchange for their Old Common Stock upon consummation of the Exchange Restructuring, (B) the Warrants, and (C) shares of New Common Stock to holders of Warrants upon exercise of their Warrants (such shares of New Common Stock being hereinafter referred to as the "Warrant Shares"); and (iii) to elect new directors to the Board of Directors (the "Board") of the Company (the "Election of the New Board") upon consummation of the Exchange Restructuring. In addition, the Stockholders will be asked to (i) consider a proposal (the "Plan Proposal") to approve the adoption of the Salant Corporation 1998 Stock Award and Incentive Plan (the "Stock Award and Incentive Plan"); and (ii) ratify the appointment of Deloitte & Touche LLP as independent auditors to the Company (together with the Restructuring Proposals and the Plan Proposal, the "Proposals"). If the Prepackaged Restructuring is pursued and the Company commences a chapter 11 bankruptcy case and files the Packaged Plan, the Company expects that each of the Restructuring Proposals will be implemented pursuant to the Prepackaged Plan. The Exchange Offer is conditioned upon, among other things, (i) 100% of the aggregate principal amount of the Senior Notes being validly tendered and not withdrawn prior to the Expiration Date (the "Minimum Tender Condition"), and (ii) approval by the Stockholders of each of the Restructuring Proposals. The Company's ability to seek confirmation of the Prepackaged Plan also depends upon certain minimum levels of acceptance thereof, as further set forth in this Exchange Restructuring Prospectus. If the Minimum Tender Condition and all other conditions to the consummation of the Exchange Offer are satisfied or waived, the Company intends to consummate the Exchange Offer. If the Exchange Offer is not consummated or not all of the Restructuring Proposals are approved by the Stockholders of the Company at the Stockholders' Meeting but the Company receives sufficient acceptances of the Prepackaged Plan to obtain confirmation thereof by the Bankruptcy Court, then the Company intends to pursue the financial restructuring of the Company by means of the filing of the Prepackaged Plan. THE SUBSIDIARIES OF THE COMPANY WOULD NOT BE PARTIES TO THE PREPACKAGED PLAN, AND WOULD THEREFORE CONTINUE TO OPERATE IN THE ORDINARY COURSE OF BUSINESS DURING THE COMPANY'S CHAPTER 11 CASE AND WOULD NOT BECOME DEBTORS IN CONNECTION WITH THE PREPACKAGED RESTRUCTURING. AS SUCH, THE PREPACKAGED PLAN WOULD NOT AFFECT THE CONTINUING AND TIMELY PAYMENT IN FULL OF THE SUBSIDIARIES' OBLIGATIONS TO SUPPLIERS, EMPLOYEES, AND OTHER CREDITORS. IN ADDITION, THE PREPACKAGED PLAN PROVIDES FOR ALL PREPETITION UNSECURED CREDITORS OF THE COMPANY, INCLUDING, WITHOUT LIMITATION, TRADE CREDITORS, TO BE PAID IN FULL IN ACCORDANCE WITH THEIR TERMS, AND SUCH CREDITORS WOULD NOT, THEREFORE, BE IMPAIRED BY, AND WOULD BE DEEMED TO ACCEPT, THE PREPACKAGED PLAN, AND THEIR VOTE ON THE PREPACKAGED PLAN WOULD NOT BE SOUGHT. THE DATE OF THIS EXCHANGE RESTRUCTURING PROSPECTUS IS [______ ___,] 1998. SEE "DISCUSSION OF RISK FACTORS" ON PAGES [ ] TO [ ] FOR A DISCUSSION OF CERTAIN RISK FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE RESTRUCTURING AND THE PREPACKAGED RESTRUCTURING. NEITHER THE SECURITIES OFFERED HEREBY NOR THE PREPACKAGED PLAN HAS BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF THESE TRANSACTIONS OR THE ACCURACY OR ADEQUACY OF THIS EXCHANGE RESTRUCTURING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The terms of the Exchange Offer and the Prepackaged Plan have been developed in the course of discussions by the Company with (i) Magten Asset Management Corp., the beneficial owner of, or the investment manager on behalf of the beneficial owners of ("Magten"), approximately $74 million in aggregate principal face amount of the Senior Notes (collectively, the "Magten Notes"), which represents approximately 71% of the aggregate principal amount of all Senior Notes, and (ii) Apollo Apparel Partners, L.P. ("Apollo"), the beneficial owner of 5,924,352 shares (the "Apollo Shares") of the Old Common Stock, which represents approximately 39.6% of the issued and outstanding shares of Old Common Stock. Magten, Apollo and the Company have entered into a letter agreement, dated March 2, 1998, as amended (the "Letter Agreement") regarding the basic terms and conditions of a comprehensive consensual plan to restructure the Company (the terms of which are consistent with the Restructuring) to which Magten and Apollo would be willing to consent, subject to certain terms and conditions. The Restructuring will convert all of the Company's indebtedness under the Senior Notes into New Common Stock. Pursuant to the Letter Agreement, Magten has agreed, among other things, to tender (or with respect to managed accounts, use its reasonable best efforts to cause to be tendered), subject to certain conditions, all of the Magten Notes pursuant to the Exchange Restructuring and, in the event the Prepackaged Plan is pursued, to vote all of the Magten Notes in favor of the Prepackaged Plan. In addition, pursuant to the Letter Agreement, Apollo agreed, among other things, to enter into a voting agreement with the Company, wherein Apollo would agree to vote all of the Apollo Shares in favor of each of the Restructuring Proposals and, in the event the Prepackaged Plan is pursued, to vote all of the Apollo Shares in favor of the Prepackaged Plan. As contemplated by the Letter Agreement, under the Restructuring, holders of 100% of the Old Common Stock of the Company as of the Record Date will receive from the Company, in the aggregate, (a) 1,496,461 shares of New Common Stock (after giving effect to the Reverse Split), constituting 7.5% of the New Common Stock issued and outstanding immediately following consummation of the Restructuring, subject to dilution for shares of New Common Stock issued under the Stock Award and Incentive Plan and the Warrant Shares, and in the case of the Exchange Restructuring only, the shares of New Common Stock issued under the Old Plans and (b) 2,216,979 Warrants representing the right to purchase, in the aggregate, 2,216,979 additional shares of New Common Stock, constituting 10% of the New Common Stock issued and outstanding immediately following consummation of the Restructuring (on a fully diluted basis), subject to adjustment. The Warrants will be exercisable for seven years from the consummation of the Restructuring (the "Restructuring Date") at an exercise price of $6.2648 per share, and each Warrant would be exercisable for one share of New Common Stock, in each case, subject to adjustment. As contemplated by the Letter Agreement, under the Restructuring, the holders of the Senior Notes as of the Record Date will receive from the Company, in the aggregate, 18,456,350 shares of New Common Stock, constituting 92.5% of the New Common Stock issued and outstanding immediately following consummation of the Restructuring, subject to dilution for shares of New Common Stock issued under the Stock Award and Incentive Plan and the Warrant Shares, and in the case of the Exchange Restructuring only, the shares of New Common Stock issued under the Old Plans. THE SENIOR NOTES TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE WITHDRAWN, SUBJECT TO THE PROCEDURES DESCRIBED HEREIN, AT ANY TIME BEFORE THEY ARE ACCEPTED FOR EXCHANGE BY THE COMPANY. VOTES ON THE PREPACKAGED PLAN MAY BE WITHDRAWN OR CHANGED, SUBJECT TO THE PROCEDURES DESCRIBED HEREIN, AT ANY TIME PRIOR TO THE EXPIRATION DATE. IF A BANKRUPTCY CASE HAS BEEN COMMENCED, WITHDRAWALS OR CHANGES OF SUCH VOTES THEREAFTER MAY BE EFFECTED ONLY WITH THE APPROVAL OF THE BANKRUPTCY COURT. THE COMPANY'S OBLIGATION TO ACCEPT THE SENIOR NOTES TENDERED PURSUANT TO THE EXCHANGE OFFER IS CONDITIONED ON, AMONG OTHER THINGS, (A) SATISFACTION OF THE MINIMUM TENDER CONDITION AND (B) APPROVAL BY THE COMPANY'S STOCKHOLDERS OF EACH OF THE RESTRUCTURING PROPOSALS. THE COMPANY RESERVES THE RIGHT TO WAIVE ANY OF THE CONDITIONS TO THE EXCHANGE RESTRUCTURING BUT DOES NOT CURRENTLY INTEND TO WAIVE ANY CONDITION. PURSUANT TO THE LETTER AGREEMENT, MAGTEN'S PRIOR WRITTEN CONSENT IS REQUIRED FOR THE COMPANY TO WAIVE THE MINIMUM TENDER CONDITION. This Exchange Restructuring Prospectus includes information relating to the Exchange Offer and the Prepackaged Plan. All recipients are urged to review this Exchange Restructuring Prospectus in its entirety. Regardless of whether a Noteholder completes a Letter of Transmittal, such Noteholder should duly complete and sign a Ballot in order to vote on the Prepackaged Plan. IF THE EXCHANGE OFFER IS NOT CONSUMMATED, BUT THE PREPACKAGED PLAN IS CONFIRMED BY THE BANKRUPTCY COURT AND CONSUMMATED, EACH NOTEHOLDER WOULD RECEIVE THE SAME CONSIDERATION OFFERED IN THE EXCHANGE OFFER WHETHER OR NOT SUCH NOTEHOLDER TENDERED IN THE EXCHANGE OFFER OR VOTED TO ACCEPT THE PREPACKAGED PLAN. IN ORDER FOR THE PREPACKAGED RESTRUCTURING TO BE CONSUMMATED, AMONG OTHER THINGS, THE BANKRUPTCY COURT MUST DETERMINE THAT THE SOLICITATION OF ACCEPTANCES FOR THE PREPACKAGED PLAN WAS IN COMPLIANCE WITH ANY APPLICABLE NON-BANKRUPTCY LAW, RULE OR REGULATION GOVERNING THE ADEQUACY OF SUCH DISCLOSURE. Noteholders as of the Record Date are eligible to vote on the Prepackaged Plan. Registered holders of Senior Notes, or persons who have obtained a properly completed note power from the registered holders thereof, may tender their Senior Notes in the Exchange Offer, regardless of whether they were Noteholders on the Record Date. NOTEHOLDERS ARE NOT REQUIRED TO TENDER THEIR SENIOR NOTES IN THE EXCHANGE OFFER IN ORDER TO VOTE ON THE PREPACKAGED PLAN. FAILURE BY A HOLDER TO SEND A DULY COMPLETED AND SIGNED BALLOT WILL BE DEEMED TO CONSTITUTE AN ABSTENTION BY SUCH HOLDER WITH RESPECT TO A VOTE ON THE PREPACKAGED PLAN. Abstentions will not be counted as votes for or against the Prepackaged Plan. Any Ballot which is executed by a holder but does not indicate an acceptance or rejection of the Prepackaged Plan will not be counted as a vote for or against the Prepackaged Plan. See "TENDERING AND VOTING PROCEDURES" and "VOTING PROCEDURES FOR PREPACKAGED PLAN AND REQUIREMENTS". THE BOARD UNANIMOUSLY RECOMMENDS THAT NOTEHOLDERS TENDER THEIR SENIOR NOTES IN THE EXCHANGE RESTRUCTURING. On April 21, 1998, at the Board's request, Ernst & Young LLP ("E&Y"), financial advisor to the Company, delivered to the Board a written opinion addressed to the Board that, as of that date and based upon and subject to the factors and assumptions set forth therein, the consideration to be received by Stockholders pursuant to the Restructuring is fair to public Stockholders from a financial point of view. E&Y subsequently delivered to the Board their written opinion addressed to the Board that, as of the date of the Proxy Statement/Prospectus and based upon and subject to the factors and assumptions set forth therein, the consideration to be received by Stockholders pursuant to the Restructuring is fair to public Stockholders from a financial point of view. See "Fairness Opinion". The Company has registered the offering and the Issuance of the shares of New Common Stock, Warrants and Warrant Shares to be issued under the Exchange Restructuring with the Securities and Exchange Commission (the "Commission") under the Company's Registration Statement. In addition, the Company has also registered the offering of the shares of New Common Stock, Warrants and Warrant Shares to be issued under the Prepackaged Restructuring in accordance with the Prepackaged Plan with the Commission under the Company's Registration Statement. The Company has fallen below the continued listing criteria of the NYSE for net tangible assets available to common stock together with average net income after taxes for the past three years. However, the NYSE has reviewed the terms and conditions of the Restructuring set forth herein and has informed the Company that it will continue to list the Company's common stock during the period prior to consummation of the Restructuring and intends to list the Company's common stock from and after the Restructuring Date. However, the NYSE has advised the Company that after consummation of the Restructuring, the NYSE intends to monitor the performance of the Company based upon the Projections set forth herein to ensure compliance with the NYSE's original listing standards in respect of the New Common Stock. The Company believes that as a result of the consummation of the Restructuring, following the Restructuring Date, the Company will be able to return to compliance with the original listing standards in respect of the New Common Stock and the Warrants and that the New Common Stock and the Warrants will continue to be listed for trading on the NYSE. However, the NYSE has advised the Company that the Company's failure to meet the Projections following the Restructuring could result in the suspension from trading and subsequent delisting of the New Common Stock. BECAUSE NO PREPACKAGED BANKRUPTCY CASE HAS BEEN FILED, THIS EXCHANGE RESTRUCTURING PROSPECTUS HAS NOT BEEN APPROVED BY THE BANKRUPTCY COURT WITH RESPECT TO THE ADEQUACY OF THE INFORMATION CONTAINED HEREIN. IF SUCH A CASE IS SUBSEQUENTLY COMMENCED, THE COMPANY INTENDS TO SEEK AN ORDER OF THE BANKRUPTCY COURT DETERMINING THAT THE SOLICITATION OF VOTES ON THE PREPACKAGED PLAN WAS IN COMPLIANCE WITH SECTION 1126(b) OF THE BANKRUPTCY CODE. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS EXCHANGE RESTRUCTURING PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. This Exchange Restructuring Prospectus, the Letter of Transmittal and the applicable Ballot and Master Ballot are first being mailed to Noteholders on or about _____ __, 1998. AVAILABLE INFORMATION The Company has filed a Registration Statement on Form S-4 (the "Registration Statement") with the Commission under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities offered hereby. As permitted by the rules and regulations of the Commission, this Exchange Restructuring Prospectus omits certain information, exhibits and undertakings contained in the Registration Statement. Such additional information, exhibits and undertakings can be inspected at and obtained from the Commission in the manner set forth below. For further information with respect to the Company and to the securities offered hereby, reference is made to the Registration Statement, and the financial schedules and exhibits filed as a part thereof and the exhibits thereto. Statements contained in this Exchange Restructuring Prospectus as to the terms of any contract or other documents are not necessarily complete and, in each case, reference is made to the copy of each such contract or other document that has been filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Company is subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files periodic reports, proxy statements and other information with the Commission. Such reports and other information filed by the Company with the Commission, as well as the Registration Statement and the exhibits thereto, can be inspected and copied at the public reference facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at the Commission's regional offices located 700 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and at 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material can also be obtained by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains an Internet Web Site that contains reports, proxy and information statements, and other information regarding the Company and other registrants that file electronically with the Commission. The address of such site is: http://www.sec.gov. In addition, the Old Common Stock is listed and traded on the NYSE, and such reports, proxy statements and other information concerning the Company should be available for inspection and copying at the New York Stock Exchange, Inc., 11 Wall Street, New York, New York 10005. THIS EXCHANGE RESTRUCTURING PROSPECTUS INCORPORATES EXHIBITS TO THE REGISTRATION STATEMENT BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS EXCHANGE RESTRUCTURING PROSPECTUS IS DELIVERED UPON WRITTEN OR ORAL REQUEST DIRECTED TO SALANT CORPORATION, ATTENTION: TODD KAHN, EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY, 1114 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10036, TELEPHONE NUMBER (212) 221-7500. IN ORDER TO ASSURE TIMELY DELIVERY OF SUCH DOCUMENTS PRIOR TO THE EXPIRATION DATE, ANY REQUEST SHOULD BE RECEIVED BY ______ __, 1998. COPIES OF SUCH DOCUMENTS WILL ALSO BE AVAILABLE UPON REQUEST THEREAFTER UNTIL THE EXCHANGE RESTRUCTURING DATE. No person has been authorized to give any information or to make any representation in connection with the Exchange Offer, the Prepackaged Plan or the solicitation of votes for the Prepackaged Plan, other than those contained in this Exchange Restructuring Prospectus and in the exhibits attached hereto or referred to herein. If given or made, such other information or representation may not be relied upon as having been authorized by the Company. This Exchange Restructuring Prospectus does not constitute an offer to sell or the solicitation of an offer to buy any securities other than those to which it relates, or an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction in which, or to any person to whom, it is unlawful to make such offer or solicitation. Neither the delivery of this Exchange Restructuring Prospectus nor any distribution of securities hereunder shall under any circumstances create any implication that the information contained herein is correct as of any time subsequent to the date hereof or that there has been no change in the information set forth herein or in the affairs of the Company since the date hereof. Any estimates of claims and equity interests set forth in this Exchange Restructuring Prospectus may vary from the final amounts of claims or equity interests allowed by the Bankruptcy Court. TABLE OF CONTENTS PAGE ---- AVAILABLE INFORMATION..................................................N-vi INDEX OF CERTAIN DEFINED TERMS........................................N-156 SUMMARY.................................................................N-1 The Company.......................................................N-1 Summary Distribution Table........................................N-1 Benefits of The Restructuring.....................................N-2 Diagram of Restructuring..........................................N-3 The Exchange Offer and Prepackaged Plan...........................N-4 Summary of Prepackaged Plan.......................................N-9 Comparison of Exchange Restructuring and Prepackaged Restructuring................................................N-12 Purpose of the Restructuring.....................................N-15 Tendering and Voting Procedures..................................N-16 Stockholders' Meeting............................................N-19 Description of Warrants..........................................N-23 Description of New CIT Credit Agreement..........................N-24 Summary of Registration Rights Plan..............................N-25 Summary of Rights Plan...........................................N-25 Summary Historical Consolidated Financial Information............N-25 Capitalization Summary...........................................N-27 Summary of Risk Factors..........................................N-28 Risk Factors Relating to the Exchange Restructuring and the Prepackaged Restructuring....................................N-28 Additional Risk Factors Relating to the Prepackaged Restructuring................................................N-29 Discussion of Risk Factors.......................................N-29 Risk of Nonconsummation of the Restructuring.....................N-30 Company Results of Operations Subject to Variable Influences; Intense Competition..........................................N-30 Dilution.........................................................N-30 Limitation on Use of Net Operating Losses........................N-30 Change in Priority...............................................N-31 Lack of Trading Market for New Common Stock; Volatility; Potential De-Listing of the New Common Stock.................N-31 Possible Volatility of Stock Price; Effect of Restructuring on Stock Price...............................................N-32 Concentrated Ownership of New Common Stock.......................N-32 Absence of and/or Restrictions on Dividends......................N-32 History of Losses; Effect of Transaction.........................N-33 Cash Flow from Operations........................................N-33 Declines in Net Sales and Gross Profits..........................N-33 Retail Environment...............................................N-34 Apparel Industry Cycles and Other Economic Factors...............N-34 Seasonality and Fashion Risk.....................................N-34 Dependence on Certain Customers and Licensees; Effect of Restructuring on Licenses....................................N-34 Foreign Operations and Sourcing; Import Restrictions.............N-35 Dependence on Contract Manufacturing.............................N-35 Information Systems and Control Procedures.......................N-36 Leverage and Debt Service........................................N-36 Restrictive Covenants............................................N-36 Need for Sustained Trade Support.................................N-37 Prior Chapter 11 Cases...........................................N-37 Disruption of Operations Relating to Bankruptcy Filing...........N-37 Certain Risks of Non-confirmation................................N-37 Certain Other Bankruptcy Considerations..........................N-38 BACKGROUND OF RESTRUCTURING............................................N-40 Background of the Restructuring..................................N-40 The Letter Agreement.............................................N-41 The Voting Agreement.............................................N-45 The Waiver and Forbearance Under the Credit Agreement and Commitment for New Credit Agreement..........................N-46 PURPOSE OF THE RESTRUCTURING...........................................N-48 RESTRUCTURING FINANCIAL CONSIDERATIONS.................................N-49 Background of the Restructuring Financial Analysis...............N-49 Fairness Opinion.................................................N-49 The Three-Year Business Plan.....................................N-53 Liquidation Analysis.............................................N-54 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS..................N-60 SALANT CORPORATION NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.........................................N-64 PROJECTED CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS...........N-67 PROJECTED CONDENSED CONSOLIDATED BALANCE SHEETS.....................N-69 PROJECTED STATEMENTS OF CONSOLIDATED CASH FLOWS.....................N-70 BUSINESS AND PROPERTIES OF THE COMPANY.................................N-71 SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION..............N-76 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................N-79 DESCRIPTION OF NEW COMMON STOCK........................................N-97 Distributions....................................................N-97 Voting...........................................................N-98 Election of Directors............................................N-98 Shares Reserved In Connection With 1993 Chapter 11 Plan..........N-98 DESCRIPTION OF CHARTER AMENDMENT.......................................N-98 SALANT CORPORATION 1998 STOCK AWARD AND INCENTIVE PLAN................N-100 Purpose of the Stock Award and Incentive Plan...................N-100 Eligibility.....................................................N-100 Plan Administration and Shares Subject to the Stock Award and Incentive Plan..........................................N-100 Awards..........................................................N-101 Change In Control...............................................N-102 Transferability.................................................N-102 Certain Federal Income Tax Considerations.......................N-102 Treatment of Options Under Old Plans............................N-103 New Plan Benefits...............................................N-103 DESCRIPTION OF REGISTRATION RIGHTS PLAN...............................N-103 DESCRIPTION OF RIGHTS PLAN............................................N-104 DESCRIPTION OF CERTAIN EXISTING INDEBTEDNESS OF THE COMPANY...........N-104 General.........................................................N-104 Revolving Credit Agreement......................................N-104 The Senior Notes................................................N-106 DESCRIPTION OF THE CHAPTER 11 CASE....................................N-107 Timetable for the Chapter 11 Case...............................N-107 Committees......................................................N-108 Actions To Be Taken Upon Commencement of Case...................N-108 DESCRIPTION OF THE PREPACKAGED PLAN...................................N-111 Brief Explanation Of Chapter 11.................................N-111 General Information Concerning Treatment Of Claims And Interests...................................................N-111 Classification And Treatment Of Claims And Interests............N-112 Unclassified Claims.............................................N-114 Administrative Expenses.........................................N-114 Priority Tax Claims.............................................N-115 Classified Claims And Interests.................................N-115 Sources Of Cash To Make Prepackaged Plan Distributions..........N-117 Executory Contracts And Unexpired Leases........................N-118 Implementation of This Plan.....................................N-118 Provisions Covering Distributions...............................N-120 Procedures for Resolving Disputed Claims........................N-123 Discharge, Injunction, Releases and Settlements of Claims.......N-124 Conditions Precedent to Confirmation Order and Effective Date...N-126 Miscellaneous provisions........................................N-126 FEASIBILITY OF THE PREPACKAGED PLAN AND THE BEST INTERESTS OF CREDITORS TEST...................................................N-128 Confirmation Hearing............................................N-128 Feasibility Of The Prepackaged Plan.............................N-130 Best Interests Test.............................................N-131 Nonconsensual Confirmation......................................N-132 APPLICATION OF SECURITIES ACT.........................................N-133 The Solicitation................................................N-133 Issuance and Resale of New Securities Under the Prepackaged Plan........................................................N-133 ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PREPACKAGED PLAN.............................................................N-134 Continuation Of The Chapter 11 Case.............................N-134 Liquidation Under Chapter 7 Or Chapter 11.......................N-134 TENDERING AND VOTING PROCEDURES.......................................N-135 The Restructuring...............................................N-135 General.........................................................N-135 Interest on Senior Notes........................................N-136 Expiration Date; Extensions; Amendments.........................N-136 How to Tender in the Exchange Offer.............................N-136 Tenders--Additional Information.................................N-137 Withdrawal of Tenders and Revocation of Votes...................N-139 Conditions......................................................N-139 VOTING AND CONFIRMATION OF THE PREPACKAGED PLAN.......................N-141 Voting Procedures for Prepackaged Plan and Requirements.........N-142 Who May Vote....................................................N-143 Procedures for Holders of Old Securities to Vote on Prepackaged Plan............................................N-143 Beneficial Owners of Old Securities.............................N-144 Brokerage Firms, Banks and Other Nominees.......................N-144 Securities Clearing Agent.......................................N-144 Importance of Proper and Timely Submission of Completed Ballots.....................................................N-145 Voting Deadline and Extensions..................................N-145 Withdrawal of Votes on the Prepackaged Plan.....................N-145 Information Agent...............................................N-146 MARKET FOR OLD COMMON STOCK AND RELATED STOCKHOLDER MATTERS...........N-146 MARKET PRICES OF THE SENIOR NOTES.....................................N-148 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.............................N-148 Federal Income Tax Consequences to Noteholders..................N-149 Market Discount.................................................N-150 Federal Income Tax Consequences to the Company..................N-150 Limitation on Net Operating Loss Carryovers.....................N-150 INFORMATION REGARDING NOMINEES........................................N-150 POST RESTRUCTURING STOCK OPTION GRANTS................................N-151 Exchange Restructuring..........................................N-151 Prepackaged Restructuring.......................................N-151 SECURITY OWNERSHIP OF MANAGEMENT......................................N-152 CERTAIN AFFILIATE TRANSACTIONS........................................N-153 PAYMENTS TO MANAGEMENT................................................N-153 ADVISORS AND REPRESENTATIVES..........................................N-153 ESTIMATED FEES AND EXPENSES...........................................N-155 LEGAL MATTERS.........................................................N-155 EXPERTS...............................................................N-155 SUMMARY The following is a summary of certain information contained elsewhere in this Exchange Restructuring Prospectus. Reference is made to, and this summary is qualified in its entirety by, the more detailed information contained in this Exchange Restructuring Prospectus, the Annexes hereto and the documents incorporated by reference herein. Noteholders are urged to read this Exchange Restructuring Prospectus and the Annexes hereto in their entirety. References herein to the "Company" shall, unless the context otherwise requires, refer to Salant Corporation and its subsidiaries. Capitalized terms used herein shall have the meanings ascribed to them as set forth under the section entitled "GLOSSARY OF CERTAIN DEFINED TERMS." THE COMPANY The Company, which was incorporated in Delaware in 1987, is the successor to a business founded in 1893 and incorporated in New York in 1919. The Company is a designer, manufacturer, importer and marketer of a broad line of men's apparel, neckwear and belts and children's sleepwear and underwear. The Company's corporate headquarters is located at 1114 Avenue of the Americas, New York, New York 10036, and its telephone number at that address is (212) 221-7500. The Company's apparel products are sold under internationally recognized owned and licensed brand names, including Perry Ellis, Manhattan, John Henry and Joe Boxer trademarks, as well as under retailers' private labels. The Company's collection of Perry Ellis menswear which includes collection sportswear, casual and dress shirts, slacks, jeans, neckwear and belts, is the Company's largest product offering. In Fiscal 1997, products sold under the Perry Ellis, Perry Ellis Portfolio and Perry Ellis America brand names (the "Perry Ellis Trademarks") represented 44% of the Company's total Fiscal 1997 net sales. The Company's merchandise is sold throughout the United States to a wide variety of retailers, including Federated Department Stores, Inc., May Company, Dillards Department Stores, Dayton Hudson, Sears, Roebuck & Co., Wal-Mart, and K-Mart. The Company believes its relationships with a wide variety of retailers, design expertise, low-cost manufacturing operations and sourcing relationships allow it to participate in numerous areas of the men's apparel industry. For additional information concerning the Company and its business, financial position and operations, see "BUSINESS AND PROPERTIES OF THE COMPANY", "SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS". SUMMARY DISTRIBUTION TABLE The following chart summarizes the consideration to be received by the Stockholders and the Noteholders pursuant to the Restructuring. EXISTING NEW COMMON SECURITY STOCK WARRANTS -------- ---------- -------- To Stockholders: Per 1,000 Shares......... 1,000 100 148.14815 In Aggregate............ 14,964,608 1,496,461 2,216,979 To Noteholders: Per $1,000 Principal Face Amount of, and all accrued and unpaid interest through the Restructuring Date on, the Senior Notes......... $ 1,000 175.977555 -- In Aggregate............. $104,879,000 18,456,350 -- BENEFITS OF THE RESTRUCTURING Consummation of the Restructuring will result in a the Noteholders receiving 92.5% of the shares of New Common Stock to be issued by the Company under the Restructuring (subject to dilution for the Stock Award and Incentive Plan, the Warrant Shares and, in the case of the Exchange Restructuring only, the Old Plans), and (b) the Stockholders receiving 7.5% of the shares of New Common Stock (subject to dilution for the Stock Award and Incentive Plan, the Warrant Shares and, in the case of the Exchange Restructuring only, the Old Plans) plus Warrants to purchase up to 10% of the issued and outstanding shares of New Common Stock (on a fully diluted basis). As a result of the consummation of the Restructuring, Magten, the beneficial holder of approximately $74 million in aggregate principal amount of the Senior Notes, representing approximately 71% of the Senior Notes, will receive its pro rata share of the shares of New Common Stock to be issued to Noteholders (i.e., Magten will receive approximately 65% of the shares of New Common Stock (subject to dilution)) in exchange for the Senior Notes beneficially held by Magten. The Stockholders currently own 100% of the common equity of the Company in the form of the Old Common Stock. The issuance of New Common Stock to the Noteholders, including Magten, pursuant to the Exchange Restructuring or the Prepackaged Restructuring, as applicable, will result in significant dilution of the equity interests of the existing holders of Old Common Stock as a percentage of the total number of outstanding shares of the common stock of the Company. As a result of the Restructuring, Apollo, the beneficial holder of approximately 39.6% of the issued and outstanding shares of Old Common Stock will receive its pro rata share of the shares of New Common Stock and Warrants to be issued to Stockholders (i.e., Apollo will receive approximately 3% of the shares of New Common Stock (subject to dilution) and approximately 39.6% of the Warrants) in exchange for the shares of Old Common Stock beneficially held by Apollo. Consummation of the Restructuring will also result in a distribution of New Common Stock and Warrants to certain officers and directors of the Company, based upon the number of shares of Old Common Stock owned by them on the Record Date. See "MARKET FOR OLD COMMON STOCK AND RELATED STOCKHOLDER MATTERS." In addition, in the event that the Exchange Restructuring is consummated, all options to purchase shares of Old Common Stock outstanding granted under the Old Plans and held by directors, officers and employees of the Company (the "Old Options") will not be terminated but will continue to remain outstanding, subject to adjustment as provided for in each of the Old Plans. Moreover, under the Stock Award and Incentive Plan, directors, officers and employees of the Company will become eligible to receive additional options to purchase shares of New Common Stock as determined by the new Board after the Restructuring Date, subject to the approval by the Stockholders of the Company. In the event that the Prepackaged Restructuring is consummated, pursuant to the Prepackaged Plan, all Old Options held by directors, officers and employees of the Company to purchase shares of Old Common Stock outstanding as of the commencement of the Chapter 11 Case granted under the Old Plans will be terminated and of no further force or effect as of the consummation of the Prepackaged Plan. In addition, each of the Old Plans shall be terminated and of no further force or effect as of the consummation of the Prepackaged Plan. The Stock Award and Incentive Plan will remain in effect after the consummation of the Prepackaged Plan; provided, that, if the Stock Award and Incentive Plan has not been approved by the Stockholders prior to the commencement of the Chapter 11 Case, any awards granted thereunder shall be subject to the subsequent approval of the Stockholders of the Company. It is the Company's intention that certain directors, officers and employees of the Company will be granted new options to purchase shares of New Common Stock under the Stock Award and Incentive Plan. The persons to receive such grants, the number of shares of New Common Stock subject to such grants, and such other terms and conditions applicable to such grants, shall be determined by the Board of Reorganized Salant in its sole discretion, except for automatic stock option grants to certain non-employee directors of the Company. See "POST RESTRUCTURING STOCK OPTION GRANTS." On March 2, 1998, Magten, Apollo and the Company entered into the Letter Agreement setting forth the basic terms and conditions of the Restructuring. The Letter Agreement was subsequently amended on June 1, 1998. See "BACKGROUND OF RESTRUCTURING -- The Letter Agreement" for a full discussion of the terms of the Letter Agreement. CIT, the Company's working capital lender, agreed to support the Company's restructuring efforts under the Letter Agreement and, on March 2, 1998, the Company entered into the Twelfth Amendment and Forbearance Agreement (the "Twelfth Amendment") with CIT, wherein, among other things, CIT waived certain existing financial covenant defaults under the Credit Agreement as of January 3, 1998 and agreed to forbear (subject to certain conditions) from exercising any of its rights or remedies arising under the Credit Agreement arising from the Company's failure to make certain interest payments on the Senior Notes. In consideration for CIT's agreement to enter into the Twelfth Amendment, pursuant thereto, the Company agreed to pay CIT a forbearance and waiver fee in the amount of $150,000. In addition, in consideration of a New Credit Agreement proposed by CIT, the Company agreed to pay CIT a non-refundable and fully-earned fee of $1,050,000, payable in three equal installments of $350,000 each on April 1, May 1 and June 1, 1998. See "BACKGROUND OF RESTRUCTURING -- The Waiver and Forbearance Under the Credit Agreement and Commitment for New Credit Agreement." Subsequent to the execution of the Twelfth Amendment, after reviewing various proposals for a new credit agreement, the Company entered into a commitment letter (the "CIT Commitment Letter") with CIT, which sets forth the terms and conditions of an agreement for a new $140 million secured credit facility with CIT, to be entered into by the Company on the Restructuring Date. See "DESCRIPTION OF NEW CIT CREDIT AGREEMENT." In conjunction with the CIT Commitment Letter, CIT and the Company entered into the Thirteenth Amendment and Forbearance Agreement (the "Thirteenth Amendment"), further extending CIT's agreement to continue to forbear from exercising its rights or remedies under the Credit Agreement. In accordance with the Twelfth Amendment, no additional closing fees, facility fees or amendment fees were charged to the Company by CIT in consideration of the execution and delivery of the Thirteenth Amendment and the CIT Commitment Letter and no other closing fee or facility fee will be charged in connection with the execution and delivery of the New CIT Credit Agreement. See "BACKGROUND OF RESTRUCTURING - -- The Waiver and Forbearance Under the Credit Agreement and Commitment for New Credit Agreement." DIAGRAM OF TRANSACTION The following chart diagrams the significant events (which are set forth in chronological order) involved in order to consummate the Restructuring either by means of the Exchange Restructuring or the Prepackaged Restructuring: [OBJECT OMITTED] THE EXCHANGE OFFER AND PREPACKAGED PLAN Consideration Offered.........For each $1,000 principal amount of Senior Notes (plus accrued but unpaid interest), Noteholders will receive 175.977555 shares of New Common Stock. As a result of the Exchange Restructuring, as of the Exchange Restructuring Date, Noteholders will receive, in the aggregate, shares of New Common Stock equivalent to 92.5% of the New Common Stock issued and outstanding immediately following consummation of the Exchange Restructuring, based on the number of outstanding shares of Old Common Stock as of the Record Date, and subject to dilution for shares of New Common Stock issued under the Stock Award and Incentive Plan and the Warrant Shares, and in the case of the Exchange Restructuring only, shares of New Common Stock issued under the Old Plans. The allocations of distributions of the New Common Stock under the Exchange Restructuring to the holders of the Senior Notes will be pro rata based on the amount of the holders' respective claims relating to the Senior Notes held by them. Noteholders will not be entitled to receive Warrants. Should the Prepackaged Restructuring be consummated, the Noteholders will receive the same consideration as the Noteholders would receive in the Exchange Restructuring. Expiration Date...............With respect to the Exchange Offer and the solicitation of acceptances of the Prepackaged Plan, the term "Expiration Date" shall mean 5:00 p.m., New York City time, on _____ __, 1998, unless the Company, in its sole discretion, extends the Exchange Offer or solicitation period, in which case the term "Expiration Date" for the Exchange Offer or solicitation period shall mean the last time and date to which the Exchange Offer or solicitation period is extended. See "TENDERING AND VOTING PROCEDURES" and "VOTING AND CONFIRMATION OF THE PREPACKAGED PLAN." Interest on Senior Notes......The consideration to be paid pursuant to the Exchange Offer or the Prepackaged Plan will be paid in respect of each $1,000 principal amount of Senior Notes (together with all accrued and unpaid interest) tendered pursuant to the Exchange Restructuring and accepted for exchange or exchanged pursuant to the Prepackaged Restructuring. By tendering Senior Notes pursuant to the Exchange Restructuring, and pursuant to the terms of the Prepackaged Restructuring, a Noteholder waives all rights to receive any payments with respect to accrued but unpaid interest on such Senior Notes, other than the New Common Stock to be paid pursuant to the Exchange Restructuring or the Prepackaged Restructuring. Outstanding Senior Notes as of the date of this Exchange Restructuring Prospectus......As of the date of this Exchange Restructuring Prospectus, there was outstanding $104.879 million aggregate principal amount of Senior Notes (plus accrued but unpaid interest thereon). As of February 28, 1998, the total interest accrued on the Senior Notes amounted to $5.5 million. As of the date of this Exchange Restructuring Prospectus, the total interest accrued on the Senior Notes amounts to $[__________]. Conditions to Exchange Restructuring.................The Company's obligation to accept Senior Notes tendered pursuant to the Exchange Restructuring is conditioned, among other things, on (a) the Minimum Tender Condition, (b) approval by the Stockholders of each of the Restructuring Proposals, and (c) obtaining the waiver of certain provisions under the Company's licensing agreements with certain licensors to the Company, and any other consents or waivers that the Company determines are necessary to effectuate the terms and conditions of the Exchange Restructuring. The Company has reserved the right to waive or seek the waiver of any one or more of these conditions but does not currently intend to waive or seek the waiver of any condition. Pursuant to the Letter Agreement, Magten's prior written consent is required for the Company to waive the Minimum Tender Condition. If any or all of the Restructuring Proposals are not approved by the Stockholders at the Stockholders' Meeting and/or the Minimum Tender Condition is not satisfied or waived, but the Company receives sufficient acceptances of the Prepackaged Plan to obtain confirmation thereof by the Bankruptcy Court, then the Company intends to pursue confirmation of the Prepackaged Plan under Chapter 11 of the Bankruptcy Code and to attempt to use such acceptances to obtain confirmation of the Prepackaged Plan. See "TENDERING AND VOTING PROCEDURES." Conditions to Prepackaged Restructuring.................The Bankruptcy Code requires that the Bankruptcy Court determine that the Prepackaged Plan complies with the requirements of Section 1129 of the Bankruptcy Code. Approval of two-thirds of the principal amount and a majority in number of the Noteholders voting on the Prepackaged Plan is required for the consummation of the Prepackaged Restructuring. See "DESCRIPTION OF THE PREPACKAGED PLAN." Certain Federal Income Tax Considerations................Noteholders will generally not recognize gain or loss upon the receipt of New Common Stock in exchange for the Senior Notes pursuant to the Restructuring. Subject to certain exceptions described herein (see CERTAIN FEDERAL INCOME TAX CONSIDERATIONS: NOTEHOLDERS), the Company will realize cancellation of indebtedness income for Federal income tax purposes as a result of the Restructuring if the fair market value of the New Common Stock received by the Noteholders pursuant to the Restructuring is less than the adjusted issue price (including any accrued but unpaid interest) of the Senior Notes exchanged therefor. The Company has approximately $55 million of operating losses and net operating loss carryovers ("NOLs") which are available to offset any cancellation of indebtedness income that may be recognized. In the event that the Restructuring is consummated by means of the Prepackaged Restructuring, such income would not be included in income for Federal income tax purposes. If the Restructuring is implemented by means of the Prepackaged Restructuring, the Company will recognize no cancellation of indebtedness income. If the Restructuring is implemented by means of the Exchange Restructuring, the Company may recognize some cancellation of indebtedness income, depending upon the trading price of the Company's stock on the date the Restructuring is implemented. If the Company is insolvent at such time, then, to the extent of the insolvency, none of the cancellation of indebtedness income will be included in its gross income. In any event, based upon current valuations, it is likely that any such cancellation of indebtedness income included in income will be fully offset by the Company's NOL's, assuming that the Company makes the election provided under Code Section 382 to "close its books" as of the closing date of the Restructuring. As a result of the Restructuring, the Company will undergo an "ownership change" for Federal income tax purposes and will be limited in its ability to use its NOLs and certain tax credit carryforwards to offset future taxable income. See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS: NOTEHOLDERS." Old Common Stock..............As of the Record Date, there were 30,000,000 shares of Old Common Stock authorized for issuance, of which 14,964,608 shares were issued and outstanding (or 1,496,461 shares of New Common Stock after giving effect to the Reverse Split). As part of the Exchange Restructuring, Stockholders will be asked to consider and approve the Charter Amendment, the Issuance and the Stock Award and Incentive Plan and to elect new directors pursuant to the Election of the New Board. If the Stockholders approve the Stock Award and Incentive Plan, the Stock Award and Incentive Plan will become effective regardless of whether the Exchange Restructuring is implemented or any of the Restructuring Proposals are approved. However, the approval of the Stock Award and Incentive Plan is not a condition to the consummation of the Restructuring. If the Prepackaged Restructuring is consummated, the Company expects that each of the Restructuring Proposals will be implemented pursuant to the Prepackaged Plan. See "PURPOSES AND EFFECTS OF THE PREPACKAGED RESTRUCTURING." Shareholder Rights Plan.......The Rights Plan provides for a dividend distribution of one right (collectively, the "Rights") for each share of Old Common Stock to holders of record of the Old Common Stock at the close of business on December 23, 1997. With certain exceptions, the Rights will become exercisable only in the event that an acquiring party accumulates 20% or more of the Company's voting stock, or if a party announces an offer to acquire 30% or more of such voting stock. In order to effectuate the terms of the Restructuring, on [_________], 1998, the Rights Plan was amended to provide that the Rights expire immediately prior to the consummation of the Restructuring. See "DESCRIPTION OF RIGHTS PLAN." Market and Trading Information: Senior Notes..................The Senior Notes are traded in the over-the-counter market by certain dealers who from time to time are willing to make a market in such securities. Trading of the Senior Notes is, however, limited, and prices and trading volumes are not reported and are difficult to monitor. See "MARKET PRICES OF THE SENIOR NOTES." Old Common Stock..............The Old Common Stock is currently traded on the NYSE and is quoted on the NYSE under the symbol "SLT". See "MARKET PRICES FOR OLD COMMON STOCK AND RELATED STOCKHOLDER MATTERS" and "DISCUSSION OF RISK FACTORS." New Common Stock..............The NYSE requires approval of the Issuance of the New Common Stock. The Company has fallen below the continued listing criteria of the NYSE for net tangible assets available to common stock together with average net income after taxes for the past three years. However, the NYSE has reviewed the terms and conditions of the Restructuring set forth herein and has informed the Company that it will continue to list the Company's common stock during the period prior to consummation of the Restructuring and intends to list the Company's common stock from and after the Restructuring Date. However, the NYSE has advised the Company that after consummation of the Restructuring, the NYSE intends to monitor the performance of the Company based upon the Projections set forth herein to ensure compliance with the NYSE's original listing standards in respect of the New Common Stock. The Company believes that as a result of the consummation of the Restructuring, following the Restructuring Date, the Company will be able to return to compliance with the original listing standards in respect of the New Common Stock and the Warrants and that the New Common Stock and the Warrants will continue to be listed for trading on the NYSE. However, the NYSE has advised the Company that the Company's failure to meet the Projections following the Restructuring could result in the suspension from trading and subsequent delisting of the New Common Stock. Warrants and Warrant Shares...The NYSE requires approval of the Issuance of the Warrants and the Warrant Shares. As discussed above, application will be made to list the Warrants and the Warrant Shares for trading on the NYSE. There can be no assurance that such application will be approved or that an active market for the Warrants or the Warrant Shares will develop or as to the prices at which they might be traded. If the Company is unable to have the Warrants or the Warrant Shares listed for trading on the NYSE upon consummation of the Restructuring, the Company will use its best efforts to cause the Warrants and/or the Warrant Shares to be quoted on the National Market System of NASDAQ or to be listed on another national securities exchange. However, there is no assurance that the Company would be successful in such efforts. See "DISCUSSION OF RISK FACTORS -- Lack of Trading Market for Warrants and New Common Stock; Volatility; Potential De-Listing of the New Common Stock." Post-Restructuring Board......Each of the existing members of the Board has delivered to the Company a resignation letter resigning from the Board effective as of the Exchange Restructuring Date. In accordance with the Company's Certificate of Incorporation, by resolution of the Board, the number of directors has been fixed at [_________] effective as of the Exchange Restructuring Date. As provided for in the Letter Agreement, the new Board will consist of: (i) Mr. Jerald Politzer, the Chairman of the Board; (ii) [__] members nominated by Magten, subject to consultation with the Company and other Noteholders who may come forward prior to the commencement of the Solicitation; and (iii) one member designated by the current Board. As described above, as contemplated by the Letter Agreement, it is expected that Magten will provide the Company with its Board nominees prior to the commencement of the Solicitation. In addition, the current Board has designated Marvin Schiller to be the current Board's nominee to the new Board. See "INFORMATION REGARDING NOMINEES." Depositary....................[__________] has been appointed as Depositary with respect to the Senior Notes for the Exchange Restructuring (the "Depositary") to act as agent for the tendering Noteholders for the purposes of receiving New Common Stock from the Company and transmitting such New Common Stock to tendering Noteholders. Questions and requests for assistance may be directed to the Depositary at one of its addresses and telephone numbers set forth on the back cover of this Exchange Restructuring Prospectus. See "ADVISORS AND REPRESENTATIVES." Information Agent/ Voting Agent..................[__________] is serving as Information Agent in connection with the Exchange Restructuring and the solicitation of acceptances of the Prepackaged Plan (the "Information Agent") and as voting agent with respect to votes on the Prepackaged Plan. Any questions regarding how to tender in the Exchange Offer or how to vote on the Prepackaged Plan, and any requests for additional copies of the Exchange Restructuring Prospectus, Letters of Transmittal, Ballots or Master Ballots should be directed to the Information Agent at its address and telephone number set forth on the back cover of this Exchange Restructuring Prospectus. See also "ADVISORS AND REPRESENTATIVES." SUMMARY OF THE PREPACKAGED PLAN The table below provides a summary of the classification and treatment of, and distributions in respect of Claims and Interests in each Class under the Prepackaged Plan. For a more precise explanation, please see "DESCRIPTION OF THE PREPACKAGED PLAN" and the Prepackaged Plan itself, a copy of which is attached hereto as Annex II. TYPE OF CLAIM OR EQUITY CLASS INTEREST DISTRIBUTION - ----- ------------------------ ---------------------------------------- - -- Administrative Expenses Allowed Administrative Expenses are to be paid in full, in cash, on the later of (i) the Effective Date and (ii) the date on which the Bankruptcy Court enters an order allowing such Administrative Expense; provided, however, that allowed Administrative Expenses representing obligations incurred in the ordinary course of business, consistent with past practice, or assumed by the Company shall be paid in full or performed by the Company in the ordinary course of business, consistent with past practice; provided further, however, that allowed Administrative Expenses incurred by the Company after the Confirmation Date, including (without limitation) claims for professionals' fees and expenses, shall not be subject to application and may be paid by the Company in the ordinary course of business without further Bankruptcy Court approval. - -- Priority Tax Claims With respect to each Allowed Priority Tax Claim, at the sole option of the Company, the Holder of an Allowed Priority Tax Claim will be entitled to receive from the Company on account of such claim: (a) Cash payments made in equal installments beginning on or before the first anniversary following the Effective Date with the final installment being payable no later than the sixth anniversary of the date of the assessment of such Allowed Priority Tax Claim, together with interest on the unpaid balance of such Allowed Priority Tax Claim from the Effective Date calculated at the Market Rate; or (b) such other treatment agreed to by the Holder of such Allowed Priority Tax Claim and the Company. 1 Priority Claims (Unimpaired) On the latest of (i) the Effective Date, (ii) the date on which such Priority Claim becomes an Allowed Claim, or (iii) the date on which the Company and the Holder of such Allowed Priority Claim otherwise agree, each Holder of an Allowed Priority Claim will be entitled to receive Cash in an amount sufficient to render such Allowed Priority Claim Unimpaired under Section 1124 of the Bankruptcy Code. 2 CIT Claim (Unimpaired) At the election of the Company prior to the Effective Date, on the Effective Date or as soon as practicable thereafter, CIT will be entitled to receive on account of the Allowed CIT Claim one of the following treatments: (i) a distribution in Cash equal to 100% of its Allowed CIT Claim, (ii) the Allowed CIT Claim will be otherwise rendered Unimpaired in accordance with Section 1124 of the Bankruptcy Code, or (iii) such other treatment as mutually agreed to by the Company and CIT. 3 Senior Note Claims (Impaired) On the Effective Date or as soon as practicable thereafter, each Holder of an Allowed Senior Note Claim will be entitled to receive on account of such Holder's Allowed Senior Note Claim such Holder's pro rata share of 18,456,350 shares of New Common Stock (or 175.977555 shares of New Common Stock for each $1,000 principal face amount of Senior Notes held by such Holder). 4 Miscellaneous Secured Claims (Unimpaired) At the election of the Company prior to the Effective Date, on the Effective Date or as soon as practicable thereafter, each Holder of an Allowed Miscellaneous Secured Claim will be entitled to receive on account of such Holder's Allowed Miscellaneous Secured Claim one of the following treatments: (i) the legal, equitable and contractual rights to which such Allowed Miscellaneous Secured Claim entitles such Holder shall remain unaltered, (ii) such Holder's Allowed Miscellaneous Secured Claim shall be reinstated and rendered Unimpaired in accordance with section 1124 of the Bankruptcy Code, or (iii) such other treatment as mutually agreed to by the Company and such Holder. 5 General Unsecured Claims (Unimpaired) At the election of the Company prior to the Effective Date, on the Effective Date or as soon as practicable thereafter, each Holder of an Allowed General Unsecured Claim that has not been fully paid or satisfied prior to the Effective Date will be entitled to receive on account of such Holder's Allowed General Unsecured Claim one of the following treatments: (i) the legal, equitable and contractual rights to which such Allowed General Unsecured Claim entitles such Holder shall remain unaltered, (ii) such Holder's Allowed General Unsecured Claim will be reinstated and rendered Unimpaired under section 1124 of the Bankruptcy Code, or (iii) such other treatment as mutually agreed to by the Company and such Holder. 6 Old Common Stock Interests (Impaired) On the Effective Date or as soon as practicable thereafter, each Holder of an Allowed Old Common Stock Interest will be entitled to receive on account of such Holder's Allowed Old Common Stock Interest such Holder's pro rata share of (i) 1,496,461 shares of New Common Stock, and (ii) the Warrants. 7 Other Interests (Impaired) On the Effective Date, Other Interests will be extinguished and no distributions will be made in respect of such Other Interests. NOTICE TO HOLDERS OF CLAIMS AND INTERESTS WHEN CONFIRMED BY THE BANKRUPTCY COURT, THE PREPACKAGED PLAN WILL BIND ALL HOLDERS OF CLAIMS AGAINST AND INTERESTS IN THE COMPANY, WHETHER OR NOT THEY ARE ENTITLED TO VOTE OR DID VOTE ON THE PREPACKAGED PLAN AND WHETHER OR NOT THEY RECEIVE OR RETAIN ANY DISTRIBUTIONS OR PROPERTY UNDER THE PREPACKAGED PLAN. THUS, ALL NOTEHOLDERS ARE ENCOURAGED TO READ THIS EXCHANGE RESTRUCTURING PROSPECTUS AND ITS ANNEXES CAREFULLY AND IN THEIR ENTIRETY BEFORE VOTING TO ACCEPT OR TO REJECT THE PREPACKAGED PLAN. THIS EXCHANGE RESTRUCTURING PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE PREPACKAGED PLAN, CONSIDERATIONS PERTINENT TO ACCEPTANCE OR REJECTION OF THE PREPACKAGED PLAN, AND DEVELOPMENTS CONCERNING THE CHAPTER 11 CASE. CERTAIN OF THE INFORMATION CONTAINED IN THIS EXCHANGE RESTRUCTURING PROSPECTUS IS BY ITS NATURE FORWARD LOOKING AND CONTAINS ESTIMATES, ASSUMPTIONS, AND PROJECTIONS THAT MAY BE MATERIALLY DIFFERENT FROM ACTUAL FUTURE RESULTS. Except with respect to the projections referenced in "PROJECTED CONSOLIDATED FINANCIAL INFORMATION" (the "Projections") and except as otherwise specifically and expressly stated herein, this Exchange Restructuring Prospectus does not reflect any events that may occur subsequent to the date hereof. Such events may have a material impact on the information contained in this Exchange Restructuring Prospectus. Neither the Company nor Reorganized Salant intend to update the Projections. Thus, the Projections will not reflect the impact of any subsequent events not already accounted for in the assumptions underlying the Projections. Further, the Company does not anticipate that any amendments or supplements to this Exchange Restructuring Prospectus will be distributed to reflect such occurrences. Accordingly, the delivery of this Exchange Restructuring Prospectus shall not under any circumstance imply that the information herein is correct or complete as of any time subsequent to the date hereof. EXCEPT WHERE SPECIFICALLY NOTED, THE FINANCIAL INFORMATION CONTAINED HEREIN HAS NOT BEEN AUDITED BY A CERTIFIED PUBLIC ACCOUNTANT AND HAS NOT BEEN PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. If you did not receive a Ballot in your package of Solicitation Materials and believe that you should have, please contact the Information Agent named below at the address or telephone number set forth in "VOTING AND CONFIRMATION OF THE PREPACKAGED PLAN -- Information Agent." COMPARISON OF EXCHANGE RESTRUCTURING AND PREPACKAGED RESTRUCTURING The following is a comparison of certain of the elements of, and differences between, the Exchange Restructuring and the Prepackaged Restructuring. PREPACKAGED EXCHANGE RESTRUCTURING RESTRUCTURING ------------------------- ------------------------- APPROVAL REQUIRED........ 100% of the aggregate Acceptances must be principal amount of the received from holders of Senior Notes must be at least two-thirds in tendered and not dollar amount and more withdrawn and a majority than one-half in number of the voting power of of Senior Notes, the outstanding Old counting only holders Common Stock must approve who vote. each of the Restructuring Proposals. EFFECT ON NOTEHOLDERS WHO DO NOT PARTICIPATE... Not applicable, as the Upon receipt of the Exchange Restructuring is requisite acceptances conditioned upon, among and consummation of the other things, 100% of the Prepackaged aggregate principal Restructuring, all amount of the Senior Senior Notes would be Notes being tendered and canceled and Noteholders not withdrawn. The would receive the same Company currently does consideration as the not intend to waive or holders who voted in seek the waiver of the favor of the Prepackaged Minimum Tender Restructuring. Condition. Pursuant to the Letter Agreement, Magten's prior written consent is required for the Company to waive the Minimum Tender Condition. ANNUAL MEETING OF STOCKHOLDERS AND IMPLEMENTATION OF PROPOSALS................ At the Stockholders' If the Prepackaged Meeting, Stockholders Restructuring is pursued will be asked to consider and a petition is filed and vote upon the Charter under the Bankruptcy Amendment, the Issuance, Code, the Company the Stock Award and expects that each of the Incentive Plan and the Restructuring Proposals Election of the New will be implemented Board. The Stockholder pursuant to the votes with respect to the Prepackaged Issuance and the Election Restructuring. Pursuant of the New Board will not to the Prepackaged Plan, be effective unless and all Old Options will be until the Charter terminated upon Amendment is approved at consummation thereof. the Stockholders' Meeting The Stock Award and and filed with the Incentive Plan will Secretary of the State of remain in effect after Delaware and the Exchange the consummation of the Offer has been Prepackaged Plan; consummated. Each of the provided, that, if the Restructuring Proposals Stock Award and is conditioned upon Incentive Plan has not approval by the been approved by the Stockholders of each of Stockholders prior to the other Restructuring the commencement of the Proposals. If any or all Chapter 11 Case, any of the Restructuring awards granted Proposals are not thereunder shall be approved by the subject to the Stockholders at the subsequent approval of Stockholders' Meeting, the Stockholders of the then none of the Company. Restructuring Proposals will become effective. If the Stockholders approve the Stock Award and Incentive Plan, the Stock Award and Incentive Plan will become effective regardless of whether the Exchange Restructuring is implemented or any of the Restructuring Proposals are approved. However, approval of the Stock Award and Incentive Plan is not a condition to the consummation of the Restructuring. MECHANICS OF PARTICIPATION............ Noteholders who desire to Impaired creditors and participate in the equity interest holders Exchange Offer must who desire to vote, and properly complete a are entitled to vote, on Letter of Transmittal and the Prepackaged Plan deliver it, together with must properly complete a the Senior Notes and any Ballot or Master Ballot, other required documents, as the case may be, and to the Depositary. Only deliver it in accordance a registered Noteholder, with the voting or persons who have instructions. Only obtained a properly beneficial owners of completed note power from Claims or Interests or, a registered Noteholder, if applicable, nominees may tender in the who are voting at the Exchange Offer. instruction of the beneficial owners and make a certification with respect thereto, who are entitled to vote on the Prepackaged Plan may vote thereon. PREFERRED STOCK VOTING RIGHTS............ There is currently no The Charter Amendment preferred stock of the will provide that any Company outstanding, but preferred stock to be any subsequently issued issued will have certain shares of preferred stock specified minimum voting may or may not have rights, as required by voting rights after the Bankruptcy Code. consummation of the Exchange Restructuring. POST-RESTRUCTURING STOCK OPTION GRANTS...... All of the Old Options Pursuant to the will not be terminated Prepackaged Plan, all and will continue to Old Options outstanding remain outstanding, as of the commencement subject to adjustment to of the Chapter 11 Case reflect the effect of the granted under the Old Reverse Split on the Old Plans will be terminated Options. In addition, and of no further force under the Stock Award and or effect as of the Incentive Plan, consummation of the directors, officers and Prepackaged Plan. In employees of the Company addition, each of the will become eligible to Old Plans shall be receive additional terminated and of no options to purchase further force or effect shares of New Common as of the consummation Stock as determined by of the Prepackaged the new Board after the Plan. The Stock Award Restructuring Date, and Incentive Plan will subject to the approval remain in effect after by the stockholders of the consummation of the the Company. Prepackaged Plan; provided, that, if the Stock Award and Incentive Plan has not been approved by the Stockholders prior to the commencement of the Chapter 11 Case, any awards granted thereunder shall be subject to the subsequent approval of the stockholders of the Company. It is the Company's intention that certain directors, officers and employees of the Company will be granted new options to purchase shares of New Common Stock under the Stock Award and Incentive Plan. The persons to receive such grants, the number of shares of New Common Stock subject to such grants, and such other terms and conditions applicable to such grants, shall be determined by the Board of Reorganized Salant in its sole discretion, except for automatic stock option grant to certain non-employee directors of the Company. PURPOSE OF THE RESTRUCTURING The purpose of the Restructuring is to help ensure the long-term viability and to contribute to the success of the Company by deleveraging the Company's capital structure. Specifically, in accordance with the Three-Year Business Plan developed by the Company, the Restructuring is designed to recapitalize the Company by converting all of the Company's long-term debt obligations under the Senior Notes (which, as of February 28, 1998, was $110.379 million, consisting of $104.879 million principal amount of, and $5.5 million of accrued interest on, the Senior Notes) into New Common Stock. Interest charges for the Company will be reduced by $11 million per year and stockholders' equity should be substantially increased as a result of the Restructuring. The Company's consolidated debt at the completion of the Restructuring will include approximately $28 million in revolver debt plus $15 million from the term loan portion of its working capital facility. This significantly lower debt-to-equity ratio should help the Company to achieve the objectives as described in the Three-Year Business Plan and make the Company more attractive to investors. The Company believes that by reducing the uncertainty surrounding its ability to pay or retire the Senior Notes which are due in their entirety on December 31, 1998, the Restructuring should maximize liquidity for the Company's business operations and thereby provide a platform for future growth and enhance the Company's total enterprise value. The Company further believes that by providing the Company with a deleveraged capital structure, the company that results from the Restructuring should be positioned favorably to withstand the normal market fluctuations in the highly volatile apparel industry. In contemplation of the Restructuring, the Company elected not to pay the interest payment of approximately $5.5 million that was due and payable under the Senior Notes on March 2, 1998, subject to a 30 day grace period. Because the Company elected not to pay the interest due on the Senior Notes by the expiration of the applicable grace period, an event of default has occurred with respect to the Senior Notes entitling the Noteholders to accelerate the maturity thereof. Holders of at least 25% in the aggregate principal face amount of the Senior Notes may accelerate all outstanding indebtedness under the Senior Notes pursuant to the terms of the Indenture. If such holders accelerate the indebtedness under the Senior Notes, the Company may be required to commence a proceeding under Federal bankruptcy law without having solicited acceptances for the Prepackaged Plan prior to the commencement of such proceeding. Pursuant to the Letter Agreement, Magten has, in accordance with Section 6.5 of the Indenture, caused a written direction to be provided to the Trustee, to forbear during the term of the Letter Agreement from taking any action under the Indenture in connection with the failure by the Company to make the interest payment on the Senior Notes that was due and payable on March 2, 1998. On April 8, 1998, the Trustee issued a Notice of Default stating that as a result of the Company's failure to make the interest payment due on the Senior Notes, an event of default under the Indenture had occurred on April 1, 1998. In addition, the Company's working capital lender, CIT, agreed to forbear until November 30, 1998, subject to certain conditions, from exercising any of its rights or remedies under the Credit Agreement, arising by virtue of the Company's failure to pay such interest on the Senior Notes. Under the Thirteenth Amendment, such agreement to forbear by CIT will terminate on November 30, 1998 or earlier upon the happening of (a) the occurrence of any Event of Default (as defined in the Credit Agreement), other than by virtue of the Company's failure to make the March 2, 1998 or August 31, 1998 interest payment on the Senior Notes or the commencement or continuation of a chapter 11 case to effectuate the Restructuring; or (b) the exercise of any right or remedy with respect to any of the Collateral by any holder of the Senior Notes or by the Trustee under the Indenture; or (c) the payment of any interest on the Senior Notes in respect of the Company's non-payment of the interest that was payable on March 2, 1998 or that will be payable on August 31, 1998 or otherwise; or (d) the occurrence of an Agreement Termination Event (as defined in the Letter Agreement), except under certain circumstances. See "BACKGROUND TO THE RESTRUCTURING -- Waiver and Forbearance Agreement and Commitment For New Credit Agreement." Failure to consummate the Restructuring could result in the acceleration of all of the indebtedness under the Senior Notes and/or the Credit Agreement. ABSENT THE RESTRUCTURING, THE COMPANY DOES NOT BELIEVE IT WILL BE ABLE TO SATISFY ITS OBLIGATIONS UNDER THE SENIOR NOTES WITHOUT A REFINANCING OF THE COMPANY'S INDEBTEDNESS UNDER THE CREDIT AGREEMENT AND/OR THE SENIOR NOTES OR AN ADDITIONAL CAPITAL INFUSION, AND IT IS UNLIKELY THAT THE COMPANY WILL BE ABLE TO OBTAIN SUCH REFINANCING OR ADDITIONAL CAPITAL INFUSION. IF THE COMPANY DETERMINES THAT IT IS OR WILL BE UNABLE TO COMPLETE THE RESTRUCTURING, THE COMPANY WILL CONSIDER ALL OTHER AVAILABLE FINANCIAL ALTERNATIVES, INCLUDING THE SALE OF ALL OR A PART OF THE COMPANY'S BUSINESSES, THE IMPLEMENTATION OF AN ALTERNATIVE RESTRUCTURING ARRANGEMENT OUTSIDE OF BANKRUPTCY, OR THE COMMENCEMENT OF A CHAPTER 11 CASE WITHOUT A PRE-BANKRUPTCY ACCEPTED PLAN OF REORGANIZATION. THERE CAN BE NO ASSURANCE, HOWEVER, THAT ANY ALTERNATIVE WOULD BE ON TERMS AS FAVORABLE TO NOTEHOLDERS AND STOCKHOLDERS AS THE RESTRUCTURING. TENDERING AND VOTING PROCEDURES How to Tender in the Exchange Offer......................... ONLY NOTEHOLDERS, OR PERSONS WHO HAVE OBTAINED A PROPERLY COMPLETED NOTE POWER FROM THE REGISTERED HOLDERS THEREOF, MAY TENDER IN THE EXCHANGE OFFER. Any beneficial holder whose Senior Notes are registered or held of record in the name of such holder's broker, dealer, commercial bank, trust company or other nominee and who wishes to tender Senior Notes should contact such Noteholder of record and instruct such Noteholder to tender Senior Notes. To tender Senior Notes pursuant to the Exchange Offer, a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof) or an Agent's Message in the case of a Book-Entry Transfer of Senior Notes, together with any signature guarantees and any other documents required by the Instructions to the Letter of Transmittal, must be received by the Depositary at one of its addresses set forth on the back cover page of this Exchange Restructuring Prospectus prior to the Expiration Date and either (i) a certificate representing such Senior Notes must be received by the Depositary at one of its addresses or (ii) such Senior Notes must be transferred pursuant to the procedures for Book-Entry Transfer set forth under "TENDERING AND VOTING PROCEDURES," and the Book-Entry Transfer of such Senior Notes into the Depositary's account at a Book-Entry Transfer Facility must be confirmed, in each case, prior to the Expiration Date. THERE IS NO PROCEDURE FOR TENDERING BY GUARANTEED DELIVERY. TENDERS BY GUARANTEED DELIVERY WILL NOT BE ACCEPTED. Noteholders will not be obligated to pay the Company any brokerage commissions or solicitation fees in connection with the Exchange Offer. See "TENDERING AND VOTING PROCEDURES." How to Vote on the Prepackaged Plan.......................... The following Classes of Claims and Interests are impaired under the Prepackaged Plan, and all Holders of Claims or Interests in such Classes as of the Record Date are entitled to vote to accept or to reject the Prepackaged Plan: Claims of Noteholders or Stockholders. To be entitled to vote to accept or to reject the Prepackaged Plan, a Noteholder or Stockholder must be the beneficial interest holder of either Senior Notes or Old Common Stock, as the case may be, at the close of business on the Record Date, whether such Claims or Interests are held of record on the Voting Record Date in such Holder's name or in the name of such Holder's broker, dealer, commercial bank, trust company or other nominee. For purposes of determining whether the requisite number of acceptances is received to approve the Prepackaged Plan, only votes which are cast at the direction of beneficial interest holders in accordance with the procedures set forth herein may be counted, and only the votes of Holders of Allowed Claims or Interests will be counted. See "VOTING AND CONFIRMATION OF THE PREPACKAGED PLAN." Ballots are to be used by beneficial interest holders whether such beneficial interest holders are also record holders or hold through other record holders. Master Ballots are to be used by record holders of Senior Notes and/or Old Common Stock which hold such Senior Notes and/or Old Common Stock for the account of one or more beneficial interest holders. A record holder which holds Senior Notes and/or Old Common Stock on behalf of one or more beneficial interest holders should collect completed Ballots from such beneficial interest holders and should complete a Master Ballot reflecting the votes of such beneficial interest holders, as indicated on their respective Ballots. Holders of such Claims and/or Interests should complete an appropriate Ballot and, where appropriate, Master Ballot, for each Class of Claims and Interests held by such Holders in accordance with the instructions set forth thereon and the procedures set forth herein and in the Prepackaged Plan. The Ballots require voting Holders to make certain certifications, including with respect to casting other votes pursuant to the Solicitation. Each beneficial interest holder of Senior Notes and each beneficial interest holder of Interests who holds Claims or Interests in more than one Class is required to vote separately with respect to each Class in which such beneficial interest holder holds Claims or Interests in aggregate amounts not in excess of the amounts which were beneficially owned as of the Record Date. A separate Ballot of the appropriate form should be used to vote on the Prepackaged Plan with respect to each Impaired Class of Claims or Interests. Votes must be made on the appropriate Ballots in order to be counted. The vote of a Noteholder will be counted only once in determining whether the requisite number of Holders in Class 3 have voted to accept the Prepackaged Plan, regardless of the number of Ballots relating to such Class submitted by or on behalf of such Holder. A Holder may not split its vote within a Class of Impaired Claims or Interests. Under the Bankruptcy Code, for purposes of determining whether the requisite acceptances have been received from an Impaired Class of Claims or Interests, the vote will be tabulated based on the ratio of (i) Allowed Claims and/or Interests with respect to which a vote to accept was received to (ii) all Allowed Claims and/or Interests of such Impaired Class with respect to which any valid vote was received. Therefore, it is possible that the Prepackaged Plan could be approved by an Impaired Class of Claims with the affirmative vote of significantly less than two-thirds in amount and one-half in number of the entire Class of Claims, or by an Impaired Class of Interests with the affirmative vote of significantly less than two-thirds in amount of the entire Class of Interests. Failure by a Holder of an Impaired Claim or an Impaired Interest to submit a properly executed Ballot or Master Ballot (as appropriate) or to indicate acceptance or rejection of the Prepackaged Plan in accordance with the instructions set forth thereon and the procedures set forth in this Exchange Restructuring Prospectus shall be deemed to constitute an abstention by such Holder with respect to a vote regarding the Prepackaged Plan. Abstentions as a result of failing to submit a properly executed Ballot or Master Ballot (as appropriate) or failing to indicate a vote either for acceptance or rejection of the Prepackaged Plan will not be counted as votes for or against the Prepackaged Plan. The Company, in its sole discretion, may waive any defect in any Ballot or Master Ballot at any time, either before or after the close of voting, and without notice. Except as otherwise ordered by the Bankruptcy Court, a Ballot or where appropriate, Master Ballot, which is either (i) not submitted to the Voting Agent, (ii) submitted to the Voting Agent without proper execution or (iii) executed and submitted to the Voting Agent without properly indicating acceptance or rejection of the Prepackaged Plan will constitute an abstention with respect to a vote on the Prepackaged Plan under section 1126(b) of the Bankruptcy Code for purposes of confirmation of the Prepackaged Plan. See "VOTING AND CONFIRMATION OF THE PREPACKAGED PLAN." Withdrawal Rights and Revocation of Votes.............. Tenders of Senior Notes may be withdrawn, subject to certain procedures, at any time before they are accepted for exchange by the Company. Votes on the Prepackaged Plan may be withdrawn or changed, subject to the procedures described herein, at any time prior to the earlier of (i) the Filing Date and (ii) the Expiration Date. Revocations of such votes thereafter may be effected only with the approval of the Bankruptcy Court. See "TENDERING AND VOTING PROCEDURES" and "VOTING AND CONFIRMATION OF THE PREPACKAGED PLAN -- Withdrawal of Votes on the Prepackaged Plan." Acceptance of Senior Notes and Delivery of New Common Stock. Subject to the satisfaction or waiver of all conditions to the Exchange Offer, the Company will accept all Senior Notes validly tendered on or prior to the Expiration Date. The New Common Stock will be delivered in exchange for the Senior Notes accepted in the Exchange Offer promptly after acceptance on the Expiration Date. Pursuant to the Prepackaged Plan, Senior Notes will be exchanged following the Effective Date upon the receipt by the Company of such Senior Notes and an accompanying Letter of Transmittal. STOCKHOLDERS' MEETING Date, Time and Place of Stockholders' Meeting......... The Stockholders' Meeting will be held at Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York 10004 on _____ __, 1998 at __:__ _.m., New York City time. Record Date; Stockholders Entitled to Vote; Quorum...... Holders of record of Old Common Stock at the close of business on the Record Date will be entitled to vote at the Stockholders' Meeting. Stockholders will be entitled to one vote per share with respect to each of the Proposals. On the Record Date, there were 14,964,608 shares of Old Common Stock outstanding, of which there were [____] holders of record. The presence, either in person or by properly executed proxy, of the holders of a majority of the shares of Old Common Stock outstanding and entitled to vote is necessary to constitute a quorum at the Stockholders' Meeting. Purpose of Stockholders' Meeting....................... The purpose of the Stockholders' Meeting is for the Stockholders to consider and to vote on various Proposals to implement the Restructuring, including Proposals (i) to approve the Charter Amendment, (ii) to approve the Issuance, (iii) to approve the Plan Proposal, (iv) to elect new directors pursuant to the Election of the New Board, (v) to ratify the appointment of Deloitte & Touche as independent auditors to the Company, and (vi) such other business as may properly come before the Stockholders' Meeting or any adjournments or postponements thereof. The Board has unanimously adopted a resolution proposing that the Company's Certificate of Incorporation be amended pursuant to the Charter Amendment to effect (i) a ten-to-one reverse stock split of the Company's outstanding shares of Old Common Stock and (ii) an increase in the number of shares of New Common Stock authorized. See "DESCRIPTION OF THE CHARTER AMENDMENT." The Charter Amendment is necessary to permit the Company to consummate the Exchange Restructuring on the terms contemplated by the Exchange Offer. In addition, assuming the aggregate market capitalization of the Company remains constant, the Reverse Split as implemented pursuant to the Charter Amendment should have the effect of increasing the trading price of the common stock of the Company from where it would otherwise trade in the absence of the Reverse Split. However, there can be no assurance that such an increase in the trading price will occur. The approval of the Stock Award and Incentive Plan by the Stockholders is necessary to provide appropriate incentives for those eligible to participate thereunder. The Board has also unanimously adopted resolutions approving the Issuance, the Stock Award and Incentive Plan and the Election of the New Board. In connection with its consideration of the Restructuring, the Board received the E&Y Fairness Opinion. See "RESTRUCTURING FINANCIAL CONSIDERATIONS -- Fairness Opinion." The approval of the Issuance and the Stock Award and Incentive Plan by the Stockholders is required by the applicable rules of the NYSE. If any or all of the Restructuring Proposals are not approved by the Stockholders at the Stockholders' Meeting, then none of the Restructuring Proposals will become effective. The Stockholder votes with respect to the Issuance and the Election of the New Board will not be effective unless and until the Charter Amendment is approved at the Stockholders' Meeting and filed with the Secretary of State of Delaware and the Exchange Restructuring has been consummated. If the Stockholders approve the Stock Award and Incentive Plan, the Stock Award and Incentive Plan will become effective regardless of whether the Exchange Restructuring is implemented or any of the Restructuring Proposals are approved. However, approval of the Stock Award and Incentive Plan is not a condition to the consummation of the Restructuring. If the Prepackaged Restructuring is required and a petition is filed under the Bankruptcy Code, the Company expects that the Restructuring Proposals will be implemented pursuant to the Prepackaged Plan. Votes Required................ Under the Delaware General Corporation Law (the "DGCL") and the Company's Certificate of Incorporation, the Issuance, the Charter Amendment and the Stock Award and Incentive Plan must be approved by the affirmative vote of the holders of a majority of the voting power of the Old Common Stock represented at the Stockholders' Meeting. If the Restructuring is effected by means of the Exchange Restructuring, the new members of the Board to be elected at the Stockholders' Meeting must be elected by the affirmative vote of the holders of a plurality of the voting power of the Old Common Stock represented at the Stockholders' Meeting. Apollo, the beneficial owner of 5,924,352 shares, representing approximately 39.6% of the issued and outstanding shares of Old Common Stock, has entered into a Voting Agreement with the Company, dated August __, 1998, wherein Apollo has agreed to vote all of its shares of Old Common Stock in favor of the Charter Amendment, the Issuance, the Stock Award and Incentive Plan and the Election of the New Board. See "BACKGROUND OF THE RESTRUCTURING -- THE VOTING AGREEMENT." In accordance with the terms of the Letter Agreement, the Company also requested that DDJ Capital Management LLC ("DDJ"), the beneficial holder of approximately 12.1% of the issued and outstanding shares of Old Common Stock as of March 10, 1998, enter into a voting agreement with the Company similar to the Voting Agreement entered into with Apollo. DDJ, however, informed the Company that it did not wish to enter into such a voting agreement. In addition, on or about March 3, 1998, DDJ requested that the Company terminate the restrictions on DDJ's ability to buy or sell shares of Old Common Stock set forth in a confidentiality agreement between DDJ and the Company (the "DDJ Confidentiality Agreement.") On March 4, 1998, the Company granted this request by DDJ. As of the date of this Exchange Restructuring Prospectus, DDJ is the beneficial owner of approximately __ shares of Old Common Stock, representing approximately _% of the issued and outstanding shares of Old Common Stock. As of _______, 1998 the Company's executive officers and directors, as a group, beneficially owned 492,721 (exclusive of the Apollo Shares) shares of the outstanding Old Common Stock, representing 3.3% of the issued and outstanding shares of Old Common Stock. Such officers and directors have advised the Company that they intend to vote in favor of each of the Proposals. The Stockholder votes with respect to the Issuance and the Election of the New Board will not become effective unless and until the Charter Amendment is approved at the Stockholders' Meeting and filed with the Secretary of State of Delaware and the Exchange Restructuring has been consummated. If the Stockholders approve the Stock Award and Incentive Plan, the Stock Award and Incentive Plan would become effective regardless of whether the Restructuring is implemented or any of the Restructuring Proposals are approved. Even if each of the Restructuring Proposals is approved by the Stockholders, the Board has reserved the right to abandon the Charter Amendment and each other Restructuring Proposal in the event that any other condition to the Restructuring is not satisfied or waived, including, but not limited to, the Minimum Tender Condition. However, the Board intends to file the Charter Amendment with the Secretary of State of Delaware if the Exchange Restructuring is consummated. Fairness Opinion.............. On April 21, 1998, at the request of the Board, E&Y delivered to the Board a written opinion (the "E&Y Fairness Opinion") addressed to the Board that, as of that date and based upon and subject to the factors and assumptions set forth therein, the consideration to be received by public Stockholders pursuant to the Restructuring is fair to public Stockholders from a financial point of view. E&Y subsequently delivered to the Board their written opinion addressed to the Board that, as of the date of the Proxy Statement/Prospectus and based upon and subject to the factors and assumptions set forth therein, the consideration to be received by public Stockholders pursuant to the Restructuring is fair to public Stockholders from a financial point of view. See "RESTRUCTURING FINANCIAL CONSIDERATIONS -- Fairness Opinion." A copy of the E&Y Fairness Opinion is attached as Annex I. Dissenters' Rights............ Stockholders will not be entitled to dissenters' rights or rights of appraisal in connection with the Charter Amendment, the Issuance, the Stock Award and Incentive Plan or the Election of the New Board. Dilution...................... Assuming 100% acceptance of the Exchange Offer and approval by the Stockholders of each Restructuring Proposal, the Company expects to issue 18,456,350 shares of New Common Stock directly to exchanging Noteholders, 1,496,461 shares of New Common Stock directly to existing Shareholders, and Warrants to purchase 2,216,979 additional shares of New Common Stock (subject to adjustment) to existing Stockholders. Based on the number of shares of outstanding Old Common Stock as of the Record Date, the 18,456,350 shares issued directly to Noteholders will represent 92.5% of the total issued and outstanding shares of New Common Stock immediately following consummation of the Exchange Restructuring, but excluding shares issued under the Stock Award and Incentive Plan and the Warrant Shares and, in the case of the Exchange Restructuring only, shares of New Common Stock issued under the Old Plans. The Stockholders currently own 100% of the common equity of the Company in the form of the Old Common Stock. As of March 16, 1998, there were 14,964,608 shares of Old Common Stock issued and outstanding. Assuming all of the conditions to the Exchange Restructuring are fulfilled, the Exchange Restructuring will result in the Stockholders receiving, in exchange for their shares of Old Common Stock, after giving effect to the Reverse Split, an aggregate of 1,496,461 shares of New Common Stock constituting 7.5% of the New Common Stock issued and outstanding immediately following consummation of the Exchange Restructuring (subject to dilution for shares of New Common Stock issued under the Stock Award and Incentive Plan and the Warrant Shares, and in the case of the Exchange Restructuring only, shares of New Common Stock issued under the Old Plans). In addition, the Stockholders will receive the Warrants, which represent the right to purchase up to 10% of the New Common Stock issued and outstanding immediately following consummation of the Exchange Restructuring and the Reverse Split (on a fully diluted basis). As a result, upon consummation of the Exchange Restructuring, the equity interests of the Stockholders represented by the Old Common Stock, as a percentage of the total number of outstanding shares of the common stock of the Company, will be significantly diluted from 100% of the Old Common Stock to 7.5% of the New Common Stock (subject to further dilution as a result of the issuance of shares of New Common Stock under the Stock Award and Incentive Plan and the Warrant Shares, and in the case of the Exchange Restructuring only, shares of New Common Stock issued under the Old Plans). Consummating the Prepackaged Plan will have the same dilutive effect. See "PURPOSE OF THE RESTRUCTURING" and "DISCUSSION OF RISK FACTORS." SUMMARY OF WARRANTS The following is a brief description of certain provisions of the Warrants. The Warrants will be issued to holders of Old Common Stock under the Warrant Agreement, to be dated the Restructuring Date, between the Company and the Warrant Agent. The following description of such provisions does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the detailed provisions of the Warrant Agreement, a copy of which is attached to the Company's Registration Statement as Exhibit 10.52. Noteholders may request a copy of the Warrant Agreement by contacting Todd Kahn, General Counsel and Executive Vice President of the Company, at (212) 221-7500. Issue......................... Upon consummation of the Exchange Restructuring, up to 2,216,979 Warrants will be issued to Stockholders which, after giving effect to the Reverse Split, will represent the right to purchase 10% of the issued and outstanding shares of New Common Stock (on a fully diluted basis). Each Warrant will be exercisable for a period of seven years from the Restructuring Date and shall be exercisable for one share of New Common Stock, subject to adjustment. Exercise Price................ Each Warrant will be exercisable at the Exercise Price of $6.2648 per share of New Common Stock. The Exercise Price and the number of shares of New Common Stock purchasable upon exercise of the Warrants are both subject to adjustment in certain cases referred to below. Stockholders will receive, for each share of Old Common Stock, .14814815 Warrants exercisable, in the aggregate and based upon the number of shares of Old Common Stock issued and outstanding as of the Record Date, for 2,216,979 shares of New Common Stock, constituting 10% of the issued and outstanding shares of New Common Stock immediately after giving effect to the Exchange Restructuring (on a fully diluted basis). No Rights Generally as Stockholders.................. No holder of Warrants will be entitled to any rights generally as a Stockholder of the Company unless and until such holder has obtained shares of New Common Stock upon the exercise of the Warrants for New Common Stock. Stockholders will not be entitled to receive Warrants unless and until they exchange their Old Common Stock for New Common Stock. Adjustment of Exercise Price and Number of Shares of New Common Stock Obtainable Upon Exercise...................... The number of shares of New Common Stock obtainable upon exercise of each Warrant, and correspondingly the Exercise Price, will be proportionately adjusted pursuant to standard antidilution provisions at any time the Company pays stock dividends, subdivides, combines or reclassifies its New Common Stock; distributes evidences of indebtedness or assets of the Company, or rights for such assets; issues New Common Stock for less than market value; issues options, warrants or other securities convertible for New Common Stock for less than market value; or effects similar dilutive transactions. SUMMARY OF NEW CIT CREDIT AGREEMENT The Company intends to enter into a New Credit Agreement, effective as of the Restructuring Date, which will replace the Company's current working capital facility under the Credit Agreement. From the beginning of Fiscal 1998, the Company received and reviewed various proposals for a New Credit Agreement which were submitted by CIT as well as various other prospective lenders. After reviewing the proposals for a New Credit Agreement received from the various lenders, and conducting extensive negotiations with certain of the lenders who submitted proposals, the Company determined that the proposal submitted by CIT contained the most advantageous terms and conditions. As a result, the Company entered into the CIT Commitment Letter, which sets forth the principal terms and conditions of an agreement for the New CIT Credit Agreement for a $140 million secured credit facility that the Company intends to enter into on the Restructuring Date. Pursuant to the CIT Commitment Letter, the New CIT Credit Agreement will provide for a general working capital facility, in the form of direct borrowings and letters of credit, up to $125,000,000, subject to an asset-based borrowing formula. The New CIT Credit Agreement will also provide for a $15,000,000 term loan facility. As collateral for borrowings under the New CIT Credit Agreement, the Company will grant to CIT a security interest in substantially all of the assets of the Company. The New CIT Credit Agreement will have an initial term commencing on the Restructuring Date and continuing through and including December 31, 2001. The New CIT Credit Agreement will also provide, among other things, that (i) the Company will be charged an interest rate on direct borrowings of .25% in excess of the prime rate of The Chase Manhattan Bank, N.A. or 2.25% in excess of the London Late Eurodollar Rate; and (ii) CIT may, in its sole discretion, make loans to the Company in excess of the borrowing formula. Pursuant to the CIT Commitment Letter, the New CIT Credit Agreement will also provide that the $15 million term loan portion of the facility shall be repaid based upon a five year amortization schedule in consecutive monthly installments, commencing on the first day of the month immediately following the date six months after the closing of the New CIT Credit Agreement and continuing thereafter with the final installment in the amount of the then remaining balance of the term loan, together with all unpaid and accrued interest thereon, due and payable on December 31, 2001. The CIT Commitment Letter provides that the New CIT Credit Agreement will contain financial covenants ("Maintenance Covenants") as to (i) minimum tangible net worth, (ii) maximum net loss, (iii) minimum interest coverage ratio, and (iv) maximum capital expenditures. Pursuant to the CIT Commitment Letter, there will be no other Maintenance Covenants contained in the New CIT Credit Agreement. The Company believes that the New CIT Credit Agreement will also contain restrictive covenants and events of default similar to those that are in the existing Credit Agreement. For a description of those restrictive covenants and events of default, see "DESCRIPTION OF CERTAIN EXISTING INDEBTEDNESS OF THE COMPANY--Revolving Credit Agreement." Pursuant to the CIT Commitment Letter and in accordance with the Twelfth Amendment, no closing or facility fees will be charged to the Company by CIT in consideration of the execution and delivery of the New CIT Credit Agreement. The Company believes that the terms and conditions of the New CIT Credit Agreement set forth in the CIT Commitment Letter are significantly more favorable than those currently existing under the Credit Agreement with CIT. Moreover, the Company also believes that the New CIT Credit Agreement will be adequate to permit the Company to operate its business in accordance with the Three-Year Business Plan. The execution of the New CIT Credit Agreement is subject to various conditions, including, but not limited to, consummation of the Restructuring by no later than November 30, 1998. There is no assurance that such conditions will be satisfied or that the New CIT Credit Agreement will be executed. In addition, under the Letter Agreement, the New CIT Credit Agreement must be on terms and conditions reasonably satisfactory to Magten, Apollo and the Company. SUMMARY OF REGISTRATION RIGHTS AGREEMENT In connection with the Restructuring, the Company will also enter into, on the Restructuring Date, a registration rights agreement (the "Registration Rights Agreement"). The following description of such provisions does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the detailed provisions of the Registration Rights Agreement, which is attached to the Company's Registration Statement as Exhibit 10.51. Noteholders may request a copy of the Registration Rights Agreement by contacting Todd Kahn, General Counsel and Executive Vice President of the Company, at (212) 221-7500. Under the terms and conditions of the Registration Rights Agreement, the Company must use commercially reasonable efforts to register the New Common Stock pursuant to a "shelf-registration" and to keep such shelf registration continuously effective for three years (subject to a two-year extension of such period to the extent that a registration statement on Form S-3 is available to the Company at the end of such initial three-year period), subject to the right to suspend the use of the prospectus constituting part of such registration statement for designated corporate purposes. Thereafter, holders who did not resell New Common Stock during the three-year period, but whose resales would have been covered by the registration statement, will be entitled to exercise, over a two-year period, up to three demand registrations and will be entitled to piggyback registration rights as well during such period. In the event that the shelf registration does not become effective within one hundred days after the date that the registration statement is filed, holders whose resales would have been covered by the registration statement will be entitled to exercise, over a two-year period, up to four demand registrations and will be entitled to piggyback registration rights as well during such period. See "DESCRIPTION OF REGISTRATION RIGHTS AGREEMENT." SUMMARY OF RIGHTS PLAN The Company is a party to a shareholder rights plan, dated December 8, 1987, as amended on December 10, 1997 (the "Rights Plan"), which provides for a dividend distribution of one right (collectively, the "Rights") for each share of Old Common Stock to holders of record of the Old Common Stock at the close of business on December 23, 1997. With certain exceptions, the Rights will become exercisable only in the event that an acquiring party accumulates 20 percent or more of the Company's voting stock, or if a party announces an offer to acquire 30 percent or more of such voting stock. Each Right, when exercisable, will entitle the holder to buy one-hundredth of a share of the Company's Series A Preferred Stock at a price of $30 per right or, upon the occurrence of certain events, to purchase either common stock of the Company or shares in an Acquiring Entity (as defined in the Rights Plan) at half the market value thereof. The Company will generally be entitled to redeem the Rights at a redemption price of $0.03 per Right at any time until the 10th day following the acquisition of a 20 percent position in its shares of Old Common Stock. In July 1993, the Rights Plan was amended to provide that an acquisition or offer by Apollo, or any of Apollo's Subsidiaries (as defined in the Rights Plan), will not cause the Rights to become exercisable. Pursuant to the December 10, 1997 amendment to the Rights Plan, the expiration date of the Rights was extended to December 23, 2002. On [ ], 1998, in connection with the Restructuring and consistent with the terms of the Letter Agreement, the Company amended the Rights Plan to provide, among other things, that the Rights will expire under the Rights Plan immediately prior to consummation of the Restructuring. See "DESCRIPTION OF RIGHTS PLAN." TAX OPINION The Company has received an opinion from Fried, Frank, Harris, Shriver and Jacobson to the effect that, subject to the assumptions and limitations set forth therein, the discussions under the sections entitled "Certain Federal Income Tax Considerations: Stockholders" in the Proxy Statement/Prospectus and "Certain Federal Income Tax Considerations: Noteholders" in the Exchange Restructuring Prospectus describe to Noteholders and Stockholders, respectively, the material federal income tax consequences of implementing the Restructuring by means of the Exchange Restructuring or the Prepackaged Restructuring. Under both the Exchange Restructuring and the Prepackaged Restructuring, except with respect to cash received in lieu of fractional shares, if any, (i) Stockholders should not recognize any gain or loss in the transaction, and (ii) Noteholders should also recognize no gain or loss, except to the extent New Common Stock received is attributable to accrued but unpaid interest on the Senior Notes. The Company will not recognize any cancellation of indebtedness income under the Prepackaged Restructuring, while it may recognize some cancellation of indebtedness income under the Exchange Restructuring. The Company will undergo an ownership change under Section 382 of the Code under both the Exchange Restructuring and the Prepackaged Restructuring and, as a result, will be limited in its use of NOL's on a going forward basis, as is discussed in greater detail herein. The tax opinion is attached to the Company's Registration Statement as Exhibit 8.1. SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION Set forth below are summary consolidated historical financial data of the Company. The summary financial data for each of the years in the five year period ended January 3, 1998 have been derived from the audited Consolidated Financial Statements of the Company. The summary financial data for the six month periods ended July 4, 1998 and June 28, 1997 have been derived from the unaudited financial statements of the Company and include all adjustments of a normal recurring nature which are necessary to present fairly such financial statements. The data presented below is qualified by, and should be read in conjunction with, the Consolidated Financial Statements and related notes thereto, and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION." The Company's fiscal year ends on the Saturday closest to December 31.
(Amounts in thousands except share, per share and ratio data) FOR THE SIX MONTHS ENDED FOR THE FISCAL YEAR ENDED ------------------------- ---------------------------------------------------------------- JULY 4, JUNE 28, JAN. 03, DEC. 28, DEC. 30, DEC. 31, JAN. 1, 1998 1997 1998 1996 1995 1994 1994 (52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) ------------ ------------ ------------ ------------ ------------ ------------ ------------ CONTINUING OPERATIONS: Net sales $ 159,343 $ 169,601 $ 396,832 $ 417,711 $ 485,825 $ 398,990 $ 379,012 Reversal of /(Provision for) Restructuring costs (FNa) 160 1,164 (2,066) (11,730) (3,550) - (5,500) Income/(loss) from continuing operations (6,835) (9,540) (10,722) (8,958) (362) 3,398 7,865 DISCONTINUED OPERATIONS: (FNe) Loss from operations, net of income taxes.................... - (8,136) (8,136) (365) (136) (9,639) (638) Estimated loss on disposal, net of income taxes............. - (580) (1,330) - - (1,796) - Reversal of estimated loss on disposal, net of income taxes - - - - - - 11,772 Extraordinary gain (FNb) - 600 2,100 - 1,000 63 24,707 Net income/(loss)(FNa) (6,835) (17,656) (18,088) (9,323) 502 (7,865) 43,706 BASIC EARNINGS/(LOSS PER SHARE: Earnings/(loss) per share from continuing operations before extraordinary gain $ (.45) $ (.68) $ (0.71) $ (0.60) $ (0.02) $ (0.23) $ 1.18 Earnings/(loss) per share from discontinued operations - $ (.58) $ (0.62) $ (0.02) $ (0.01) $ (0.76) $ 1.68 Earnings per share from extraordinary gain - .04 0.14 - 0.06 - 3.72 Basic earnings/(loss) per share (FNa) (.45) (1.17) (1.19) (0.62) 0.03 (0.53) 6.58 DILUTED EARNINGS/(LOSS) PER SHARE: Earnings/(loss) per share from continuing operations before extraordinary gain $ (.45) $ (.68) $ (0.71) $ (0.60) $ (0.02) $ 0.23 $ 1.10 Earnings/(loss) per share from discontinued operations - (.58) (0.62) (0.02) (0.01) (0.76) 1.57 Earnings per share from extraordinary gain - .04 0.14 - 0.06 - 3.48 Diluted earnings/(loss) per share(FNa) (.22) (1.17) (1.19) (0.62) 0.03 (0.53) 6.15 CASH DIVIDENDS PER SHARE - - - - - - - WEIGHTED AVERAGE SHARES: Shares used in computing basic earnings per share 15,170 15,108 15,139 15,078 15,008 14,954 6,638 Add - Common stock equivalents (FNd) (FNd) (FNd) (FNd) 110 (FNd) 465 Shares used in computing diluted earnings per share 15,170 15,108 15,139 15,078 15,118 14,954 7,103 AT END OF PERIOD: Current assets $ 158,808 $ 168,929 $ 148,899 $ 150,986 $ 163,799 $ 172,234 $ 161,375 Total assets 242,289 256,635 233,377 235,251 253,970 266,157 251,946 Current liabilities (FNc) 201,481 100,190 185,692 59,566 61,704 71,104 44,427 Long-term debt (FNc) - 104,879 - 106,231 110,040 109,908 111,851 Deferred liabilities 5,340 8,453 5,382 8,863 11,373 13,479 16,766 Working capital/(deficiency) (42,673) 68,739 (36,793) 91,420 102,095 101,130 116,948 Current ratio 0.8:1 1.7:1 0.8:1 2.5:1 2.7:1 2.4:1 3.61:1 Shareholders' equity $ 35,468 $ 43,113 $ 42,303 $ 60,591 $ 70,853 $ 71,666 $ 78,902 Book value per share $ 2.34 $ 2.85 $ 2.79 $ 4.01 $ 4.71 $ 4.78 $ 5.34 Number of shares outstanding 15,170 15,108 15,170 15,094 15,041 15,008 14,781 (a) Includes, for the six month periods ended July 4, 1998 and June 28, 1997, a reversal of a previously recorded restructuring provision of $160 and $1,164, respectively, related to the excess portion of net liabilities set up for the closure of all retail outlet stores other than Perry Ellis outlet stores and the closure of the J.J. Farmer sportswear product line, respectively; for the year ended January 3, 1998, a provision of $2,066 (14 cents per share; tax benefit not available) for restructuring costs principally related to (i) $3,530 related to the decision in the fourth quarter to close all retail outlet stores other than Perry Ellis outlet stores and (ii) the reversal of previously recorded restructuring provisions of $1,464, primarily resulting from the settlement of liabilities for less than the carrying amount, resulting in the reversal of the excess portion of the provision; for the year ended December 28, 1996, a provision of $11,730 (78 cents per share; tax benefit not available) for restructuring costs principally related to (i) the write-off of goodwill and the write-down of other assets for a product line which has been put up for sale, (ii) the write-off of certain assets and accrual for future royalties for a licensed product line and (iii) employee costs related to closing certain facilities; for the year ended December 30, 1995, a provision of $3,550 (24 cents per share; tax benefit not available) for restructuring costs principally related to (i) fixed asset write-downs at locations to be closed and (ii) inventory markdowns for discontinued product lines; and for the year ended January 1, 1994, a provision of $5,500 (Basis loss per share of 83 cents; tax benefit not available) for restructuring costs principally related to the costs incurred in connection with the closure of certain unprofitable operations, including (i) inventory markdowns associated with those product lines and (ii) fixed asset write-downs at closed locations. (b) Includes, for the six month period ended June 28, 1997 a gain of $600 for the reversal of excess liabilities previously provided for the anticipated settlement of claims arising from the prior chapter 11 proceeding; for the year ended January 3, 1998, a gain of $2,100 (14 cents per share) related to the reversal of excess liabilities previously provided for the anticipated settlement of claims arising from the Chapter 11 proceeding; for the year ended December 30, 1995, a gain of $1,000 (6 cents per share) related to the reversal of excess liabilities previously provided for the anticipated settlement of claims arising from the Chapter 11 proceeding; for the year ended December 31, 1994, a gain of $63 (no per share effect) related to the purchase and retirement of a portion of the Senior Notes at a price below the principal amount thereof; and for the year ended January 1, 1994, a gain of $24,707 (basic earnings per share of $3.72) related to the settlement and anticipated settlement of claims arising from the Chapter 11 proceeding. (c) At July 4, 1998 and January 3, 1998, long-term debt of $104,879 had been classified as a current liability. See Note 1 to the Consolidated Financial Statements at page F-6 and page F-26 of the Company's Registration Statement of which this Exchange Restructuring Prospectus is a part. (d) Common stock equivalents have not been included in these periods as their inclusion would be anti-dilutive to the calculation. (e) 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 in 1997 was $8,136, which included a charge of $4,459 for the write-off of goodwill. Net sales of the division were $2,822, $20,408 and $15,696 in 1997, 1996 and 1995, respectively. Additionally, in 1997, the Company recorded a charge of $1,330 to accrue for expected operating losses during the phase-out period through March 1998. No income tax benefits have been allocated to the division's 1997, 1996 and 1995 losses. In February 1995, the Company discontinued the operations of the Vera Scarf division, which imported and marketed women's scarves. The loss from operations of the division in 1994 was $9,639, which included a fourth quarter charge of $9,004 for the write-off of goodwill and other intangible assets. Net sales of the division were $1,673 and $5,087 in 1995 and 1994, respectively. Additionally, in 1994 the Company recorded a fourth quarter charge of $1,796 to accrue for expected operating losses during the phase-out period through June 1995. No income tax benefits have been allocated to the division's 1994 loss.
CAPITALIZATION SUMMARY The following table sets forth the unaudited historical capitalization of the Company as of April 4, 1998 and the unaudited pro forma consolidated capitalization of the Company after giving effect to the Exchange Restructuring as if the Exchange Restructuring had occurred on July 4, 1998. The Exchange Restructuring transactions reflect (i) the issuance of 18,456,350 shares, after giving effect to the Reverse Split, of New Common Stock to Noteholders, (ii) the issuance of 1,517,100 shares of New Common Stock to Stockholders, after giving effect to the Reverse Split, which includes 1,496,461 shares of New Common Stock to be issued upon consummation of the Restructuring and 20,639 shares of New Common Stock which are issuable to settle claims asserted in the 1990 Chapter 11 Case, and (iii) the issuance of Warrants representing the right to purchase up to 2,216,979 shares, after giving effect to the Reverse Split, of New Common Stock to Stockholders. The Unaudited Pro Forma Consolidated Balance Sheet as of July 4, 1998 includes pro forma adjustments as if the Exchange Restructuring had been completed on that date. This table should be read in conjunction with the "SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION," "UNAUDITED PRO FORMA FINANCIAL STATEMENTS," the condensed consolidated interim unaudited financial statements for the six months ended July 4, 1998 and the Consolidated Financial Statements for the year ended January 3, 1998 and the notes thereto included elsewhere in this Exchange Restructuring Prospectus. (UNAUDITED) JULY 4, 1998 -------------------- ACTUAL PRO FORMA --------- --------- ($ IN THOUSANDS) Cash and cash equivalents................................ $ 1,160 $ 1,160 ========= ========= Long-term debt, including current portion: Senior Notes........................................... $ 104,879 $ -- --------- --------- Total long-term debt................................ $ 104,879 -- Stockholder's equity: Common stock (15,405 actual shares outstanding (inclusive of treasury stock and shares issuable to settle claims); 19,973 pro forma shares outstanding)........................................... 15,405 19,973 Additional paid-in capital............................. 107,249 206,860 Deficit................................................ (82,100) (79,283) Accumulated other comprehensive income................. (3,472) (3,472) Less-treasury stock, at cost-234 shares................ (1,614) -- --------- --------- Total stockholder's equity.......................... 35,468 144,078 --------- --------- Total capitalization............................. $ 140,347 $ 144,078 ========= ========= SUMMARY OF RISK FACTORS Investment in the New Common Stock involves a high degree of risk. Prior to deciding whether to (a) participate in the Exchange Offer and/or (b) vote to accept the Prepackaged Plan, each Noteholder should carefully consider all of the information contained in this Exchange Restructuring Prospectus, especially the factors described in the following paragraphs: RISK FACTORS RELATING TO THE EXCHANGE RESTRUCTURING AND THE PREPACKAGED RESTRUCTURING Noteholders should consider that (a) in the event that, for any reason, the Restructuring is not consummated, the Noteholders may accelerate the outstanding indebtedness under the Senior Notes, (b) there can be no assurances that an active market for the New Common Stock will develop or continue to exist, or that the price of the New Common Stock will not be volatile, (c) upon completion of the Restructuring, the Senior Notes will be tendered and exchanged for New Common Stock which, in a liquidation or reorganization under the Bankruptcy Code, would rank below all debt claims, (d) the Company is currently highly leveraged and, once the Restructuring is consummated, the Company will have long-term indebtedness outstanding under the term loan portion of the Company's working capital facility, (e) economic, market or other conditions (including, but not limited to, the volatility of the men's apparel industry) have affected the Company's historical performance and may adversely affect cash flow, sales and profits in the future and there can be no assurance that such conditions will not adversely effect the Company's ability to meet its financial projections developed from the Three-Year Business Plan, (f) market forces, such as interest rates, affect the value of securities and are influenced by conditions beyond the Company's control, (g) the Company's capital expenditure levels assumed in preparation of the projected financial data contained herein may be inadequate to maintain the Company's long-term competitive position, (h) the Company is restricted in its ability, among other restrictions under the Credit Agreement, to declare and pay cash dividends on its common equity, and those and other restrictions should continue after consummation of the Exchange Restructuring, under the New Credit Agreement, (i) if certain of the major suppliers, licensors, manufacturers and vendors that the Company currently deals with were to change the terms or credit limits or product availability that it currently extends to the Company, it could have a significant negative impact on the Company's sales, cash position and liquidity, (j) the Company is subject to the risk of increased competition, which could affect its sales volume, pricing and margins, (k) there are certain Federal income tax considerations with respect to the Restructuring, including the Company's net operating loss carryovers being reduced or subject to limitations on use, although such reduction or limitation would be greater under the Exchange Restructuring than under the Prepackaged Restructuring (see "DISCUSSION OF RISK FACTORS -- Limitation on Use of Net Operating Losses"), and (l) the Company is not in compliance with the continuing listing requirements of the NYSE, and de-listing from the NYSE could adversely affect the liquidity of the market for their shares of New Common Stock and the Warrants. ADDITIONAL RISK FACTORS RELATING TO THE PREPACKAGED RESTRUCTURING Noteholders should consider that (a) commencement of bankruptcy proceedings, even if only to confirm the Prepackaged Plan, could adversely affect the relationship between the Company and its subsidiaries, licensors, licensees, employees, customers and suppliers which, in turn, could adversely affect the Company's ability to complete the Prepackaged Restructuring or obtain confirmation of the Prepackaged Plan, (b) the Prepackaged Plan might not be confirmed by the Bankruptcy Court, even if all classes of impaired creditors and equity interest holders accept the Prepackaged Plan and (c) there can be no assurance that the Bankruptcy Court will decide that this Exchange Restructuring Prospectus meets the disclosure requirements of the Bankruptcy Code. DISCUSSION OF RISK FACTORS Noteholders should consider the following risk factors prior to deciding whether to (a) participate in the Exchange Offer and/or (b) vote to accept the Prepackaged Plan: RISK OF NONCONSUMMATION OF THE RESTRUCTURING If holders of at least 25% in aggregate principal face amount of the Senior Notes accelerate all outstanding indebtedness under the Senior Notes pursuant to the terms of the Indenture, such an acceleration of the outstanding indebtedness under the Senior Notes could result in the Company becoming subject to a proceeding under the Federal bankruptcy laws. As contemplated by the terms of the Letter Agreement, Magten has, in accordance with Section 6.5 of the Indenture, caused a written direction to be provided to the Trustee, to forbear during the term of the Letter Agreement from taking any action under the Indenture in connection with the failure by the Company to make the interest payment on the Senior Notes that was due and payable on March 2, 1998. However, there is no assurance that the holders of 25% or more in principal amount of the Senior Notes will not decide to accelerate the outstanding indebtedness under the Senior Notes prior to consummation of the Restructuring or if the Stockholders fail to approve the Restructuring COMPANY RESULTS OF OPERATIONS SUBJECT TO VARIABLE INFLUENCES; INTENSE COMPETITION The Company's business is sensitive to changes in consumer spending patterns, consumer preferences and overall economic conditions. The Company is also subject to fashion trends affecting the desirability of its merchandise. 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 significantly greater financial resources than the Company. The Company also competes for private label programs with the internal sourcing organizations of its own customers. The Company's future performance will be subject to such factors, most of which are beyond its control, and there can be no assurance that such factors would not have a material adverse effect on the Company's results of operations and financial condition. DILUTION Upon completion of the Restructuring, the Company will issue 18,456,350 shares of New Common Stock directly to exchanging Noteholders and 1,496,461 shares of New Common Stock to Stockholders, and will reserve 2,216,979 shares of New Common Stock for issuance upon exercise of the Warrants. The issuance of 18,456,350 shares to Noteholders under the Issuance will result in a significant dilution of the existing equity interests of the Stockholders (as a percentage of outstanding shares of common stock) which could adversely affect the market price and the value of the New Common Stock. Immediately following the consummation of the Exchange Restructuring or the Prepackaged Restructuring, as applicable, (i) the 18,456,350 shares of New Common Stock issued directly to Noteholders will, after giving effect to the Restructuring, represent 92.5% of the total outstanding shares of New Common Stock (excluding the Warrant Shares), and (ii) the 1,496,461 shares of New Common Stock issued directly to Stockholders will, after giving effect to the Restructuring, represent 7.5% of the total outstanding shares of New Common Stock (excluding the Warrant Shares), each based on the number of shares of Old Common Stock outstanding as of the Record Date. Upon consummation of the Restructuring, holders of Old Common Stock will also receive, for each share of Old Common Stock held, .14814815 Warrants with an exercise price of $6.2648 per share (subject to adjustment). Based upon the current market price of the Old Common Stock (after giving effect to the Reverse Split), the Warrants may be "out of the money" immediately following the Restructuring, and no assurance can be made that the Warrants will ever be "in the money." If all Warrants are exercised, the percentage of New Common Stock held by exchanging Noteholders would be reduced from 92.5% to 83.25%, and the percentage of New Common Stock held by exchanging Stockholders would be reduced from 7.5% to 6.75% (assuming that none of the Warrants are held by the Stockholders at the time the Warrants are exercised). See "PURPOSE OF THE RESTRUCTURING." In addition, there can be no assurance that the Company will not need to issue additional Common Stock in the future in order to achieve its business plan or if it does not achieve its projected results, which could lead to further dilution to holders of the Company's Common Stock. LIMITATION ON USE OF NET OPERATING LOSSES As a result of the receipt by Noteholders of New Common Stock in exchange for the Senior Notes pursuant to the Restructuring, the Company will undergo an "ownership change" for Federal income tax purposes. Accordingly, the Company will be limited in its ability to use its net operating loss carryovers and certain tax credit carryforwards to offset future taxable income. Under the Exchange Restructuring, the limitation imposed upon the Company's use of its net operating loss carryovers would be more restrictive than under the Prepackaged Restructuring. See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS: NOTEHOLDERS." In general, under the Exchange Restructuring the Company will be subject to an annual limitation on the use of its NOL's generated prior to the ownership change. This annual limitation is determined by multiplying the value of the Company immediately before the ownership change by the adjusted federal long-term tax exempt interest rate published periodically by the federal government. Based on an estimated market capitalization of $10,000,000 and a federal long term interest rate of 5%, the annual limitation to which the Company's NOL's would be subject is approximately $500,000 under the Exchange Restructuring. Since there is a 15 year carryover period applicable to these NOL's, the maximum amount of NOL that the Company could use is $7,500,000. Under the Prepackaged Restructuring, the Company would be able to compute the annual limitation by using the value of the Company after considering the increase in value attributable to the retirement of the Senior Notes resulting from the transaction. The appropriate post-ownership change value which may be used in computing the annual limitation will not be known until the Prepackaged Restructuring is complete. Assuming the value of the Company increases to $120,000,000 as a result of the cancellation of creditors' claims, the annual limitation to which the Company's NOL's would be subject is approximately $6,000,000 under the Prepackaged Restructuring. Accordingly, the Company would be able to utilize $90,000,000 of NOL over the applicable 15 year carryover period. Currently, after considering the impact of an ownership change occurring in 1993, the Company has approximately $130,000,000 of NOL's that may be used to offset future taxable income. If the Exchange Restructuring occurs, the Company would be able to offset future taxable income with at most approximately $7,500,000 of NOL's, resulting in a loss of approximately $122,500,000 of NOL's. If, on the other hand, the Prepackaged Restructuring occurs, the Company would be able to offset future taxable income with, at most, approximately $90,000,000 of NOL's, resulting in a loss of approximately $40,000,000 of NOL's. CHANGE IN PRIORITY The Senior Notes are secured debt obligations of the Company and, accordingly, have priority over the Common Stock with respect to payment in the event of a liquidation, dissolution or winding-up of the Company. Upon exchange pursuant to the Exchange Offer, the Senior Notes tendered and accepted will be exchanged for shares of New Common Stock. In any liquidation or reorganization of the Company under the Bankruptcy Code, the New Common Stock, as equity securities of the Company, would rank below all debt claims, including claims of the lender under the Company's New Credit Agreement. In addition, holders of the New Common Stock will not be entitled to receive any payment or other distribution of assets upon the liquidation or dissolution of the Company until after the holders of preferred stock, if any, have received the entire preferential amounts to which they may be entitled. See "DESCRIPTION OF NEW COMMON STOCK." LACK OF TRADING MARKET FOR NEW COMMON STOCK; VOLATILITY; POTENTIAL DE-LISTING OF THE NEW COMMON STOCK There can be no assurance that an active market for the New Common Stock will develop or, if any such market does develop, that it will continue to exist. Further, the degree of price volatility in any such market that does develop may be significant. Accordingly, no assurance can be given as to the liquidity of the market for any of the New Common Stock or the price at which any sales may occur. The Company has fallen below the continued listing criteria of the NYSE for net tangible assets available to common stock together with average net income after taxes for the past three years. However, the NYSE has reviewed the terms and conditions of the Restructuring set forth herein and has informed the Company that it will continue to list the Company's common stock during the period prior to consummation of the Restructuring and intends to list the Company's common stock from and after the Restructuring Date. However, the NYSE has advised the Company that after consummation of the Restructuring, the NYSE intends to monitor the performance of the Company based upon the Projections set forth herein to ensure compliance with the NYSE's original listing standards in respect of the New Common Stock. The Company believes that as a result of the consummation of the Restructuring, following the Restructuring Date, the Company will be able to return to compliance with the original listing standards in respect of the New Common Stock and the Warrants and that the New Common Stock and the Warrants will continue to be listed for trading on the NYSE. However, the NYSE has advised the Company that the Company's failure to meet the Projections following the Restructuring could result in the suspension from trading and subsequent delisting of the New Common Stock. If the common stock of the Company were de-listed, there could be an adverse effect on the liquidity of the market for such common stock. Should the Restructuring be consummated, the Company expects to be able to return to full compliance with all of the NYSE's requirements for continued listing on the NYSE. See "UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS." Moreover, the NYSE has advised the Company that if the Company seeks to consummate the Restructuring by means of the Prepackaged Restructuring but is unable to do so, the Old Common Stock is subject to being delisted. The Company expects that the New Common Stock and the Warrants will be eligible for listing and will be listed for trading on the NYSE. There can be no assurances, however, that the New Common Stock and/or the Warrants will be listed for trading on the NYSE. If the Company is unable to have the New Common Stock and the Warrants listed for trading on the NYSE upon consummation of the Restructuring, the Company will use its best efforts to cause all New Common Stock and Warrants to be quoted on the National Market System of the NASDAQ or to be listed on another national securities exchange. However, there is no assurance that the Company would be successful in such efforts. POSSIBLE VOLATILITY OF STOCK PRICE; EFFECT OF RESTRUCTURING ON STOCK PRICE Since March 3, 1998, the market price of the Old Common Stock has experienced some degree of volatility. There can be no assurance that such volatility will not continue for the New Common Stock or become more pronounced. In addition, the stock market has recently experienced, and is likely to experience in the future, significant price and volume fluctuations which could materially adversely effect the market price of the New Common Stock without regard to the operating performance of the Company. The Company believes that factors such as the Restructuring, quarterly fluctuations in the financial results of the Company or its competitors and general conditions in the industry, the overall economy, the financial markets and other risks described herein could cause the price of the New Common Stock to fluctuate substantially. Even though the Company expects the Reverse Split to "normalize" the post-restructuring trading of the New Common Stock, no assurances can be made that the Reverse Split will "normalize" post-restructuring trading of the New Common Stock. If post-restructuring trading is not "normalized," the New Common Stock may experience significant price and volume fluctuations which could materially adversely effect the market price of the New Common Stock. CONCENTRATED OWNERSHIP OF NEW COMMON STOCK Following consummation of the Restructuring, the ownership of the New Common Stock will likely be significantly more concentrated than was the ownership of the Old Common Stock. Assuming that the current holders of the Senior Notes do not significantly change prior to the consummation of the Restructuring, the Company will be controlled by a few stockholders who are current holders of the Senior Notes. These holders of New Common Stock may seek to influence the direction of the Company. For instance, following consummation of the Restructuring, Magten will own in excess of 65% of the issued and outstanding shares of New Common Stock, subject to dilution for the Warrant Shares. As a result, Magten may have the ability to control the Company's management, policies and financing decisions, to elect a majority of the members of the Company's Board and to control the vote on all matters coming before the stockholders of the Company. Pursuant to the Letter Agreement, the Company has agreed that three to five out of seven to nine members of the initial new Board members will be nominated by Magten, subject to consultation with the Company and other Noteholders who may come forward for election to the Board following the Restructuring. See "INFORMATION REGARDING NOMINEES." The Company does not have complete information regarding the beneficial ownership of the Senior Notes and is not aware of any stated intention by Magten or any agreement among Noteholders generally to seek to influence the direction of the Company or to otherwise act in concert following the Restructuring. There can be no assurance, however, that no such agreements exist. ABSENCE OF AND/OR RESTRICTIONS ON DIVIDENDS The Company did not pay any dividends on the Old Common Stock in 1995, 1996 or 1997 and does not anticipate paying dividends on the New Common Stock at any time in the foreseeable future. Moreover, the Credit Agreement places restrictions on the Company's ability to declare or pay cash dividends on the Old Common Stock and the Company believes that the New Credit Agreement will similarly restrict the payment of dividends on the New Common Stock. For a description of the limitations contained in the Credit Agreement, see "DESCRIPTION OF CERTAIN EXISTING INDEBTEDNESS OF THE COMPANY." HISTORY OF LOSSES; EFFECT OF TRANSACTION Although the Company was profitable for the fiscal year ended December 30, 1995, for the fiscal years ended December 31, 1994, December 28, 1996, and January 3, 1998, the Company reported net losses of $7,865,000, $9,323,000, and $18,088,000 respectively. The net losses were primarily attributable to the write-off of goodwill, the write-down of other assets, facility shut-downs and the closure of certain unprofitable operations. There can be no assurance that the Company will regain its profitability, or have earnings or cash flow sufficient to cover its fixed charges. See "SALANT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS" at F-2 to the Company's Registration Statement of which this Exchange Restructuring Prospectus is a part. CASH FLOW FROM OPERATIONS During the fiscal years ended December 28, 1996 and January 3, 1998, the Company had positive cash flow from operating activities of $17.1 million and negative cash flow from operating activities of $9.8 million, respectively. The fiscal 1996 figure reflects a $17.5 million reduction in inventories due to improved inventory management, and the effects of the implementation of a strategic business plan for the men's apparel group. The lower inventory balance was partially offset by an increase in accounts receivable, due to changes in the Company's factoring arrangements with CIT which reduced the amount of accounts receivable sold to CIT and the related factoring costs. The Fiscal 1997 figure reflects an operating loss of $10.7 million and an increase in accounts receivable of $5.7 million, offset by non-cash charges, such as depreciation and amortization, of $8.9 million. 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 should be adequate to meet the financing requirements it anticipates during the next twelve months provided that the Company consummates the Restructuring and closes a New Credit Agreement. See "DESCRIPTION OF NEW CIT CREDIT AGREEMENT." There can be no assurance, however, (i) that the Company will consummate the Restructuring, or (ii) that the Company will be able to close a New Credit Agreement on favorable terms, or (iii) that future developments and general economic trends will not adversely affect the Company's operations and, hence, its anticipated cash flow. The Company's capital expenditure levels assumed in preparation of the projected financial data contained herein (see "PROJECTED CONSOLIDATED FINANCIAL INFORMATION") may be inadequate to maintain the Company's long-term competitive position depending on the demand for the Company's goods and as a result of competitive, regulatory and technological developments (including new market developments and new opportunities) in the Company's industry. DECLINES IN NET SALES AND GROSS PROFITS Sales of men's apparel decreased by $18.9 million, or 5.5%, in Fiscal 1997. This decrease resulted from (a) a $12.4 million reduction in sales of men's slacks, of which $8.4 million reflected the elimination of unprofitable programs and the balance was primarily due to operational difficulties experienced in the first quarter of Fiscal 1997 related to the move of manufacturing and distribution out of the Company's facilities in Thomson, Georgia, (b) a $5.7 million reduction in sales of men's sportswear, which included a $16.7 million reduction for the elimination of the Company's J.J. Farmer and Manhattan sportswear lines, as offset by an $11.0 million increase in sales of Perry Ellis sportswear product, (c) a $5.1 million decrease in sales of men's accessories, primarily due to the slow-down of the novelty neckwear business and (d) a $4.7 million reduction in sales of certain dress shirt lines, which reflected the elimination of unprofitable businesses. The total sales reduction attributable to the elimination of unprofitable programs was $29.8 million. These sales decreases were partially offset by a $9.5 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, underwear and sportswear increased by $3.4 million, or 7.5%, in Fiscal 1997. This increase was primarily a result of the continuing expansion of the Joe Boxer children's product line. Sales of the retail outlet stores division decreased by $5.4 million, or 19.8%, in Fiscal 1997. This decrease was due to (i) a decrease in the number of stores in the first 10 months of Fiscal 1997 and (ii) the decision in November 1997 to close all non-Perry Ellis outlet stores. The Company ceased to operate the non-Perry Ellis outlet stores in November 1997. The gross profit margin of the children's sleepwear and underwear segment declined as a result of (i) slowdown in sales of certain licensed products, requiring a greater percentage of off-price sales, as well as an increase in discounts and allowances, (ii) an increase in reserves for remaining inventory, and (iii) higher distribution and product handling costs. The gross profit of the retail outlet stores decreased primarily as a result of inventory markdowns of $1.6 million (7.3% of net sales) related to the closing of the non-Perry Ellis stores. Excluding these inventory markdowns, the gross profit margin increased 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. RETAIL ENVIRONMENT The retail industry has experienced significant consolidation and other ownership changes resulting in a decrease in the number of retailers. In addition, 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 protection under the federal bankruptcy laws. In the future, other retailers in the United States and in foreign markets may consolidate, undergo restructurings or reorganizations, or realign their affiliations, any of which could decrease the number of stores that carry the Company's products or increase the ownership concentration within the retail industry. There can be no assurance that such changes would not have a material adverse effect on the Company's results of operations and financial condition. APPAREL INDUSTRY CYCLES AND OTHER ECONOMIC FACTORS The apparel industry historically has been subject to substantial cyclical variations, 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. SEASONALITY 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. In addition, the Company experiences seasonal fluctuations in its net sales and net income, with a disproportional amount of the Company's net sales and a majority of its net income typically realized during the fourth quarter. Net sales and net income are generally weakest during the first quarter. The Company's quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the Company's ability to source, manufacture and distribute its products. DEPENDENCE ON CERTAIN CUSTOMERS AND LICENSEES; EFFECT OF RESTRUCTURING ON LICENSES Certain of the Company's customers, including some under common ownership, have accounted for significant portions of the Company's gross revenues. In Fiscal 1997, approximately 17% of the Company's net sales were made to Sears Roebuck & Co. ("Sears"), approximately 11% of the Company's net sales were made to Federated Department Stores, Inc. ("Federated") and approximately 10% of the Company's net sales were made to TJX Corporation ("TJX"). In 1996, approximately 13% of the Company's net sales were made to Sears. In 1996 and 1995, net sales to Federated represented approximately 11% and 12% of the Company's net sales, respectively. In 1995, approximately 11% of the Company's net sales were made to TJX. In 1995, approximately 13% of the Children's Group's net sales were made to Dayton Hudson Corporation. No other customers accounted for more than 10% of the net sales of the Company or any of its business segments during 1995, 1996 or 1997. A decision by the controlling owner of a group of stores or any substantial customer, whether motivated by fashion concerns, financial difficulties, or otherwise, to decrease the amount of merchandise purchased from the Company or to cease carrying the Company's products could materially adversely affect the Company. In Fiscal 1997, approximately 44% of the Company's net sales was attributable to products sold under the Perry Ellis Portfolio by Perry Ellis and Perry Ellis America trademarks which are licensed to the Company under a series of license agreements with Perry Ellis International, Inc. ("PEI"). The license agreements contain renewal options which, subject to compliance with certain conditions contained therein, permit the Company to extend the terms of such license agreements. Assuming the exercise by the Company of all available renewal options, the license agreements covering men's apparel and accessories will expire on December 31, 2015. If the Company were unable to exercise its right to renew the agreements or the agreements were terminated by their terms, the resulting inability to sell products bearing a Perry Ellis trademark would have a material adverse affect on the Company. The Company has four material licenses with PEI. The earliest possible expiration of three of such licenses (i.e., the PEI dress shirt license, neckwear license and belt and suspender license) is December 31, 2000 (assuming that such date is not accelerated under the terms of the licenses); however, each of these licenses is renewable in the sole discretion of the Company until the year 2015. The Company is also the licensee under eleven license agreements with The Walt Disney Company ("Disney"). While the Disney licenses, in the aggregate, are material, no single Disney license is material to the Company's businesses. Certain of the Disney licenses expire as early as December 31, 1998. The Company's licensing agreements with PEI contain a "change of control" provision that provides PEI with certain rights upon the occurrence of a "change of control." Those rights include, among others, the right to terminate any or all of the licenses within two years after the occurrence of the change of control. The Company intends to seek confirmation from PEI that consummation of the Restructuring will not give rise to any rights of PEI under such change of control provision. The Company believes that if such confirmation is not obtained prior to the Restructuring Date, the Restructuring can, in any event, be consummated on the same terms and conditions without giving rise to any rights of PEI under such provision. In addition to the license agreements with PEI and Disney, the Company is also a party to several other license agreements. Certain of these other license agreements contain "change of control" provisions which may be triggered by the Restructuring, or otherwise contain provisions that enable the licensor to terminate the license or exercise other remedies thereunder as a result of the Restructuring. The Company intends to seek a waiver of any such provisions from the applicable licensors. However, there can be no assurance that any such waivers will be obtained, or to the extent such waivers are obtained, on what terms they would be granted. FOREIGN OPERATIONS AND SOURCING; IMPORT RESTRICTIONS During Fiscal 1997, approximately 12% of the products produced by the Company (measured in units) were manufactured in the United States, with the balance manufactured in foreign countries. Facilities operated by the Company accounted for approximately 75% of its domestic-made products and 37% of its foreign-made products; the balance in each case was attributable to unaffiliated contract manufacturers. In Fiscal 1997, approximately 47% of the Company's foreign production was manufactured in Mexico, approximately 18% was manufactured in Guatemala and approximately 12% was manufactured in the Dominican Republic. 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. As a result, the Company's operations would be significantly adversely affected by political instability resulting in the disruption of trade from the countries in which the Company's contractors or suppliers are located, the imposition of additional regulations relating to imports, the imposition of additional duties, taxes, and other charges on imports, decreases in quota levels or available quota allocations, significant fluctuations of the value of the dollar against foreign currencies (although predominately all of the Company's contracts are designated in U.S. dollars) or restrictions on the transfer of funds. The inability of a contractor to ship orders of the Company's products in a timely manner could cause the Company to miss the delivery date requirements of its customers for those items, which could result in cancellation of orders, refusal to accept deliveries, or a reduction in sales prices. Further, since the Company is generally unable to return merchandise to its suppliers, it could be faced with a significant amount of unsold merchandise, which could have a material adverse effect on the Company. There can be no assurance that such factors would not have a material adverse effect on the Company's results of operations. DEPENDENCE ON CONTRACT MANUFACTURING In Fiscal 1997, the Company produced 59% of all of its products (in units) through arrangements with independent contract manufacturers. The use of such contractors and the resulting lack of direct control could subject the Company to difficulty in obtaining timely delivery of products of acceptable quality. In addition, as is customary in the industry, the Company does not have any long-term contracts with its fabric suppliers or product manufacturers. While the Company is not dependent on one particular product manufacturer or raw materials 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. INFORMATION SYSTEMS AND CONTROL PROCEDURES 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 the Company's overall operations. The Company's current software systems, without modification, will be adversely affected by the inability of the systems to appropriately interpret date information after 1999. As part of the process of (i) improving the Company's IS to provide and enhance support to all operating areas and (ii) resolving year 2000 issues, the Company entered into a working agreement (the "EDS Agreement") with Electronic Data Systems Corporation ("EDS"). The EDS Agreement constituted the initial phase of a long-term project to outsource the Company's IS and to remedy year 2000 issues. As part of this initial phase, the Company and EDS identified the ability of one of the two major enterprise systems in the Company to be modified to make such system Year 2000 compliant and to migrate the operations of the Company to one enterprise system (the "System Conversion"). As a result of the ability to implement the System Conversion and after reviewing the cost of outsourcing the IS function to EDS, Salant has determined not to outsource the IS functions to EDS. Instead, the Company will use internal resources for the System Conversion and other consultants for the implementation of new software. The Company anticipates that the System Conversion, as well as the implementation of new software, will be completed by the first quarter of 1999. The Company anticipates that the cost of the System Conversion and new software will be approximately $10 million, to be incurred during 1998 and 1999. If the Company fails to complete such conversion in a timely manner, such failure will have a material adverse effect on the business, financial condition and results of operations of the Company. While the Company believes its current IS is generally adequate to support the Company's business operations, certain deficiencies relating to the age and design of the systems, including, without limitation, difficulties in planning, forecasting, allocating and measuring performance through an integrated financial system, may adversely affect the business operations of the Company in the near and long-term. There can be no assurance that the Company's efforts to improve upon and enhance its present IS will resolve or eliminate any such existing or potential deficiencies. As noted above, the Company has implemented a program designed to ensure that all the Company's software will manage and manipulate data involving the transition of dates from 1999 to 2000 without functional or data abnormality and without inaccurate results to such dates. Any failure on the part of the Company to ensure that any such software complies with year 2000 requirements could have a material adverse effect on the business, financial condition, and results of operations of the Company. Likewise, any failure on the part of suppliers or customers of the Company to implement a year 2000 compliance program could have a material adverse effect on the business, financial condition and results of operations of the Company if such lack of compliance interrupts the Company's daily business interactions and relationships with such suppliers or customers. LEVERAGE AND DEBT SERVICE As of July 4, 1998, the Company had outstanding total interest bearing indebtedness of approximately $157.1 million. The amount of indebtedness of the Company will be reduced by the principal amount of Senior Notes as a result of the Restructuring. The Company will continue to have annual fixed debt service requirements under the term loan portion of the New Credit Agreement. The Company expects that the New Credit Agreement will have a term loan component in the maximum principal amount of $15 million. See "DESCRIPTION OF NEW CIT CREDIT AGREEMENT." The ability of the Company to make principal and interest payments under the Company's working capital facility, including the term loan component, will be dependent upon the Company's future performance, which is subject to financial, economic and other factors affecting the Company, some of which are beyond its control. There can be no assurance that the Company will be able to meet its fixed charges as such charges become due. RESTRICTIVE COVENANTS The Credit Agreement contains certain restrictive covenants which impose prohibitions or limitations on the Company with respect to, among other things, (i) the incurrence of indebtedness, (ii) capital expenditures, (iii) the creation or incurrence of liens, (iv) the declaration or payment of dividends or other distributions on, or the acquisition, redemption or retirement of, any shares of capital stock of the Company, and (v) mergers, consolidations and sales or purchases of substantial assets. The Credit Agreement also requires that the Company, under certain circumstances, satisfy a maximum net loss test. Failure to comply with such covenants could result in a default under the Credit Agreement which could have a material adverse effect on the financial condition and results of operations of the Company. The Company currently anticipates that the New Credit Agreement will also contain certain restrictive covenants. See "DESCRIPTION OF NEW CIT CREDIT AGREEMENT." NEED FOR SUSTAINED TRADE SUPPORT The Company's ability to achieve sales growth and profitability includes significant reliance on continued support from its vendors. If the Company's major vendors reduce their credit lines or product availability to the Company, it could have a material adverse effect on the Company's sales, cash position and liquidity. IN ADDITION, IN CONNECTION WITH VOTING ON THE PREPACKAGED PLAN, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED BY NOTEHOLDERS: DISRUPTION OF OPERATIONS RELATING TO BANKRUPTCY FILING The Company's solicitation of acceptances of the Prepackaged Plan, or any subsequent commencement of the Chapter 11 Case, even in connection with the Prepackaged Plan, 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. Weakened operating results could adversely affect the Company's ability to obtain confirmation of the Prepackaged Plan or to avoid financial difficulties after consummation of the Prepackaged Plan. 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 Prepackaged Plan. PRIOR CHAPTER 11 FILINGS The Company has been a debtor in bankruptcy on two prior occasions. See "BUSINESS AND PROPERTIES OF THE COMPANY -- Bankruptcy Court Cases." The Company's first chapter 11 case was commenced on February 22, 1985. The plan of reorganization with respect to the first chapter 11 case was confirmed by the Bankruptcy Court on May 19, 1987, and was consummated on June 2, 1987. The Company's second chapter 11 case was commenced on June 27, 1990. The plan of reorganization with respect to the second chapter 11 case was confirmed by the Bankruptcy Court on July 30, 1993 and was consummated on September 20, 1993. As a result of the Company's two prior bankruptcies, the risks inherent in a subsequent chapter 11 case may be further exacerbated if the Company pursues the Restructuring by means of the Prepackaged Plan. CERTAIN RISKS OF NON-CONFIRMATION Even if the requisite acceptances are received, there can be no assurance that the Bankruptcy Court will confirm the Prepackaged Plan. A creditor or an interest holder might challenge the adequacy of the disclosure or the balloting procedures and results as not being in compliance with the Bankruptcy Code. Even if the Bankruptcy Court were to determine that the disclosure and the balloting procedures and results were appropriate, the Bankruptcy Court could still decline to confirm the Prepackaged Plan if it were to find that any statutory conditions to confirmation had not been met. Section 1129 of the Bankruptcy Code sets forth the requirements for confirmation and requires, among other things, a finding by the Bankruptcy Court that the confirmation of the Prepackaged Plan is not likely to be followed by a liquidation or a need for further financial reorganization and that the value of distributions to non-accepting creditors and interest holders will not be less than the value of distributions such creditors and interest holders would receive if the debtor were liquidated under Chapter 7 of the Bankruptcy Code. See "FEASIBILITY OF THE PREPACKAGED PLAN AND THE BEST INTERESTS OF THE CREDITORS TEST." There can be no assurance that the Bankruptcy Court will conclude that these requirements have been met, but the Company believes that the Bankruptcy Court should be able to find that the Prepackaged Plan will not be followed by a need for further financial reorganization and that non-accepting creditors and Interest Holders will receive distributions at least as great as would be received following a liquidation pursuant to Chapter 7 of the Bankruptcy Code. See "VOTING AND CONFIRMATION OF THE PREPACKAGED PLAN." Additionally, even if the required acceptances of each of Class 3 (i.e., Noteholders) and Class 6 (i.e., Stockholders) are received, the Bankruptcy Court might find that the Solicitation of votes or the Prepackaged Plan did not comply with the solicitation requirements made applicable by subsection 1126(b) of the Bankruptcy Code and Bankruptcy Rule 3018(b). In such an event, the Company may seek to resolicit acceptances, but confirmation of the Prepackaged Plan could be substantially delayed and possibly jeopardized. The Company believes that its Solicitation of acceptances of the Prepackaged Plan complies with the requirements of subsection 1126(b) of the Bankruptcy Code and Bankruptcy Rule 3018(b), that duly executed Ballots and Master Ballots will be in compliance with applicable provisions of the Bankruptcy Code and the Bankruptcy Rules, and that, if sufficient acceptances are received, the Prepackaged Plan should be confirmed by the Bankruptcy Court. The Company, however, expressly reserves the right not to file the Prepackaged Plan and to pursue other alternatives. Should the Bankruptcy Court fail to confirm the Prepackaged Plan after the Chapter 11 Case has been filed, the Company would then consider all financial alternatives available to it at the time, which may include an effort to sell in the Chapter 11 Case all or a part of the Company's business or an equity interest in the Company and the negotiation and filing of an alternative reorganization plan. Pursuit of any such alternative could result in a protracted and non-orderly reorganization with all the attendant risk of adverse consequences to its and its subsidiaries businesses, operations, employees, customers and supplier relations and their ultimate ability to function effectively and competitively. Even if the Prepackaged Plan is confirmed by the Bankruptcy Court, 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. The confirmation and consummation of the Prepackaged Plan are also subject to certain conditions. See "DESCRIPTION OF THE PREPACKAGED PLAN -- Conditions Precedent To Confirmation Order And Effective Date." If the Prepackaged Plan, or a plan determined by the Bankruptcy Court not to require resolicitation of acceptances by Classes, were not to be confirmed, it is unclear whether a reorganization could be implemented and what Holders of Claims and Interests would ultimately receive with respect to their Claims and Interests. If an alternative reorganization could not be agreed to, it is possible that the Company would have to liquidate its assets, in which case Holders of Claims and Interests could receive less than they would have received pursuant to the Prepackaged Plan. CERTAIN OTHER BANKRUPTCY CONSIDERATIONS Treatment Of The Warrants In the event of a subsequent bankruptcy case involving the Company, the Warrants, which will be received by Holders of Old Common Stock in partial consideration for dilution of their ownership interest in the Company, would be treated as equity securities. Moreover, the Warrants may receive less favorable treatment than the New Common Stock in a subsequent bankruptcy case, because the equity interests in Reorganized Salant represented by the Warrants would not be so direct as the equity interests in Reorganized Salant represented by the New Common Stock. Failure To File Prepackaged Plan Absent the Restructuring, the Company does not believe it will be able to satisfy its debt obligations under the Senior Notes without a refinancing of its indebtedness under the Credit Agreement and/or the Senior Notes or an additional capital infusion and it is unlikely that the Company will be able to obtain such refinancing or capital infusion. If the Company determines that it is or will be unable to complete the Restructuring, the Company will consider all other available financial alternatives, including the sale of all or a part of the Company's business, the implementation of an alternative restructuring arrangement outside of bankruptcy, or the commencement of a Chapter 11 case without a preapproved plan of reorganization. There can be no assurance, however, that any alternative would be on terms as favorable to Holders of Senior Notes, Old Common Stock or General Unsecured Claims as the Restructuring. If the Exchange Restructuring is not consummated, but Ballots and Master Ballots containing votes to accept the Prepackaged Plan are received in sufficient amounts and numbers, in the Company's judgment, to confirm the Prepackaged Plan, the Company expects to (but expressly reserves the right not to) file a prepackaged Chapter 11 case and use such Ballots and Master Ballots to confirm the Prepackaged Plan. The Company believes that obtaining sufficient acceptances before commencing a bankruptcy case would be preferable from the point of view of its creditors, Stockholders and other constituents because such acceptances can reduce disputes during such a case concerning the reorganization of the Company and should, therefore, substantially reduce the time and costs of such a case, result in a larger distribution to the Company's creditors and stockholders than would be available under a non-prepackaged reorganization under Chapter 11 of the Bankruptcy Code or a liquidation under Chapter 7 of the Bankruptcy Code (in the absence of other alternatives) and afford the Company the best opportunity to accomplish the Restructuring in a bankruptcy case. If the Exchange Restructuring is not consummated and the Company does not have the necessary acceptances from Holders of Interests to confirm the Prepackaged Plan, the Company might nevertheless file a petition for relief under Chapter 11 of the Bankruptcy Code and seek confirmation of the Prepackaged Plan notwithstanding the dissent of certain Holders of Interests. See "FEASIBILITY OF THE PREPACKAGED PLAN AND THE BEST INTERESTS OF CREDITORS TEST -- Nonconsensual Confirmation." In such event, the Company would seek to satisfy the Bankruptcy Code standards for confirmation by means of a "cramdown" against such Holders of Interests. Alternatively, the Company may seek to accomplish an alternative restructuring of its capitalization and its obligations to its Stockholders and creditors and obtain their consent to any such restructuring plan with or without a pre-approved plan of reorganization or otherwise. See "ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PREPACKAGED PLAN." However, there can be no assurance that any alternative restructuring arrangement or plan would result in a reorganization of the Company other than a liquidation, or that any such reorganization would be on terms as favorable to the Holders of Claims and Holders of Interests as the terms of the Prepackaged Plan. There is a risk that distributions to Holders of Claims and Interests under a liquidation or under a protracted and non-orderly reorganization would be substantially delayed and diminished. For purposes of comparison with the anticipated distributions under the Prepackaged Plan, the Company has prepared an analysis of estimated recoveries in a liquidation under Chapter 7 of the Bankruptcy Code. See "RESTRUCTURING FINANCIAL CONSIDERATIONS--Liquidation Analysis." A description of procedures followed and the assumptions and qualifications in connection with this Liquidation Analysis is set forth in the notes thereto. Effect On Operations The Company believes that the Solicitation and any subsequent commencement of a Chapter 11 case in connection with the Prepackaged Plan should not materially adversely affect the Company's and its subsidiaries' relationships with customers, employees and suppliers, provided that the Company can demonstrate sufficient liquidity to continue to operate the business and a likelihood of success for the Prepackaged Restructuring in a reasonably short time frame. The Company believes that the Solicitation offers the most expeditious means to achieve the Prepackaged Restructuring. It is possible that despite the belief and intent of the Company, the Solicitation or any subsequent commencement of a Chapter 11 case could adversely affect the relationships between the Company, its subsidiaries and their employees, customers and suppliers. There is a risk that, due to uncertainty about the Company's future, (i) employees may be distracted from performance of their duties or more easily attracted to other career opportunities, (ii) customers may seek alternative sources of supply or require financial assurances of future performance and (iii) suppliers may restrict ordinary credit terms or require financial assurances of performance. This risk is exacerbated by the fact that the Company has been a debtor in bankruptcy on two prior occasions. If such relationships were adversely affected, the Company and its subsidiaries' financial performance and working capital position could materially deteriorate. This deterioration could adversely affect the Company's ability to complete the Solicitation or, if such Solicitation is successfully completed, to obtain confirmation of the Prepackaged Plan. Nonconsensual Confirmation The Company will request that the Bankruptcy Court confirm the Prepackaged Plan under Bankruptcy Code Section 1129(b). Section 1129(b) permits confirmation of the Prepackaged Plan despite rejection by one or more impaired classes if the Bankruptcy Court finds that the Prepackaged Plan "does not discriminate unfairly" and is "fair and equitable" as to the non-accepting class or classes. Because Class 7 (i.e., Other Interests) is deemed not to have accepted the Prepackaged Plan, the Company will request that the Bankruptcy Court find that the Prepackaged Plan is fair and equitable and does not discriminate unfairly as to Class 7 (and any other class that fails to accept the Prepackaged Plan). For a more detailed description of the requirements for acceptance of the Prepackaged Plan and of the criteria for confirmation notwithstanding rejection by certain classes, see "FEASIBILITY OF THE PREPACKAGED PLAN AND THE BEST INTERESTS OF CREDITORS TEST -- Nonconsensual Confirmation." The Company, however, will not seek confirmation of the Prepackaged Plan unless it is accepted by Class 3 (i.e., the Noteholders) BACKGROUND OF RESTRUCTURING The following summary of the background of the Restructuring, including the principal terms of the Letter Agreement, the Letter Agreement Amendments, the Twelfth Amendment, the Thirteenth Amendment, the Voting Agreement and the CIT Commitment Letter, does not purport to be complete and is qualified in its entirety by reference to those documents, including the definitions of certain terms contained therein. Copies of the Letter Agreement, the Letter Agreement Amendment, the Twelfth Amendment, the Thirteenth Amendment, and the CIT Commitment Letter are filed as Exhibit 10.42, Exhibit 10.55, Exhibit 10.43, Exhibit 10.53 and Exhibit 10.54, respectively, to the Company's Registration Statement. The form of Voting Agreement is attached to the Company's Registration Statement as Exhibit 9.1. Noteholders may request copies of any or all of these documents by contacting Todd Kahn, General Counsel and Executive Vice President of the Company, at (212) 221-7500. Whenever particular provisions of such documents are referred to herein, such provisions are incorporated herein by reference, and the statements are qualified in their entirety by such reference. BACKGROUND OF THE RESTRUCTURING On February 22, 1985, Salant Corporation, a New York corporation ("Salant NY") and its two largest subsidiaries, Thomson Company, Inc. ("Thomson") and Obion Company, Inc. ("Obion") filed with the Bankruptcy Court separate voluntary petitions for relief under Chapter 11 of title 11 of the Bankruptcy Code (Case Nos. 85-B-10229 (PBA) through 85-B-10231 (PBA), inclusive). Salant NY's other United States, Canada and Mexico subsidiaries did not seek relief under the Bankruptcy Code or other foreign insolvency laws, respectively. On May 19, 1987, the Bankruptcy Court issued an order confirming the Joint Plan Chapter 11 Plan of Salant NY, Thomson and Obion (the "1987 Chapter 11 Plan"). The 1987 Chapter 11 Plan was consummated on June 2, 1987. On June 2, 1987, pursuant to the provisions of the 1987 Chapter 11 Plan, the assets and liabilities of Salant NY, Thomson and Obion were substantively consolidated, and Salant NY, Thomson and Obion and the inactive subsidiaries of Salant NY merged with a wholly-owned subsidiary of Salant NY. The Company is the surviving corporation of such merger. On June 27, 1990, the Company and its wholly-owned subsidiary, Denton Mills Inc. ("Denton Mills"), each filed with the Bankruptcy Court a separate voluntary petition for relief under Chapter 11 of the Bankruptcy Code (Case Nos. 90-B-12037(CB) and 90-B-12038(CB)) (the "1990 Chapter 11 Case"). On July 30, 1993, the Bankruptcy Court issued an order confirming the Third Amended Joint Plan of Reorganization of the Company and Denton Mills (the "1993 Chapter 11 Plan"). The 1993 Chapter 11 Plan was consummated on September 20, 1993. Pursuant to the 1993 Chapter 11 Plan, on September 20, 1993, the Company issued the Senior Notes. While issuance of the Senior Notes facilitated the Company's emergence from Chapter 11, the Company, as a result, was capitalized with a significant amount of long-term debt. In connection with the formulation of the 1993 Chapter 11 Plan, management of the Company believed that, based upon projected operating results, the Company would be able to refinance the Senior Notes prior to their final maturity. The entire aggregate principal amount of the Senior Notes (which is currently in the aggregate amount of $104.879 million) becomes due on December 31, 1998. Since emerging from bankruptcy in September 1993, the Company has from time to time explored various strategies regarding its overall business operations and, in particular, various possible transactions that would result in a refinancing of its long-term debt obligations. In this connection, during the period from the beginning of Fiscal 1997 through the date of this Exchange Restructuring Prospectus, including since the announcement of the proposed Restructuring on March 3, 1998, the Company has from time to time received indications of interest from various third parties to purchase all or a portion of the Company's businesses or assets. See "Alternative Transactions" below. During this period, the Company's refinancing efforts have been significantly hampered by its inconsistent operating results and the fact that investors in the marketplace generally do not look favorably upon investing in highly-leveraged apparel companies. In the latter half of Fiscal 1997, the Company, working with the Company's various investment banking firms, the Board and management analyzed and assessed its financial situation and explored with the Board and management the availability of capital in both the private and public debt and equity markets for the purpose of recapitalizing the Company. The investment banking firms advised the Company that they did not believe that the Company could recapitalize by use of the capital markets, in light of the Company's past inconsistent operating performance, together with the reluctance of investors to invest in apparel companies suffering from high debt-to-equity ratios. The Company's unfavorable operating results continued throughout the fourth quarter of Fiscal 1997. Net sales for the fourth quarter of Fiscal 1997 were $116.4 million, a 1.1% increase from the comparable quarter in 1996, however, the Company's net losses amounted to $5.6 million (as compared to a net income of $6.1 million in 1996), and the loss from continuing operations before interest, income taxes and extraordinary gain was $2.4 million (as compared to $10.6 million of income from continuing operations before interest and income taxes for the same quarter of 1996). These results heightened the Company's concern that, absent a restructuring or other extraordinary transaction, it would be difficult for the Company to make the principal payment under its Senior Notes due on December 31, 1998 of $104.879 million. Moreover, during the fourth quarter of Fiscal 1997, the Company closed 42 of its retail outlets (representing all retail outlets other than the Perry Ellis outlet stores), determined to close one of its distribution centers and changed the sourcing of a portion of its Perry Ellis product line. While these changes were essential to streamline the Company by eliminating non-core businesses and correcting certain operational issues, these actions had a detrimental affect on the Company's earnings and profitability in Fiscal 1997. As a result, heading into fiscal year 1998, the Company was concerned that, in light of its inconsistent operating performance and the Company's inability to access the capital markets in order to refinance or retire its indebtedness under the Senior Notes, the Company's ability to maintain the support and confidence of its trade vendors was at risk. In that connection, the Company, in consultation with its financial advisors, decided that it needed to immediately address the Company's high level of indebtedness in order to avoid any permanent adverse effects on its business operations, future productivity and growth potential. In addition, as a result of the Company's performance during Fiscal 1997, as of January 3, 1998, the Company had failed to meet certain of the financial covenants contained in the Credit Agreement (the "CIT Financial Covenants"). In this connection, the Company reviewed the advisability of making the $5.5 million interest payment on the Senior Notes due and payable on March 2, 1998 with a view towards maximizing liquidity in order to appropriately fund operations during the pendency of the restructuring transactions. Commencing in December 1997, the Company began discussions with CIT regarding a possible restructuring of the Company's indebtedness under the Senior Notes (including various issues relating to the Company's failure to meet the CIT Financial Covenants and the then upcoming March 1998 interest payment on the Senior Notes). The Company believed that, given the potential instability that is associated with any restructuring process, it would be most productive to adopt a strategy to maximize liquidity and thereby protect the total enterprise value of the Company. The Company also concluded that the Noteholders and the Stockholders would best be served by converting the Senior Notes into equity of the Company, thus allowing the Company to eliminate a significant portion of its debt and substantially improve its balance sheet. THE LETTER AGREEMENT In furtherance of the Company's continuing efforts to deleverage, the Company approached Magten Asset Management Corp., the beneficial owner of, or the investment manager on behalf of the beneficial owners of, approximately $74 million in aggregate principal face amount of Senior Notes (the "Magten Notes"), representing approximately 71% of the aggregate principal amount of all Senior Notes, to discuss the possible terms and conditions of a restructuring of the indebtedness under the Senior Notes, including the Magten Notes. In addition, in connection with the Company's efforts to restructure, the Company developed the Three-Year Business Plan. See "RESTRUCTURING FINANCIAL CONSIDERATIONS -- The Three-Year Business Plan." During the months of January and February, 1998, the Company continued to actively discuss a restructuring of the Company with Magten and Apollo, the beneficial owner of 5,924,352 shares (the "Apollo Shares") of Old Common Stock, representing approximately 39.6% of the issued and outstanding shares. During this period, the Company continued its negotiations with CIT to ensure its support of the Restructuring. These efforts culminated in the Letter Agreement. The substance of the Company's negotiations with Magten and Apollo primarily centered upon each party's evaluation of, and opinion concerning, the enterprise value of the Company (discussed in more detail below) and the Company's Three-Year Business Plan. The Company believed that it was most productive to engage in discussions with Magten, Apollo and CIT because, as noted above, Magten is the beneficial holder of approximately 71% of the Senior Notes, Apollo is the beneficial holder of approximately 39.6% of the Old Common Stock and CIT is the Company's working capital lender. The Board fully participated in the negotiation of the terms of the Restructuring. Although the terms of the Restructuring were not negotiated with any non-affiliated Stockholders or any minority Noteholders, the Trustee under the Indenture was provided with, and commented upon, preliminary drafts of the Company's Registration Statement, including drafts of the Exchange Restructuring Prospectus, Proxy Statement/Prospectus, and Prepackaged Plan, prior to the filing of the Registration Statement with the Commission. In connection with the discussions concerning the Restructuring by the parties, and in order to determine the allocation of the equity of the Company among the Stockholders and Noteholders upon the consummation of the Restructuring, the Company, Magten and Apollo determined that it was necessary to assume a total enterprise value for the Company. After a review of the Company's Three-Year Business Plan, as well as any other factor deemed relevant by each party, each of the Company, Magten and Apollo developed its own view as to the total enterprise value of the Company. After significant discussion, solely for purposes of allocating the equity of the Company post-Restructuring, the parties assumed a total enterprise value for the Company of $185 million. The parties also assumed that the average outstanding balance under the Company's working capital facility for the post-restructured Company would be $60 million. Thus, the total net equity value of the Company after giving effect to the Restructuring was assumed to be $125 million. Neither the Company, Magten nor Apollo has expressed any opinion as to the accuracy of any of the foregoing assumptions, including, without limitation, the total enterprise value of the Company. Such assumptions were made solely for purposes of allocating the equity of the Company post-Restructuring among the Noteholders and Stockholders pursuant to the Restructuring. As a result of the foregoing assumptions and calculations, the parties agreed in the Letter Agreement that they would each support the Restructuring (subject to certain conditions described below on pages __ to __), pursuant to which (i) Noteholders would receive 92.5% of the New Common Stock, which equates to a distribution of equity to Noteholders with an implied value of $110 million after giving effect to the conversion of the Senior Notes and after taking into consideration the value of the Warrants as determined below (which amount approximates the aggregate outstanding amount under the Senior Notes as of the date the Letter Agreement was entered into - i.e., $104.879 million in aggregate principal amount and $5.5 million in accrued and unpaid interest as of February 28, 1998); and (ii) Stockholders would receive (a) 7.5% of the New Common Stock, which equates to a distribution of equity to Stockholders with an implied value of $8.9 million after taking into consideration the value of the Warrants as determined below, and (b) seven year Warrants representing the right to purchase 10% of the New Common Stock (on a fully diluted basis). Using the Black-Scholes option pricing formula, which incorporates such factors as the relationship of the underlying stock's price to the strike price of the Warrants and the time remaining until the Warrants expire, a value of $6.1 million is implied for the Warrants. On March 2, 1998, Magten, Apollo and the Company entered into the Letter Agreement setting forth the basic terms and conditions of the Restructuring. Pursuant to the Letter Agreement, the parties agreed, among other things, to support the Restructuring on the following terms: (i) the entire long term debt (which, as of February 28, 1998, was $110.379 million, consisting of $104.879 million of principal amount and $5.5 million of accrued interest on the Senior Notes) would be converted into 92.5% of the Company's issued and outstanding New Common Stock immediately following consummation of the Restructuring, subject to dilution for shares of New Common Stock issued under the Stock Award and Incentive Plan and the Warrant Shares and, in the case of the Exchange Restructuring only, the shares of New Common Stock issued under the Old Plans, and (ii) the Old Common Stock would be converted into 7.5% of the Company's issued and outstanding New Common Stock immediately following consummation of the Exchange Restructuring, subject to dilution for shares of New Common Stock issued under the Stock Award and Incentive Plan and the Warrant Shares and, in the case of the Exchange Restructuring only, the shares of New Common Stock issued under the Old Plans, plus Stockholders would receive seven year Warrants to purchase up to 10% of the Company's New Common Stock, on a fully diluted basis. In addition, pursuant to the Letter Agreement and in order to effect the Restructuring, the Company agreed to (a) effectuate the Reverse Split in order to "normalize" the post-restructuring trading of the New Common Stock by reducing the number of outstanding shares and, thus, increasing the per share stock price; (b) elect a new Board, consisting of between five and seven members comprised of Mr. Jerald Politzer, as Chairman, between three and five members nominated by Magten, subject to consultation with the Company and other Noteholders who may come forward, and one member nominated by the current Board; (c) enter into a registration rights agreement for the benefit of Noteholders who will hold 10% or more of the New Common Stock immediately after occurrence of the Restructuring Date, on terms and conditions reasonably acceptable to Magten and the Company; (d) enter into a New Credit Agreement to replace the Company's existing working capital facility under the Credit Agreement on terms reasonably satisfactory to Magten and Apollo; (e) adjust all existing stock options and other equity based plans to reflect the Restructuring and/or adopt the Stock Award and Incentive Plan; and (f) amend the Company's existing Rights Plan to permit the Restructuring to be consummated without causing any rights thereunder to become exercisable as a result. Pursuant to the Letter Agreement, Magten agreed, among other things, to tender (or with respect to managed accounts, use its reasonable best efforts to cause to be tendered) all of the Magten Notes in acceptance of the Exchange Offer, provided that certain conditions are satisfied, including that (i) all applicable federal and state securities laws are complied with, and (ii) the terms of the Exchange Offer and the remaining components of the Restructuring are consistent with the terms of the Exchange Offer and Restructuring as described in the Letter Agreement. As contemplated by the Letter Agreement, Magten has, in accordance with Section 6.5 of the Indenture, caused a written direction to be provided to the Trustee, to forbear during the term of the Letter Agreement from taking any action under the Indenture in connection with the failure by the Company to make the interest payment on the Senior Notes that was due and payable on March 2, 1998. Subsequent to the execution of the Letter Agreement, the Company, Magten and Apollo entered into two letter agreements, dated June 1, 1998 and July 8, 1998 (the "Letter Agreement Amendments"), amending the Letter Agreement. The Letter Agreement Amendments, among other things, extend the dates for certain Magten Agreement Termination Events and Apollo Agreement Termination Events upon which Magten and/or Apollo may terminate the Letter Agreement as follows (and as described in more detail below): (i) the Company must have obtained the requisite Stockholders' consent of the Restructuring by November 30, 1998; (ii) the Exchange Offer must have been commenced by August 31, 1998; and (iii) the Restructuring must have been consummated by November 30, 1998. References herein to the "Letter Agreement" shall, when appropriate, refer to the Letter Agreement as amended by the Letter Agreement Amendments. Each of the existing members of the Board has delivered to the Company a resignation letter resigning from the Board effective as of the Exchange Restructuring Date. In accordance with the Company's Certificate of Incorporation, by resolution of the Board, the number of directors has been fixed at [ ] effective as of the Exchange Restructuring Date. As provided for in the Letter Agreement, the new Board will consist of: (i) Mr. Jerald Politzer, as the Chairman of the Board; (ii) [ ] members to be nominated by Magten, subject to consultation with the Company and other Noteholders who may come forward prior to the commencement of the Solicitation; and (iii) one member designated by the current Board. As described above, as contemplated by the Letter Agreement, it is expected that Magten will provide the Company with its Board nominees prior to the commencement of the Solicitation. In addition, the current Board has designated Marvin Schiller to be the current Board's nominee to the new Board. If any nominee should be unavailable for election at the Stockholders' Meeting, the proxies will be voted for the election of such other person as may be recommended by the Board. See "INFORMATION REGARDING NOMINEES." Magten's obligations under the Letter Agreement will (subject to the proviso in clause (g) below) terminate upon the occurrence of any of the following events (a "Magten Agreement Termination Event") unless waived in writing by Magten: (a) the Company has not obtained the requisite shareholder approval for the Restructuring Proposals at the Stockholders' Meeting on or before November 30, 1998; (b) the Exchange Offer shall not have commenced on or before August 31, 1998; (c) the Restructuring Date shall not have occurred on or before November 30, 1998; (d) the Company or Apollo shall have disclaimed publicly in writing (or in a writing sent to Magten) its intention to pursue the Restructuring; (e) there occurs any material change in the terms or the feasibility of the Restructuring that materially affects the Noteholders, not previously consented to by Magten; (f) the Company shall be the subject of a voluntary or involuntary petition under the Bankruptcy Code prior to the occurrence of the Restructuring Date, other than a voluntary petition filed in connection with a prepackaged or prenegotiated chapter 11 case to effectuate the Restructuring, provided, however, that the filing of an involuntary petition will only be deemed to constitute a Magten Agreement Termination Event when and if such involuntary petition for relief has continued undismissed for 60 days or an order or decree approving the involuntary petition has continued unstayed and in effect for 60 days; and (g) to the extent the right of Magten to vote or direct the disposition of the Magten Notes results from an arrangement in existence on March 2, 1998 under which Magten has been engaged to perform investment management services on behalf of a beneficial owner of the Magten Notes, (i) such engagement will be terminated by such beneficial owner or as a result of any statutory, regulatory or bona fide business requirement or condition not related to the subject matter of the Letter Agreement, or (ii) such beneficial owner on its own (without any direct or indirect influence from Magten) directs Magten to dispose of some or all of the Magten Notes beneficially owned by such beneficial owner; provided, that, in any case, the Magten Agreement Termination Event arising pursuant to this clause (g) shall apply only to, and shall result in the termination of Magten's obligations under the Letter Agreement solely with respect to, those Senior Notes as to which Magten's engagement has been terminated or as to which such a disposal direction has been issued, and further provided, that such Magten Agreement Termination Event shall have no effect whatsoever on any of Magten's other obligations under the Letter Agreement. Apollo's obligations under the Letter Agreement will terminate upon the occurrence of any of the following events (an "Apollo Agreement Termination Event") unless waived in writing by Apollo: (a) the Restructuring Date shall not have occurred on or before November 30, 1998; (b) there occurs any material change in the terms or the feasibility of the Restructuring that materially and adversely affects the Stockholders, not previously consented to by Apollo; and (c) the Company shall be the subject of a voluntary or involuntarily petition under the Bankruptcy Code prior to the occurrence of the Restructuring Date, other than a voluntary petition filed in connection with a prepackaged or prenegotiated chapter 11 case to effectuate the Restructuring, provided, however, that the filing of an involuntary petition will only be deemed to constitute an Apollo Agreement Termination Event when and if such involuntary petition for relief has continued undismissed for 60 days or an order or decree approving the involuntary petition has continued unstayed and in effect for 60 days. In addition, the respective obligations of Magten, Apollo and the Company to consummate each of the transactions contemplated by the Restructuring are also subject to the satisfaction of each of the following conditions: (a) neither Magten, the Company nor Apollo has failed to comply with any of its obligations set forth in the Letter Agreement; (b) the negotiation, preparation and execution of mutually satisfactory definitive transaction agreements and other documents incorporating the terms and conditions of each of the transactions contemplated by the Restructuring set forth in the Letter Agreement and such other terms and conditions as the parties may reasonably require; (c) all authorizations, consents and regulatory approvals required, if any, in connection with the consummation of the transactions contemplated by the Restructuring and the continuation of the Company's businesses as currently constituted shall have been obtained; and (d) the holders of 100% (or such lesser percentage as agreed upon by Magten) of the Senior Notes shall have tendered their Senior Notes in connection with the Exchange Offer. In the event that less than 100% of the aggregate principal amount of the Senior Notes are tendered in the Exchange Offer but at least two-thirds in principal amount and a majority in number of the Noteholders voting have voted in favor of the Prepackaged Plan, the Company intends to file the Prepackaged Plan under Chapter 11 of the Bankruptcy Code. Pursuant to the Letter Agreement, Magten has agreed to tender (or with respect to managed accounts, use its reasonable best efforts to cause to be tendered), subject to certain conditions, all of the Magten Notes pursuant to the Exchange Offer and, in the event the Prepackaged Plan is pursued, to vote all of the Magten Notes in favor of the Prepackaged Plan. Even though the Company expects the Reverse Split to "normalize" the post-restructuring trading of the New Common Stock, no assurances can be made that the Reverse Split will "normalize" post-restructuring trading of the New Common Stock. If post-restructuring trading is not "normalized," the New Common Stock may experience significant price and volume fluctuations which could materially adversely effect the market price of the New Common Stock. THE VOTING AGREEMENT In accordance with the terms of the Letter Agreement, on August _, 1998, Apollo and the Company entered into the Voting Agreement. A form of the Voting Agreement is filed as Exhibit 9.1 to the Company's Registration Statement. For a copy of the form of the Voting Agreement, Noteholders may contact Todd Kahn, General Counsel and Executive Vice President of the Company, at (212) 221-7500, to request a copy. Pursuant to the Voting Agreement, Apollo agreed that, subject to Apollo's receipt of proxy or other solicitation materials in respect of the Restructuring that are consistent with the terms of the Letter Agreement, (A) at any meeting of the Stockholders, however called, and in any action by consent of the Stockholders, Apollo will vote all of the Apollo Shares in favor of each of the transactions contemplated by the Restructuring with respect to which a vote of the Stockholders is called, including, without limitation, each of the Restructuring Proposals; (B) Apollo will vote all of the Apollo Shares in favor of any plan of reorganization for which votes to accept or reject such plan of reorganization have been solicited; provided, that, such plan of reorganization is consistent with the terms of the Restructuring set forth in the Letter Agreement; (C) so long as it is the beneficial owner of the Apollo Shares, Apollo will not at any time prior to the termination of the Letter Agreement, support or encourage, directly or indirectly, any financial restructuring concerning the Company other than the Restructuring or any transaction or other action that is inconsistent with the terms of the Restructuring; and (D) Apollo will not sell, transfer or assign any of the Apollo Shares or any voting interest therein during the term of the Letter Agreement except to a purchaser who agrees in writing prior to such acquisition to be bound by the terms of this Agreement and by all the terms of the Letter Agreement with respect to the Apollo Shares being acquired by such purchaser. In addition, pursuant to the Voting Agreement, Apollo also agreed that if it fails to comply with the provisions of the Letter Agreement, as determined by the Company in its sole discretion, such failure will result, without any further action by Apollo, in the irrevocable appointment of the Company, until termination of the Voting Agreement, as Apollo's attorney and proxy pursuant to the provisions of Section 212(c) of the Delaware General Corporate Law, with full power of substitution, to vote, and otherwise act (by written consent or otherwise) with respect to, the Apollo Shares which Apollo is entitled to vote at any meeting of Stockholders (whether annual or special and whether or not an adjourned or postponed meeting) or consent in lieu of any such meeting or otherwise, on the matters and in the manner specified in the Voting Agreement. The Company's refinancing efforts during Fiscal 1997 included discussions with DDJ Capital Management, LLC ("DDJ") regarding a possible refinancing transaction. As of March 10, 1998, DDJ was the beneficial owner of 1,809,100 shares of Old Common Stock, which represents approximately 12.1% of the issued and outstanding shares of Old Common Stock. In connection with these discussions, DDJ entered into a confidentiality agreement (the "DDJ Confidentiality Agreement") with the Company relating to DDJ's review of various materials relative to such proposed refinancing. The DDJ Confidentiality Agreement contained certain restrictions on the ability of DDJ to buy or sell shares of Old Common Stock. In accordance with the terms of the Letter Agreement, the Company requested that DDJ enter into a voting agreement with the Company similar to the Voting Agreement entered into with Apollo. DDJ, however, informed the Company that it did not wish to enter into such a voting agreement. In discussions between the Company and DDJ, DDJ stated that it was "disappointed" that the Company was not pursuing a refinancing. However, DDJ has not expressed opposition to the Restructuring. In addition, on or about March 3, 1998, DDJ requested that the Company terminate the restrictions on DDJ's ability to buy or sell shares of Old Common Stock set forth in the DDJ Confidentiality Agreement. On March 4, 1998, the Company granted this request by DDJ. As of the date of this Exchange Restructuring Prospectus, DDJ is the beneficial owner of approximately ____ shares of Old Common Stock, representing approximately ____% of the issued and outstanding shares of Old Common Stock. THE WAIVER AND FORBEARANCE UNDER THE CREDIT AGREEMENT AND COMMITMENT FOR NEW CREDIT AGREEMENT CIT agreed to support the Company's restructuring efforts under the Letter Agreement and, on March 2, 1998, the Company entered into the Twelfth Amendment with CIT, wherein CIT (i) waived certain existing financial covenant defaults under the Credit Agreement as of January 3, 1998; (ii) agreed to forbear (subject to certain conditions) from exercising any of its rights or remedies arising under the Credit Agreement arising from the Company's failure to make the interest payment on the Senior Notes due and payable on March 2, 1998: (iii) agreed to continue making loans, advances and other financial accommodations to the Company; and (iv) agreed to amend certain provisions of the Credit Agreement, including an increase in the advance rate for revolving loans made pursuant to the Credit Agreement. Under the Twelfth Amendment, such agreement to forbear by CIT will terminate on July 1, 1998 or earlier upon the happening of (a) the occurrence of any Event of Default (as defined in the Credit Agreement) other than a Payment Default (as defined in the Twelfth Amendment) or (b) the failure of the Company to execute and deliver to CIT before June 1, 1998, (i) a commitment letter executed by CIT providing for the agreement between CIT and the Company to enter into a new $135 million syndicated credit facility (in replacement of the financing and factoring arrangements provided by CIT pursuant to the Credit Agreement) on terms and conditions satisfactory to CIT or (ii) a copy of a commitment letter executed between another lender and the Company providing for a credit facility to the Company which by its terms provides for closing and funding thereof on or before July 1, 1998, and enabling the Company upon such closing and funding to simultaneously terminate the Credit Agreement and all other Financing Agreements (as defined in the Credit Agreement) and to satisfy in full all of its then existing Obligations (as defined in the Credit Agreement) to CIT; or (c) the exercise of any right or remedy with respect to any of the Collateral (as defined in the Credit Agreement) by any holder of any Senior Notes or by the Trustee under the Indenture; or (d) the payment of any interest on the Senior Notes in respect of the Company's failure to make the March 2, 1998 interest payment or otherwise. In consideration for CIT's agreement to enter into the Twelfth Amendment, pursuant thereto, the Company agreed to pay CIT a forbearance and waiver fee in the amount of $150,000. In addition, in consideration of a New Credit Agreement proposed by CIT, the Company agreed to pay CIT a non-refundable and fully earned fee of $1,050,000, payable in three equal installments of $350,000 each on April 1, May 1 and June 1, 1998. This fee is non-refundable in whole or in part, provided, however, that notwithstanding the foregoing, (a) if the Company does execute a New Credit Agreement with CIT, such fee will be applied to satisfy any and all closing fees and facility fees under such New Credit Agreement, or (b) if CIT does not extend a New Credit Agreement to the Company because CIT's Executive Credit Committee fails to give credit approval for such facility, then $600,000 of such fee shall be refunded to the Company. In the event that CIT becomes the lender under the New Credit Agreement or under a debtor-in-possession working capital facility, if the Prepackaged Restructuring is pursued, the Twelfth Amendment provides that no other closing fee or facility fee shall be due and payable in connection with any such replacement credit facility provided by CIT. Relative to the June 1, 1998 deadline contained in the Twelfth Amendment by which the Company was required to obtain a commitment for a New Credit Agreement, since the beginning of Fiscal 1998, the Company received and reviewed various proposals for a New Credit Agreement which were submitted by CIT as well as various other prospective lenders. After reviewing the proposals for a New Credit Agreement received from the various lenders, and conducting extensive negotiations with certain of the lenders who submitted proposals, the Company determined that the proposal submitted by CIT contains the most advantageous terms and conditions. As a result, the Company entered into a commitment letter with CIT (the "CIT Commitment Letter"), which sets forth the principal terms and conditions of an agreement for a new $140 million secured credit facility with CIT under the New CIT Credit Agreement that the Company intends to enter into on the Restructuring Date. The execution of the New CIT Credit Agreement is subject to various conditions, including, but not limited to, the consummation of the Restructuring. For a more detailed description of the new working capital facility to be provided by CIT pursuant to the CIT Commitment Letter, see "DESCRIPTION OF NEW CIT CREDIT AGREEMENT." Pursuant to the CIT Commitment Letter and in accordance with the Twelfth Amendment, no closing or facility fees will be charged to the Company by CIT in consideration of the execution and delivery of the New CIT Credit Agreement. In conjunction with obtaining the financing commitment under the CIT Commitment Letter, CIT has agreed to further support the Restructuring by entering into the Thirteenth Amendment and Forbearance Agreement, dated as of June 1, 1998 (the "Thirteenth Amendment"), wherein CIT agreed (i) to continue to forbear (subject to certain conditions) from exercising any of its rights or remedies under the Credit Agreement arising from the Company's failure to make the interest payment on the Senior Notes due and payable on March 2, 1998 or by virtue of an event of default arising from the failure of the Company to make the interest payment on the Senior Notes due and payable on August 31, 1998; (ii) to continue to make loans, advances and other financial accommodations to the Company through the earlier of the Restructuring Date and November 30, 1998, subject to the terms and conditions of the Thirteenth Amendment; and (iii) to amend certain provisions of the Credit Agreement, including a reduction of the rate of interest charged on the revolving credit loans, an increase in the advance rate for revolving credit loans made under the Credit Agreement and the elimination of any and all provisions providing for the factoring of the Company's accounts receivable. Under the Thirteenth Amendment, such agreement to forbear by CIT will terminate on November 30, 1998 or earlier upon the happening of (a) the occurrence of any Event of Default (as defined in the Credit Agreement), other than by virtue of the Company's failure to make the March 2, 1998 or August 31, 1998 interest payment on the Senior Notes or the commencement or continuation of a chapter 11 case to effectuate the Restructuring; or (b) the exercise of any right or remedy with respect to any of the Collateral by any holder of the Senior Notes or by the Trustee under the Indenture; or (c) the payment of any interest on the Senior Notes in respect of the Company's non-payment of the interest that was payable on March 2, 1998 or that will be payable on August 31, 1998 or otherwise; or (d) the occurrence of an Agreement Termination Event (as defined in the Letter Agreement), except under certain circumstances. Moreover, the Thirteenth Amendment provides that in the event that the Company seeks to consummate the Restructuring by filing a chapter 11 case, (i) the Credit Agreement will remain in full force and effect (subject to certain conditions) and (ii) immediately upon commencement of the chapter 11 case, the Company and CIT will seek Bankruptcy Court approval and authority for CIT to extent post-petition financing to the Company on the same terms and conditions as set forth in the Credit Agreement. In accordance with the Twelfth Amendment, no additional closing fees, facility fees or amendment fees were charged to the Company by CIT in consideration of the execution and delivery of the Thirteenth Amendment. While the Company expects that the Restructuring will be consummated prior to November 30, 1998, if the Restructuring is not consummated by such date, the Company intends to request an extension of the forbearance period referred to above from CIT. However, there is no assurance that such an extension would be granted. ALTERNATIVE TRANSACTIONS Subsequent to the date that the Company announced the proposed Restructuring on March 3, 1998, the Company has continued to review all options which might be available to the Company, including several indications of interest received from various third parties to purchase all or part of the Company's businesses or assets. In order to identify and solicit indications of interest with respect to alternative transactions, the Company has engaged in detailed discussions with certain of such third parties in order to explore the possibility of an acquisition transaction or business combination involving the Company. In that connection, the Company has entered into confidentiality agreements with such potential third party purchasers. While certain of these third parties demonstrated varied levels of interest in further discussions, as of the date hereof, the Company has not entered into any agreement concerning any such proposed transaction. Discussions regarding alternative transactions are ongoing. PURPOSE OF THE RESTRUCTURING The purpose of the Restructuring is to help ensure the long-term viability and to contribute to the success of the Company by deleveraging the Company's capital structure. Specifically, in accordance with the Three-Year Business Plan developed by the Company, the Restructuring is designed to recapitalize the Company by converting all of the Company's long-term debt obligations under the Senior Notes (which, as of February 28, 1998, was $110.379 million, consisting of $104.879 million principal amount of, and $5.5 million of accrued interest on, the Senior Notes) into New Common Stock. Interest charges for the Company will be reduced by $11 million per year and stockholders' equity should be substantially increased as a result of the Restructuring. The Company's consolidated debt at the completion of the Restructuring will include approximately $28 million in revolver debt plus $15 million from the term loan portion of its working capital facility. This significantly lower debt-to-equity ratio should help the Company to achieve the objectives as described in the Three-Year Business Plan and make the Company more attractive to investors. The Company believes that by reducing the uncertainty surrounding its ability to pay or retire the Senior Notes which are due in their entirety on December 31, 1998, the Restructuring should maximize liquidity for the Company's business operations and thereby provide a platform for future growth and enhance the Company's total enterprise value. The Company further believes that by providing the Company with a deleveraged capital structure, the company that results from the Restructuring should be positioned favorably to withstand the normal market fluctuations in the highly volatile apparel industry. In contemplation of the Restructuring the Company elected not to pay the interest payment of approximately $5.5 million that was due and payable under the Senior Notes on March 2, 1998, subject to a 30 day grace period. Because the Company elected not to pay the interest due on the Senior Notes by the expiration of the applicable grace period, an event of default has occurred with respect to the Senior Notes entitling the Noteholders to accelerate the maturity thereof. Pursuant to the Letter Agreement, Magten has, in accordance with Section 6.5 of the Indenture, caused a written direction to be provided to the Trustee, to forbear during the term of the Letter Agreement from taking any action under the Indenture in connection with the failure by the Company to make the interest payment on the Senior Notes that was due and payable on March 2, 1998. On April 8, 1998, the Trustee issued a Notice of Default stating that as a result of the Company's failure to make the interest payment on the Senior Notes, an event of default under the Indenture had occurred on April 1, 1998. Holders of at least 25% in the aggregate principal face amount of the Senior Notes may accelerate all outstanding indebtedness under the Senior Notes pursuant to the terms of the Indenture. If such holders accelerate the indebtedness under the Senior Notes, the Company may be required to commence a proceeding under the Federal bankruptcy laws without having solicited acceptances for the Prepackaged Plan prior to the commencement of such proceeding. In addition, the Company's working capital lender, CIT, agreed to forbear until November 30, 1998, subject to certain conditions, from exercising any of its rights or remedies under the Credit Agreement, arising by virtue of the Company's failure to pay such interest on the Senior Notes. Failure to consummate the Restructuring could result in the acceleration of all of the indebtedness under the Senior Notes and/or the Credit Agreement. ABSENT THE RESTRUCTURING, THE COMPANY DOES NOT BELIEVE IT WILL BE ABLE TO SATISFY ITS OBLIGATIONS UNDER THE SENIOR NOTES WITHOUT A REFINANCING OF THE COMPANY'S INDEBTEDNESS UNDER THE CREDIT AGREEMENT AND/OR THE SENIOR NOTES OR AN ADDITIONAL CAPITAL INFUSION, AND IT IS UNLIKELY THAT THE COMPANY WILL BE ABLE TO OBTAIN SUCH REFINANCING OR ADDITIONAL CAPITAL INFUSION. IF THE COMPANY DETERMINES THAT IT IS OR WILL BE UNABLE TO COMPLETE THE RESTRUCTURING, THE COMPANY WILL CONSIDER ALL OTHER AVAILABLE FINANCIAL ALTERNATIVES, INCLUDING THE SALE OF ALL OR A PART OF THE COMPANY'S BUSINESSES, THE IMPLEMENTATION OF AN ALTERNATIVE RESTRUCTURING ARRANGEMENT OUTSIDE OF BANKRUPTCY, OR THE COMMENCEMENT OF A CHAPTER 11 CASE WITHOUT A PRE-BANKRUPTCY ACCEPTED PLAN OF REORGANIZATION. THERE CAN BE NO ASSURANCE, HOWEVER, THAT ANY ALTERNATIVE WOULD BE ON TERMS AS FAVORABLE TO NOTEHOLDERS AND STOCKHOLDERS AS THE RESTRUCTURING. If any of the Restructuring Proposals are not approved by the Stockholders and/or the Minimum Tender Condition is not satisfied or waived, but the Company receives sufficient acceptances of the Prepackaged Plan to obtain confirmation thereof by the Bankruptcy Court, then the Company intends to pursue confirmation of the Prepackaged Plan under Chapter 11 of the Bankruptcy Code and to attempt to use such acceptances to obtain confirmation of the Prepackaged Plan. If the Company determines that it is or will be unable to complete the Restructuring, the Company will consider all financial alternatives available to it at such time, which may include the sale of all or part of the Company's business, the implementation of an alternative restructuring arrangement outside of bankruptcy, or the commencement of a Chapter 11 case with or without a preapproved plan of reorganization. There can be no assurance, however, that any alternative restructuring would result in a reorganization of the Company rather than a liquidation, or that any such reorganization would be on terms as favorable to the Noteholders and Stockholders as the terms of the Restructuring. If a liquidation or a protracted and non-orderly reorganization were to occur, there is a risk that the ability of the Noteholders and Stockholders to recover their investments would be even more impaired than under the Restructuring and would be substantially delayed. A non-consensual restructuring would likely have a material adverse impact on the Company and its employees, suppliers and customers. RESTRUCTURING FINANCIAL CONSIDERATIONS BACKGROUND OF THE RESTRUCTURING FINANCIAL ANALYSIS The Restructuring was designed to enable the Company to achieve the Three-Year Business Plan by attempting to maximize liquidity for the Company's business operations which should thereby provide a platform for future growth and enhance the Company's total enterprise value. The Board reviewed the Three-Year Business Plan and projections and the various factors influencing the apparel industry which historically had affected the Company's operations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." FAIRNESS OPINION Pursuant to an agreement effective as of December 18, 1997, between E&Y and the Company (the "E&Y Agreement"), the Company engaged E&Y to act as its financial advisor in connection with the Restructuring. In addition, E&Y performed certain valuation services at the request of the Company under the E&Y Agreement. For a more detailed description of the arrangements pursuant to the E&Y Agreement, including the fees and expenses payable to E&Y by the Company, see "ADVISORS AND REPRESENTATIVES." On March 25, 1998, the Company retained E&Y to render its opinion as to whether or not the consideration to be received by public Stockholders pursuant to the Restructuring is fair to the public Stockholders from a financial point of view. On April 21, 1998, at the request of the Board, E&Y delivered to the Board the E&Y Fairness Opinion addressed to the Board stating its opinion that as of that date and based upon and subject to the factors and assumptions set forth therein, the consideration to be received by public Stockholders pursuant to the Restructuring is fair to the public Stockholders from a financial point of view. E&Y subsequently delivered to the Board their written opinion addressed to the Board that, as of the date of the Proxy Statement/Prospectus and based upon and subject to the factors and assumptions set forth therein, the consideration to be received by public Stockholders pursuant to the Restructuring is fair to the public Stockholders from a financial point of view. THE FULL TEXT OF THE E&Y FAIRNESS OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED, AND QUALIFICATIONS AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY E&Y, IS ATTACHED AS ANNEX I TO THIS EXCHANGE RESTRUCTURING PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. NOTEHOLDERS ARE URGED TO READ SUCH OPINION IN ITS ENTIRETY. THE E&Y FAIRNESS OPINION WAS PROVIDED TO THE BOARD FOR ITS USE AND BENEFIT AND IS DIRECTED ONLY TO THE FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE CONSIDERATION TO BE RECEIVED BY PUBLIC STOCKHOLDERS PURSUANT TO THE RESTRUCTURING AND DOES NOT ADDRESS THE MERITS OF THE UNDERLYING DECISION BY THE COMPANY TO ENGAGE IN THE RESTRUCTURING NOR DOES IT CONSTITUTE A RECOMMENDATION TO THE COMPANY'S STOCKHOLDERS AS TO HOW SUCH STOCKHOLDERS SHOULD VOTE ON THE PROPOSED RESTRUCTURING. THE SUMMARY OF THE E&Y FAIRNESS OPINION SET FORTH IN THIS EXCHANGE RESTRUCTURING PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. In arriving at the E&Y Fairness Opinion, E&Y, among other things: (i) reviewed the terms of the Restructuring, as set forth in the Letter Agreement included in the Company's Form 8-K filing dated March 4, 1998, the Company's Annual Report, Form 10-K and related audited financial information for the fiscal year ended January 3, 1998 and the Company's Forms 10-Q and the related unaudited financial information for the quarterly periods ending September 27, 1997 and June 28, 1997, unaudited financial information for the two month period ending March 7, 1998 and a draft copy of the Company's Registration Statement on Form S-4, dated April 17, 1998, to be filed in conjunction with the Restructuring; (ii) reviewed and discussed with the Company's management certain information, including financial forecasts (specifically the Three-Year Business Plan), relating to the business, earnings, cash flow, assets, liabilities and prospects of the Company, furnished to E&Y; (iii) conducted discussions with members of senior management of the Company concerning their respective businesses and prospects, before and after giving effect to the Restructuring; (iv) reviewed the historical market prices and valuation multiples for the Old Common Stock and considered the reasonableness of this information as it related to fair market valuation of the Old Common Stock; (v) applied commonly-accepted valuation procedures in determining the fair market value of the Company's total invested capital ("TIC") on a going concern basis; (vi) reviewed the Three Year Business Plan; and (vii) reviewed such other financial studies and analyses and took into account such other matters as E&Y deemed necessary, including its assessment of general economic, market and monetary conditions. In preparing its opinion, E&Y assumed and relied on the accuracy and completeness of all information supplied by the Company or others, information otherwise made available to E&Y, information discussed with or reviewed by or for E&Y, and any publicly available information. E&Y did not assume any responsibility for independently verifying such information and did not undertake an independent evaluation or appraisal of any of the assets or liabilities of the Company. In addition, E&Y did not assume any obligation to conduct, nor did E&Y conduct, any physical inspection of the properties or facilities of the Company. With respect to the financial forecast information furnished to or discussed with E&Y by the Company, E&Y assumed that they were reasonably prepared and reflect the best currently available estimates and judgments of the Company's management as to the expected future financial performance of the Company, as the case may be. E&Y also assumed that the final form of the Restructuring would be in the form of the Restructuring as set forth in the Company's Registration Statement, filed with the Commission as of the date of the E&Y Fairness Opinion. The form of the Restructuring described in the Company's Registration Statement filed with the Commission as of the date of the E&Y Fairness Opinion is the same in all material respects as the form of the Restructuring described herein. The E&Y Fairness Opinion is necessarily based upon market, economic and other conditions as they existed and could be evaluated on and on the information made available to E&Y as of, the date of such opinion. E&Y assumed that in the course of obtaining the necessary regulatory or other consents or approvals (contractual or otherwise) for the Restructuring, no restrictions, including any divestiture requirements or amendments or modifications, will be imposed that will have a material adverse effect on the contemplated benefits to Stockholders of the Restructuring. E&Y was not authorized by the Company or the Board to solicit, nor did it solicit, third-party indications of interest for the acquisition of all or any part of the Company. E&Y did participate in discussions and negotiations among representatives of the Company, Apollo and Magten, including each party's financial and legal advisors, and it provided advisory services to the Company in connection with the Restructuring including valuation and assessment of the terms of the Restructuring, however, E&Y did not determine the terms of the Restructuring. In addition, E&Y was not asked to consider, and the E&Y Fairness Opinion does not in any manner address, the price at which shares of the Company will trade following the announcement or consummation of the Restructuring. The following is a summary of the facts and circumstances observed by E&Y and the material financial and comparative analyses performed by E&Y in connection with the preparation of the E&Y Fairness Opinion. REVIEW OF THE PROCESS BY WHICH THE TERMS OF THE RESTRUCTURING WERE DETERMINED. E&Y reviewed the facts and circumstances surrounding the Company leading to the Restructuring as well as the process by which the Restructuring was negotiated to identify issues relating to fairness to public Stockholders. The Company has advised E&Y that the following issues, among others, occurring prior to the Restructuring, are important to consider: (i) the severe financial distress of the Company caused by decreasing sales volume in Fiscal 1997, (ii) the inability of the Company to meet the CIT Financial Covenants as of January 3, 1998, (iii) anticipated difficulty in meeting a semi-annual coupon payment on the Senior Notes, (iv) anticipated difficulty in meeting funding requirements for critical capital expenditures required to maintain the Company's operations on a competitive footing, (v) anticipated difficulty in refinancing the Senior Notes upon maturity at December 31, 1998, and (vi) replacement of substantially all of the Company's senior management in 1997 including the Chief Executive Officer, Chief Financial Officer and other members of senior management. With regard to the facts and circumstances surrounding the negotiation process in which the terms of the Restructuring were determined, E&Y observed, among other things, that (i) the Company initiated negotiations with the largest holders of the Senior Notes and Old Common Stock, Magten and Apollo, respectively, (ii) under the current capital structure of the Company (the "Current Structure"), Magten controls approximately 67% of the Senior Notes, and Apollo controls approximately 40% of the Old Common Stock, (iii) at the time of the negotiations, DDJ, an entity unrelated to either the Company, Magten or Apollo, held approximately 12% of the Company's Old Common Stock and was not included in negotiations regarding the Restructuring, (iv) the Company proposed a restructuring plan under which holders of the Senior Notes would exchange their claims against the Company for a percentage of the Company's common stock, (v) in several negotiations taking place over the course of several weeks, the Company, Magten and Apollo agreed to the terms of the Restructuring, (vi) Magten and Apollo are unrelated entities and have no interests in the Company other than those represented by their respective claims against and interests in the Company, and (viii) based on publicly available information, as of the date of its opinion Magten owns none of the Company's common equity, and Apollo owns none of the Company's Senior Notes as of the date of its opinion. FAIR MARKET VALUATION OF THE COMPANY'S TOTAL INVESTED CAPITAL. In conducting financial analyses to determine the fairness of the Restructuring to the public Stockholders, E&Y employed commonly-accepted valuation approaches to determine the fair market value of the Company's total invested capital ("TIC") on a going concern basis. Such commonly accepted valuation approaches include, but are not limited to, the guideline company approach, the comparable transaction approach and the discounted cash flow approach described herein. GUIDELINE COMPANY APPROACH. E&Y performed a guideline company analysis to identify the fair market value of the Company's TIC on a going concern basis pursuant to which it compared certain publicly available financial and operating data, projections of future financial performance and market statistics (based on closing stock prices on April 3, 1998) of nine companies with those for the Company assuming implementation of the Restructuring. These companies include Farah, Inc., Garan, Inc., Haggar Corp., Hampton Industries, Hartmarx Corp., Oxford Industries, Inc., Phillips-Van Heusen, Premiumwear, Inc. and Supreme International Corp. E&Y compared TIC as a multiple of, among other things, latest twelve months ("LTM") earnings before interest, taxes, depreciation and amortization ("EBITDA"), 1998 estimated EBITDA, LTM earnings before interest and taxes ("EBIT"), 1998 estimated EBIT, LTM sales and 1998 estimated sales. In each case, financial performance of the Company assumed implementation of the Restructuring. With respect to the nine guideline companies, E&Y's analysis indicated median TIC as a multiple of LTM EBITDA of 8.0x, 1998 estimated EBITDA of 5.7x, LTM EBIT of 10.5x, 1998 estimated EBIT of 9.6x, LTM sales of 0.48x, 1998 estimated sales of 0.46x. No company utilized in the guideline company approach analysis was identical to the Company. Accordingly, an analysis of the results of such a comparison is not purely mathematical; rather it involves complex considerations and judgments concerning differences in historical and projected financial and operating characteristics of the comparable companies and other factors that could affect the public trading value of the comparable companies or company to which they are being compared. COMPARABLE TRANSACTION APPROACH. E&Y reviewed certain publicly available information regarding six selected apparel industry acquisitions announced since February 1993 (the "Acquisition Comparables"), and for each transaction calculated transaction value (defined as offer value plus total debt) as a multiple of LTM EBITDA, LTM EBIT and LTM revenues. Such analysis indicated that the transaction value as a multiple of LTM EBITDA ranged from 6.2x to 7.9x, with a median of 7.6x, as a multiple of LTM EBIT ranged from 5.9x to 16.1x, with a median of 8.6x, and as a multiple of LTM revenues ranged from 0.44x to 0.92x, with a median of 0.76x. There were a limited number of transactions in the apparel industry which E&Y deemed to be relevant. No company utilized in the comparable apparel industry acquisitions analysis was identical to the Company. Accordingly, an analysis of the results of this comparison is not purely mathematical; rather it involves complex considerations and judgments concerning differences in historical and projected financial and operating characteristics of the comparable acquired companies and other factors that could affect the offer value of such companies and the Company. DISCOUNTED CASH FLOW ANALYSIS. Using projections for the Company prepared by its management for the fiscal years ending January 1, 1998 through December 30, 2000 (see "PROJECTED CONSOLIDATED FINANCIAL INFORMATION"), E&Y calculated ranges of implied TIC values for the Company based upon the sum of the discounted present value of the Company's three year stream of projected un-levered after-tax free cash flow (defined as tax-effected EBIT excluding extraordinary and non-recurring items, plus depreciation and amortization, minus capital expenditures, minus (plus) increases (decreases) in working capital) and the discounted net present value of a terminal value based on a range of multiples of its projected calendar year 2000 EBITDA. In performing this analysis, E&Y utilized discount rates reflecting a weighted average cost of capital. COMPARISON OF ALLOCATION OF TIC ON A GOING CONCERN BASIS TO EXISTING EQUITY. E&Y reviewed the proportion of TIC value, as calculated on a going concern basis, that would be attributable to the current owners of the Old Common Stock both under the Current Structure as well as under the revised capital structure described in the Restructuring. Value allocable to the owners of the Old Common Stock under the Current Structure equals 100% of the Company's TIC value after satisfying the Credit Agreement and the Senior Notes. Value allocable to current owners of the Old Common Stock under the revised capital structure described in the Restructuring equals the value of the Warrants plus 7.5% of the Company's New Common Stock after satisfying the Credit Agreement. E&Y has identified value of the Warrants by, among other things, employing a Black-Scholes option pricing model. By allocating the fair market value of the Company's TIC, as calculated on a going concern basis, to holders of Senior Notes and Old Common Stock under the Current Structure, E&Y has not quantified potential decreases in the value of such securities due to the Company's current financial distress and associated additional risk. CONSIDERATION OF CONTROL STATUS AND MARKETABILITY. E&Y has considered the issues of relative elements of control status and marketability faced by holders of Old Common Stock under the Current Structure and as anticipated under the revised structure as set forth in the Restructuring. HISTORICAL STOCK PRICE ANALYSIS. E&Y reviewed and analyzed the history of the trading price for the Company's common stock. Since emerging from bankruptcy in 1993, the Company's stock price declined steadily, losing approximately 85% of its value between the four-year high of $11.00 per share in June of 1994 and the $1.6875 value per share as of the March 2, 1998, which is the date immediately prior to the public announcement of the Restructuring. The price per share as of the March 2, 1998 also represented over a 40% decline since announcement of the Company's third quarter results in early November of 1997. With the exception of an early December announcement of a charge to be taken by the Company in connection with closure of outlet stores, no information had been publicly disclosed prior to the March 3, 1998 public announcement with regard to the Company's failure to satisfy the covenants of its Credit Agreement nor on the Company's potential difficulty in meeting a March, 1998 semi-annual coupon payment due on the Senior Notes while also funding critical capital expenditures. Following the March filing, the stock price further declined from $1.69 as of February 27, 1998 to $0.63 as of March 13, 1998. The preparation of a fairness opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. Therefore, such an opinion is not readily susceptible to partial analysis or summary description. In arriving at its opinion, E&Y did not attribute any particular weight to any analysis or factor considered by it. Accordingly, E&Y's analyses must be considered as a whole and selecting portions of its analyses, without considering all of its analyses, would create an incomplete view of the process underlying the E&Y Fairness Opinion. In performing its analyses, numerous assumptions were made with respect to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of E&Y or the Company. Any estimates contained in the analyses performed by E&Y are not necessarily indicative of future results, which may be significantly more or less favorable than suggested by such analyses. Additionally, estimates of the value of businesses or securities do not purport to be appraisals or to reflect the prices at which such businesses or securities might actually be sold. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty. In addition, as described above, the E&Y Fairness Opinion was among several factors taken into consideration by the Board in making its determination to approve the Restructuring. Consequently, the E&Y analyses described herein should not be viewed as determinative of the decision of the Board or the Company's management with respect to the fairness of the Restructuring. E&Y'S FINANCIAL ADVISORY FEE. In connection with the E&Y Fairness Opinion and pursuant to a letter agreement dated March 25, 1998 between the Company and E&Y, the Company agreed to pay E&Y (i) a fee of $75,000 payable in cash upon execution of the letter agreement and (ii) $75,000 payable in cash on the date that E&Y informed the Company that they were prepared to deliver the E&Y Fairness Opinion. Pursuant to such letter agreement, the Company also agreed to reimburse E&Y for its reasonable out-of-pocket expenses and indemnify E&Y and certain related persons for certain liabilities related to or arising out of its engagement, including liabilities under Federal securities laws. To date, the Company has paid $150,000 to E&Y in respect of its services pursuant to such letter agreement. In addition to the letter agreement entered into in connection with the E&Y Fairness Opinion, E&Y and the Company entered into the E&Y Agreement effective as of December 18, 1997 pursuant to which the Company engaged E&Y to act as its financial advisor in connection with the Restructuring. Pursuant to the E&Y Agreement, the Company agreed to pay E&Y a monthly advisory fee in the amount of $125,000, consisting of two components (i) $95,000 per month, and (ii) $90,000 at the end of every three month period (representing $30,000 per month for the prior three months) and to reimburse E&Y for its reasonable out-of-pocket costs. To date, the Company has paid approximately $600,000 to E&Y in respect of its services under the E&Y Agreement. The E&Y Agreement may be terminated at any time. At the request of the Company, E&Y performed certain valuation services under the E&Y Agreement. In connection with those services, E&Y has been paid $100,000 by the Company. See "ADVISORS AND REPRESENTATIVES." E&Y is an internationally recognized financial services firm. E&Y, through its Financial Advisory Service practice, is continuously engaged in the valuation of businesses and securities in connection with restructurings, mergers and acquisitions and other purposes. E&Y has in the past provided financial advisory services to the Company, including having acted as advisor to the Company and providing valuation services in connection with the re-negotiation of its Credit Agreement and with consideration of the Restructuring, and may continue to do so and has received, and may receive, fees for the rendering of such services. Although E&Y did not determine the terms of the Restructuring, E&Y did provide financial advisory services to the Company including valuation advisory services pertaining to the terms of the Restructuring. THE THREE-YEAR BUSINESS PLAN The summary that follows is not intended to be complete and is qualified, in its entirety, by the actual terms of the Three-Year Business Plan. See "PROJECTED CONSOLIDATED FINANCIAL INFORMATION" for the projected financial information on which the Three Year Business Plan is based. In the latter part of Fiscal 1997 and the beginning of 1998, the Company developed the Three-Year Business Plan. Under the Three-Year Business Plan, the Company intends to, among other things: (i) grow its currently profitable branded businesses with its existing labels such as Perry Ellis, John Henry and Manhattan; (ii) expand its branded menswear business with new licensed labels; (iii) expand its private brand programs such as Sear's Canyon River Blues denim and Khaki programs; (iii) develop strategies designed to return the Company's Children Group to historical levels of profitability; (iv) implement procedures designed to improve operational efficiencies in distribution, manufacturing and information systems; and (v) leverage the overhead structure of the Company. While the Three-Year Business Plan contemplates the Company maintaining each business segment and major line of business through the three year period, the Company will periodically review each such business segment and major line of business in order to determine whether each aspect of the Company's business is (i) performing as budgeted, (ii) consistent with the Company's strategic goals, and (iii) conducive to creating operating profits in order to maximize shareholder value. As a result of such periodic reviews the Company may determine to refocus capital to different aspects of its business, sell assets and/or exit certain businesses. LIQUIDATION ANALYSIS The Company has prepared the following liquidation analysis with the assistance of its financial advisor, E&Y. The liquidation analysis estimates the gross value available for distribution in a liquidation under chapter 7 of the Bankruptcy Code to be between $122,541,000 and $149,167,000 less (i) all indebtedness outstanding under the Credit Agreement with CIT estimated to be $58,562,000, and (ii) administrative expenses including trustee and professional fees estimated to be between $43,062,000 and $51,667,000. Accordingly, under such analysis the net proceeds available to Noteholders and Stockholders would be between $12,312,000 and $47,543,000. Based on the Noteholders' claim of $104,879,000 plus accrued and unpaid interest to the date of liquidation (which amounts are estimated to aggregate $114,067,000), the liquidation would net the Noteholders' between a 10.8% and 41.7% recovery on their claims and leave existing Stockholders with no consideration, assuming a strict priority distribution. THE FOLLOWING LIQUIDATION ANALYSIS IS AN ESTIMATE OF THE PROCEEDS THAT MAY BE GENERATED AS A RESULT OF A HYPOTHETICAL CHAPTER 7 LIQUIDATION OF THE ASSETS OF THE COMPANY. THE LIQUIDATION ANALYSIS MAKES NUMEROUS ASSUMPTIONS WITH RESPECT TO ASSET VALUATION, INDUSTRY PERFORMANCE, BUSINESS AND ECONOMIC CONDITIONS, AND OTHER MATTERS, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL. MOREOVER, THE METHODS AND ASSUMPTIONS USED IN PREPARING THE LIQUIDATION ANALYSIS INVOLVE SIGNIFICANT ELEMENTS OF SUBJECTIVE JUDGMENT ON THE PART OF THE COMPANY AND MAY OR MAY NOT PROVE TO BE CORRECT. THE LIQUIDATION ANALYSIS DOES NOT PURPORT TO BE A VALUATION OF THE COMPANY'S ASSETS AND IS NOT NECESSARILY INDICATIVE OF THE VALUES THAT MAY BE REALIZED IN AN ACTUAL LIQUIDATION WHICH MAY BE SIGNIFICANTLY MORE OR LESS FAVORABLE THAN THE ESTIMATES CONTAINED IN THE LIQUIDATION ANALYSIS.
SALANT CORPORATION HYPOTHETICAL LIQUIDATION ANALYSIS ($ IN THOUSANDS) ESTIMATED ASSETS ESTIMATED LIQUIDATION VALUE AVAILABLE FOR % RECOVERY (UNAUDITED) LIQUIDATION -------------------------- -------------------------- (UNAUDITED) LOW HIGH LOW HIGH NOTE ----------- ----------- ----------- ----------- ----------- ----------- ASSETS TO BE LIQUIDATED Cash & Cash Equivalents $ 3,922 100.0% 100.0% $ 3,922 $ 3,922 Accounts Receivable 64,786 70.0% 80.0% 45,350 51,829 1 Inventory 95,231 84.4% 95.1% 53,353 61,083 2 Prepaid Expenses 3,590 45.0% 65.0% 1,616 2,334 3 Net Property & Equipment 25,215 5.0% 10.0% 4,500 7,000 4 Other Assets 57,240 24.1% 40.2% 13,800 23,000 5 ----------- ----------- ----------- Total Assets $ 249,984 122,541 149,167 =========== LESS: ADMINISTRATIVE AND PRIORITY CLAIMS Merchandise Receipts During Liquidation Period (21,500) (21,500) 2 Wind-down Expenses (13,802) (10,802) 6 Trustee Fees (3,676) (2,238) 7 Professional Fees (Estimate) (5,000) (3,000) Employee Severance and Related Costs (5,363) (4,197) 8 Prepetition Priority Tax Claim (326) (326) Subtotal (2,000) (1,000) ----------- ----------- (51,667) (43,062) ----------- ----------- NET LIQUIDATION PROCEEDS AVAILABLE FOR DISTRIBUTION 70,874 106,105 LESS: SECURED CLAIMS Pre-petition Lenders (58,562) (58,562) 9 ----------- ----------- PROCEEDS AVAILABLE FOR DISTRIBUTION TO SENIOR SECURED NOTEHOLDERS 12,312 47,543 SENIOR SECURED NOTEHOLDERS (114,067) (114,067) 10 RECOVERY % SENIOR SECURED NOTEHOLDERS 10.8% 41.7% PROCEEDS AVAILABLE FOR DISTRIBUTION TO GENERAL UNSECURED CREDITORS 0 0 GENERAL UNSECURED CREDITORS: Accounts Payable, Trade (34,331) (34,331) 11 Lease Rejection Claims (10,013) (7,510) 12 Purchase Order Cancellation Claims (8,500) (6,375) 3 Pension Termination Costs (7,900) (7,900) 13 Contingency for Unrecorded Claims (2,000) (1,000) ----------- ----------- TOTAL UNSECURED CLAIMS $ (62,744) $ (57,116) =========== =========== RECOVERY PERCENT - GENERAL UNSECURED CREDITORS 0.0% 0.0% RECOVERY TO EQUITY HOLDERS $ 0 $ 0 =========== ===========
GENERAL ASSUMPTIONS a) The Liquidation Analysis reflects the Company's estimates of the proceeds that would be realized if the Company were to be liquidated in accordance with Chapter 7 of the Bankruptcy Code and is based on the Company's projected assets and liabilities as of July 1, 1998 (which for purposes of this Liquidation Analysis is assumed to be the date that a hypothetical Chapter 7 case would be commenced). Underlying the Liquidation Analysis are a number of estimates and assumptions that, although developed and considered reasonable by management, are inherently subject to uncertainties beyond the control of the Company and its management. b) The Liquidation Analysis assumes that the wind-down of the Company's estate would be completed within twelve months (the "Liquidation Period") and the sale of the assets would be completed during the first five months of the Liquidation Period. The Liquidation Period would allow the Company to sell its inventories, wind down operational activities, complete the claims reconciliation process and make distributions to parties-in-interest. c) The wind-down costs in the liquidation analysis include operating expenses and other costs considered likely to be incurred during the Liquidation Period. Significant liquidation activities would include the liquidation of inventories, collection of accounts receivable, negotiation for the sale of real estate and/or real estate leases, equipment located in the Company's manufacturing facilities and distribution centers, owned trademarks and other remaining assets. d) During the first three months of the Liquidation Period, staff reductions would take place for IS programmers, buying, selling, manufacturing and administrative staff, and certain management positions. During that period, certain IS, financial, legal and administration personal would be retained to manage the wind down and plan the inventory liquidation. e) All assets are assumed to be sold for cash or cash equivalents, and all distributions are assumed to be completed on or about June 30, 1999. f) The claim amounts reflected in the liquidation analysis are based on the Company's estimate of claims which are expected to be incurred as a result of the liquidation and the Company's estimate of claims which would exist as of July 1, 1998. NOTES TO LIQUIDATION ANALYSIS The following notes describe the significant assumptions that are reflected in the Liquidation Analysis. Note 1 - Accounts Receivable Accounts receivable balances primarily include amounts due from customers. The recovery of receivables is based on an estimate by the Company's management of collection, given such factors as the aging of the receivables and the time and effort to make inquires. For purposes of this Liquidation Analysis, the high estimate assumes 80% recovery on the accounts receivable balance and the low estimate assumes 70% recovery on the accounts receivable balance which includes a provision for chargebacks. Note 2 - Inventory It is assumed that, upon conversion of the case to a Chapter 7 liquidation, the Company would stop entering into new purchase commitments and would mitigate purchase order cancellation claims by receiving as many orders as is practical during the Liquidation Period. The cost of on order merchandise for which delivery was accepted by the Company during the Liquidation Period represents an administrative expense of the estate. It is assumed that claims arising from the cancellation of purchase orders would approximate 100% of the cost of the orders in the low recovery scenario and 75% in the high recovery scenario. It is assumed that the inventory would be liquidated in the Company's current channels of distribution over a five month period. The liquidation analysis reflects recoveries on inventory after adjustments for defective merchandise, shrink, markdowns and other allowances incurred during the Liquidation Period. Note 3 - Prepaid Expenses Prepaid expenses consist mostly of prepaid rent and other expenses. The low estimate assumes a 45% recovery in a liquidation. The high estimate assumes a possible recovery of 65% of the prepaid expense balance. Note 4 - Property and Equipment Recoveries for owned real estate is based upon an estimate by the Company's management of the current market for such properties assuming a forced liquidation sale. Machinery and equipment and lease hold improvements are assumed to have minimal value in liquidation. Note 5 - Other Assets Primarily relates to the value of owned trademarks and tradenames, which have been valued based upon a multiple of net royalty income. Note 6 - Wind-Down Costs The estimate for wind-down costs was based on expense levels of the Company in February 1998. The liquidation process was assumed to commence immediately upon the filing of these cases. Such expenses were forecast by department assuming the wind down of each department, as appropriate, during the Liquidation Period. Solely for purposes of Liquidation Analysis it was estimated that under the low recovery scenario, wind-down costs would be 110% of the estimated total expenses to allow for contingencies. The high recovery is assumed to be 90% of the estimated wind down expenses. Note 7 - Trustee Fees Section 326 of the U.S. Bankruptcy Code limits U.S. Trustee fees to 3.0% of gross liquidation proceeds. The low recovery estimate assumes 3.0% of the low value of the liquidation proceeds. The high recovery estimate assumes 1.5% of the high liquidation proceeds. Note 8 - Employee Severance and Related Costs Estimate includes the cost of severance in accordance with Company policy and includes an estimate for retention bonuses necessary in order to ensure an orderly liquidation. Estimate is based upon one month's salary at current headcount levels. High scenario assumes aggregate severance and retention bonuses at 90% of this amount and high scenario assumes 110%. Note 9 - Prepetition Bank Lenders Represents amounts due to CIT under the Credit Agreement. Such amounts are deemed to be fully secured for the purpose of this analysis. Note 10 - Senior Secured Notes The Senior Secured Notes are secured by a second lien on all of the assets of the Company (other than certain assets, including, without limitation, general intangibles of the Company, with respect to which the Senior Secured Notes are secured by a first lien thereon, subject to the right of CIT to receive, under certain circumstances, the first $15 million of proceeds from the sale of the Company's general intangibles). Accordingly this analysis assumes that all proceeds available for distribution would be used to satisfy the claims of the note holders before any distribution could be made to the general unsecured creditors. Claim amounts include accrued but unpaid interest through July 1, 1998. Note 11 - Accounts Payable and Accrued Expenses Postpetition accounts payable and accrued expenses reflects estimated vendor and expense payables outstanding estimated at July 1, 1998. Note 12 - Lease Rejection Claims The lease rejection claim is calculated under the guidelines as stipulated by the section 502(b) of the Bankruptcy Code which limits lease damages to the greater of one year's lease obligation, or 15% of the remaining lease terms, not to exceed 3 years. The high recovery scenario contemplates 25% mitigation of the claims relating to leases with below market rents. Note 13 - Pension Termination Costs Represents the cost actuarially determined to terminate the Company's various pension and retirement plans, as of January 3, 1998. DISTRIBUTION OF NET PROCEEDS ($ IN THOUSANDS) The following table sets forth an estimated distribution of the between $70,874 and $106,105 in net proceeds distributable to holders of secured claims, nonpriority unsecured claims and equity interests in a hypothetical Chapter 7 liquidation of the Company on the Effective Date and a comparison to estimated recoveries under the proposed Prepackaged Plan. The distribution in such liquidation gives effect to strict enforcement of all contractual subordination provisions.
CHAPTER 7 CHAPTER 11 ---------------------------------------------- ---------------------------------------------- CLAIM OR CLAIM OR EQUITY RECOVERY RECOVERY EQUITY RECOVERY RECOVERY CLASS INTEREST ($) (%) INTEREST ($) (%) - ------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) 2 $58,562 $58,562 100% $58,562 $58,5621 100% (CIT Claim) 3 $114,067 $12,312 to 10.8% to $114,067 $110,0002 96.4% (Senior Note $47,453 41.7% Claims) 4 $0 $0 -- $0 $0 -- (Misc. Secured Claims) 5 $57,116 to $0 -- $35,331 to $35,331 to 100% (General $62,744 $36,331 $36,3313 Unsecured Claims) 6 Old Common $0 -- Old $15,0004 -- Stock Common Stock Interests 7 Other $0 -- Other $0 -- Interests Interests As illustrated by the foregoing, the Company believes that under the Prepackaged Plan, each Holder of an Impaired Claim in Class 3 and each Holder of an Impaired Interest will receive on account of such Claim or Interest, property of a value, as of the Effective Date, that is not less than the value such Holder would receive if the Company were liquidated under Chapter 7 of the Bankruptcy Code on the Effective Date. Accordingly, the Company believes the Prepackaged Plan satisfies the requirements of the best interests test set forth in Section 1129(a)(7) of the Bankruptcy Code. - --------------------- 1 Estimated aggregate amount due to CIT under the Credit Agreement as of July 1, 1988 (which date, for purposes of this Liquidation Analysis, is assumed to be the date that a hypothetical Chapter 7 case would be commenced). See "Liquidation Analysis" above. 2 Estimated aggregate value attributable to share of New Common Stock to be issued to Holders of Senior Note Claims. See "BACKGROUND OF RESTRUCTURING -- The Letter Agreement." 3 Estimated aggregate amount due to holders of General Unsecured Claims as of July 1, 1988. See "Liquidation Analysis" above. 4 Estimated aggregate value attributable to shares of New Common Stock and Warrants to be issued to Holders of Old Common Stock Interests. See "BACKGROUND OF RESTRUCTURING -- The Letter Agreement."
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The following Unaudited Pro Forma Consolidated Balance Sheet as of July 4, 1998 and the Unaudited Pro Forma Consolidated Statements of Operations for the six month period ended July 4, 1998 and for the year ended January 3, 1998 are based upon the historical financial position and results of operations as of and for the periods then ended. The following pro forma adjustments (based on the assumptions set forth below) give affect to the Exchange Restructuring transactions, including (i) the issuance of 18,456,350 shares, after giving affect to the Reverse Split, of New Common Stock to Noteholders, (ii) the issuance of 1,517,100 shares of New Common Stock to Stockholders, after giving effect to the Reverse Split, which includes 1,496,461 shares of New Common Stock to be issued upon consummation of the Restructuring and 20,639 shares of New Common Stock reserved for issuance in order to settle claim asserted in the 1990 Chapter 11 Case, and (iii) the issuance of Warrants representing the right to purchase up to 2,216,979 shares, after giving effect to the Reverse Split, of New Common Stock to Stockholders. The following Unaudited Pro Forma Consolidated Balance Sheet as of July 4, 1998 includes pro forma adjustments as if the Exchange Restructuring had been completed on that date. The following Unaudited Pro Forma Consolidated Statement of Operations for the six month period ended July 4, 1998 and the year ended January 3, 1998 includes pro forma adjustments as if the Exchange Restructuring had been completed at December 29, 1996. The pro forma adjustments are based on available information and upon certain assumptions that the Company believes are reasonable under the circumstances. The unaudited pro forma condensed consolidated financial statements and accompanying notes should be read in conjunction with the historical consolidated financial statements of the Company, including the notes thereto, and the other information pertaining to the Company appearing elsewhere in this Exchange Restructuring Prospectus or incorporated herein. THESE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED TO BE INDICATIVE OF THE FINANCIAL CONDITIONS OR RESULTS OF OPERATIONS OF THE COMPANY HAD THE TRANSACTIONS DESCRIBED THEREIN BEEN CONSUMMATED ON THE RESPECTIVE DATES INDICATED AND ARE NOT INTENDED TO BE PREDICTIVE OF THE FINANCIAL CONDITION OR RESULTS OF OPERATIONS OF THE COMPANY AT ANY FUTURE DATE OR FOR ANY FUTURE PERIOD.
SALANT CORPORATION UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (IN THOUSANDS) HISTORICAL PRO FORMA PRO FORMA JULY 4, 1998 ADJUSTMENTS JULY 4, 1998 ASSETS Current Assets: Cash and cash equivalents .......... $ 1,160 $ 1,160 Accounts receivable, net ........... 41,195 41,195 Inventories ........................ 107,143 107,143 Prepaid expenses and other current 9,310 (4,452)(C) 4,768 assets Total current assets ............... 158,808 154,266 (4,452) Property, plant & equipment, net ... 27,561 27,561 Other assets ....................... 55,920 55,920 --------- --------- --------- $ 242,289 $ (4,452) $ 237,747 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Loans payable ...................... $ 52,176 $ 52,176 Accounts payable ................... 23,604 23,604 Reserve for business restructuring . 869 869 Accrued salaries, wages and other .. 19,953 (9,318)(B) 11,680 liabilities 1,045(c) Current portion of long term debt .. 104,879 (104,879)(b) -- --------- --------- --------- Total Current Liabilities ..... 201,481 (113,152) 88,329 Deferred Liabilities ............... 5,340 5,340 Shareholders' equity: Preferred stock ................. -- -- Common stock .................... 15,405 (234)(d) 19,973 (15,171)(e) 1,517 (e) 18,456 (b) Additional paid-in capital ...... 107,249 15,171 (e) 206,860 (1,517)(e) 6,100 (b) 85,444 (b) (5,587)(c) Deficit ......................... (82,100) (1,380)(d) (79,283) 4,197 (b) Accumulated other comprehensive (3,472) (3,472) income........................... Treasury stock .................. (1,614) 1,614 (d) -- --------- ------------ --------- Total stockholders' equity .... 35,468 105,942 144,078 $ 242,289 0 $ 237,747 ========= ========= ========= See notes to the Unaudited Pro Forma Consolidated Financial Statements.
SALANT CORPORATION UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JULY 4, 1998 PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ---------------------------------------------------- Net sales $ 159,343 $ 159,343 Costs of sales 125,926 125,926 --------- ------------ --------- Gross profit 33,417 33,417 Selling, general and administrative expenses (34,333) (34,333) Royalty Income 2,676 2,676 Goodwill amortization (940) (940) Other income, net 160 160 Reversal of Division 171 171 restructuring costs --------- ------------ -------- Income from continuing operations before interest, income taxes and extraordinary gain 1,151 ------------ 1,151 Interest expense, net (8,042) 5,506(f) (2,536) loss from continuing -------- ------------ --------- operations before income taxes (6,891) 5,506 (1,385) Income taxes ................. (26) -(g) (26) --------- ----------- -------- loss from continuing operations ................... $ (6,865) 5,506 $ (1,359)(h) ========= =========== ========= Basic loss per share from continuing operations ... (0.45) $ (.07) ========= ========= Weighted average common stock outstanding .................. 15,170 19,973 (i) ========= ========= See notes to the Unaudited Pro Forma Consolidated Financial Statements.
SALANT CORPORATION UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 3, 1998 PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ------------------------------------------------------ Net sales $ 396,832 $ $ 396,832 Costs of sales 312,358 312,358 ----------- ------------- -------- Gross profit 84,474 84,474 Selling, general and administrative expenses (80,593) (80,593) Royalty Income 5,596 5,596 Goodwill amortization (1,881) (1,881) Other income, net 575 575 Division restructuring costs (2,066) (2,066) ----------- ------------- ----------- Income from continuing operations before interest, income taxes and extraordinary gain 6,105 6,105 Interest expense, net (16,660) 11,226(f) (5,434) ----------- ------------- ----------- Income/(loss) from continuing operations before income taxes (10,555) 11,226 671 Income taxes 167 -(g) 167 ----------- ------------- ----------- Income/(loss) from continuing operations (10,722) 11,226 504 (h) =========== ============= =========== Basic earnings/(loss) per share from continuing operations $ (0.71) $ .03 =========== =========== Weighted average common stock outstanding $ 15,139 $ 19,973 (i) =========== =========== See notes to the Unaudited Pro Forma Consolidated Financial Statements.
SALANT CORPORATION NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (a) Presentation: The Unaudited Pro Forma Consolidated Financial Statements assume that the transactions contemplated by the Exchange Restructuring occurred on July 4, 1998 for purposes of the Unaudited Pro Forma Consolidated Balance Sheet and December 29, 1996 for purposes of the Unaudited Pro Forma Consolidated Statement of Operations. (b) Represents (i) the Noteholders exchange of $104.879 million principal amount of Senior Notes and $6.65 million of accrued interest thereon for 18,456,350 shares, after giving affect to the ten-for-one Reverse Stock Split, of New Common Stock, and (ii) the issuance of Warrants, representing the right to purchase up to 2,216,979 shares, after giving affect to the ten-for-one Reverse Split, of New Common Stock, to Stockholders at a value of $6.1 million, using the Black-Scholes option pricing formula, which incorporates such factors as the relationship of the underlying stock's price to the strike price of the Warrants and the time remaining until the Warrants expire. (c) Represents expenses of $5,587 (of which $4,542 have been paid as of July 4, 1998) attributable to the restructuring activities of the Company which are offset against stockholders equity. (d) Represents the retirement of the Company's outstanding Treasury Stock at original cost. (e) Represents the retirement of 15,171,000 shares Old Common Stock, which includes 14,964,608 issued and outstanding shares and 206,392 shares of Old Common that have been reserved for issuance in order to settle claims asserted in the 1990 Chapter 11 Case, and the issuance of 1,517,100 shares of New Common Stock to Stockholders, thereby giving effect to the ten-for-one Reverse Split, which includes 1,496,461 shares of New Common Stock to be issued upon consummation of the Restructuring and 20,639 shares of New Common Stock to be reserved for issuance in order to settle claims asserted in the 1990 Chapter 11 Case. (f) Represents the elimination of interest expense relating to the Company's existing 10 1/2% Senior Notes. (g) No tax provision was reflected due to the utilization of approximately $500,000 of net operating loss carryforwards. (h) The Unaudited Pro Forma Consolidated Statements of Operation do not include an extraordinary (loss)/gain on early extinguishment of debt of approximately ($1.2) million and $4.2 million at January 4, 1998 and July 4, 1998, respectively. (i) The pro forma weighted average shares outstanding assumes all New Common Stock is outstanding for the entire period. PROJECTED CONSOLIDATED FINANCIAL INFORMATION The projected financial information set forth below (the "Projections") should be read in conjunction with the assumptions, qualifications, limitations and explanations set forth herein, the selected historical financial information and the other information set forth in "Selected Historical Consolidated Financial Information" in this Exchange Restructuring Prospectus and the other financial statements contained herein. GENERAL The Projections contained herein constitutes "forward-looking statements" within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. The Projections reflect numerous assumptions, including various assumptions with respect to the anticipated future performance of the Company after the Restructuring, industry performance, general business and economic conditions and other matters, some of which are beyond the control of the Company. In addition, unanticipated events and circumstances may affect the actual financial results of the Company in the future. THEREFORE, WHILE THE PROJECTIONS ARE NECESSARILY PRESENTED WITH NUMERICAL SPECIFICITY, THE ACTUAL RESULTS ACHIEVED THROUGHOUT THE YEARS 1998-2000 (the "PROJECTED PERIOD") MAY VARY FROM THE PROJECTED RESULTS. THESE VARIATIONS MAY BE MATERIAL. ACCORDINGLY, NO REPRESENTATION CAN BE MADE OR IS MADE WITH RESPECT TO THE ACCURACY OF THE PROJECTIONS OR THE ABILITY OF THE COMPANY TO ACHIEVE THE PROJECTED RESULTS. See "RISK FACTORS" for a discussion of certain factors that may affect the future financial performance of the Company and of the various risks associated with the securities of the Company to be issued pursuant to the Restructuring. The Company does not, as a matter of course, make public projections of its anticipated financial position or results of operations. Accordingly, the Company does not anticipate that it will, and disclaims any obligation to, furnish updated projections in the event that actual industry performance or the general economic or business climate differs from that upon which the Projections have been based. Further, the Company does not anticipate that it will include such information in documents required to be filed with the Commission, or otherwise make such information public. The Projections have been prepared by the Company's management, and while it believes that the assumptions underlying the projections for the Projected Period, when considered on an overall basis, are reasonable in light of current circumstances, no assurance can be given or is given that the Projections will be realized. The Projections were not prepared in accordance with standards for projections promulgated by the American Institute of Certified Public Accountants or with a view to compliance with published guidelines of the Commission regarding projections or forecasts. The Projections have not been audited, reviewed or compiled by the Company's Independent Auditors. Neither the Company's independent auditors, nor any other independent accountants or financial advisors, have compiled, examined or performed any procedures with respect to the projected consolidated financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the projected financial information. PRINCIPAL ASSUMPTIONS The Projections are based upon forecasts of operating results during the Projected Period. The following is a listing of assumptions that were used to develop the Projections. 1) The Projections assume that the Restructuring will be consummated on November 30, 1998. 2) The Projections assume that the Company will continue to operate without significant changes to its current structure. 3) The Projections assume that the current economic environment continues throughout the Projected Period 4) The Projections assume that no unforeseen national or international events will occur during the Projected Period that would cause the retail industry to be adversely impacted. In addition to the aforementioned assumptions, the Projections are based on numerous detailed operating assumptions. The Projections also assume, among other things, the successful implementation of the Three-Year Business Plan. The table below summarizes the projected operating statistics that management believes are significant and upon which the financial results of the Company will depend during the Projected Period.
---------------------------------------------------------------------------- ACTUAL 1997 1998 1999 2000 ---- ---- ---- ---- Net Sales (Millions) $396.8 $374.3 $385.8 $425.0 Total Gross Margin as a % of Sales 21.3% 23.3% 24.7% 25.5% Total Operating Expenses as a % of 20.3% 19.5% 19.5% 18.6% Total Sales ----------------------------------------------------------------------------
SALES During the Projected Period, sales are assumed to increase from $396.8 million in fiscal 1997 to $425.0 million in fiscal year 2000, a 2.3% compound annual growth rate. This increase in sales is expected to result from a combination of additional sales to existing customers and the development of new customers. In the Perry Ellis division, sales growth will be driven by the continued opening of in-store shops for the sportswear collection business, expansion of casual sportswear through the Perry Cottons line, re-establishment of the Perry Ellis Portfolio Pants line in at least three department stores, and new door expansion with existing customers in Canada. Sales growth in the Salant Menswear Group is expected to result from a strategy of aligning the dress shirt business with the accessories business by structuring the salesforce around retail customers rather than product line, by concentrating on private label growth in dress shirts, bottoms and accessories, and by refocusing Perry Ellis accessories into department stores. In the Children's Group, sales growth is expected to result from enhanced brand management of the sleepwear business by price points and customer type. GROSS MARGIN The Gross Margin presented in the Projections includes cost of merchandise and certain design, manufacturing and distribution costs. The overall level of Gross Margin as a percentage of sales is expected to increase during the Projected Period primarily as the result of a change in the sales mix and an improvement related to certain manufacturing, sourcing and distribution processes. The expected changes in sales mix will reflect a higher proportion of regular price and incentive price sales and a lower proportion of off-price sales, in all divisions. This shift will occur as a result of the minimization of off-price programs, as well as improvements in the manufacturing process and product quality (i.e., fewer seconds). Improvements in gross margins will also result from better execution in sourcing and distribution, such as shifting production to more effective off-shore facilities. Management believes that the improvements in gross management are achievable based upon process improvements made to date and recent trends away from off-price sales, and the continued focus of recently hired Vice Presidents of Manufacturing and Distribution (two previously vacant positions). OPERATING EXPENSES Expenses are forecast based upon existing expense structures adjusted for increases in sales and changes relating to the implementation of a new management information system structure. In conjunction with the Three-Year Business Plan, management has introduced various initiatives that have streamlined its operations and reduced overhead costs. It is assumed that expenses will decrease in total dollar amount during the Projected Period from $80.6 million in fiscal year 1997 to $79.1 million in fiscal year 2000. Expenses as a percentage of sales ("Operating Expenses/Net Sales") is assumed to decrease during the Projected Period from 20.3% in fiscal year 1997 to 19.5% in fiscal year 2000. Management intends to implement several new initiatives which management believes will further benefit the Company's operations and will help reduce expenses to the assumed levels. Management's primary means of reducing operating expenses as a percentage of sales is to leverage operating expenses through increased sales, which is expected to result from the initiatives described above. Other expense reduction initiatives to be substantially completed by the end of 1998 include the consolidation of the Perry Ellis Bottoms and Dress Shirts divisions into one operational group focusing on Portfolio, sub-licensing of the Perry Ellis America line, consolidation of the Accessories division into Salant Menswear Group, the installation of a new electronic data processing system and the discontinuation of the Joe Boxer Sportswear line. However, the impact on operations from these expense reduction initiatives will be seen throughout the Projected Period. WORKING CAPITAL Working capital has been forecast based upon the Company's experience and expectations in the marketplace and are consistent with the trends that the Company is currently experiencing. CAPITAL EXPENDITURES The Projections assume a significant reinvestment of capital into the Company over the Projected Period. The main areas of focus are management information systems, manufacturing and distribution. Management believes that these expenditures will substantially enhance operating efficiency, provide a platform for continued growth and are necessary to achieve the levels of profitability in the Projections. INCOME TAXES The Company believes that the transactions contemplated by the restructuring will cause a substantial limitation of the use of the NOLs pursuant to Section 382 of the Internal Revenue Code. A combined federal and state income tax rate of 40% has been assumed in calculating the income taxes to be paid for each of the projected years. INTEREST EXPENSE During the Projected Period, annual interest expense consists of interest on the average outstanding Revolver, interest on the average outstanding Term Loan, annual credit facility fees, and an annual fee related to average Letter of Credit usage. For the Projected Period, the assumed interest rate for both the Revolver and the Term Loan is .25 percent in excess of the Prime Rate or 8.75% (based on the Prime Rate as of August 26, 1998). For the Revolver, the assumed interest rate is multiplied by the average Revolver borrowings as projected by management resulting from the operating projections in the business plan. The assumed credit facility fees for both the Revolver and the Term Loan are $100,000 for 1998 and $200,000 under the new credit facility for 1999 and 2000. The assumed annual fee on the average Letter of Credit usage was based on a rate of 1.75% for each year in the Projected Period, multiplied by the average Letters of Credit assumed to be outstanding. THE THREE-YEAR BUSINESS PLAN In connection with the Company's efforts to restructure, the Company developed the Three-Year Business Plan. See "RESTRUCTURING FINANCIAL CONSIDERATIONS -- The Three-Year Business Plan." The Projections form a part of the Three-Year Business Plan. Projected income statement, balance sheet and cash flow statements for the Company are included for each of the fiscal years 1998, 1999 and 2000. Additional information relating to the principal assumptions used in preparing the projections is set forth below. See "DISCUSSION OF RISK FACTORS" for a discussion of various factors that could materially affect the Company's financial condition, results of operations, business, prospects and securities. PROJECTED CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (In thousands) FISCAL YEAR ENDING DEC. 31, ----------------------------- 1998 1999 2000 --------- --------- -------- Net sales $ 374,346 385,788 424,953 Cost of goods sold 287,085 290,652 316,747 --------- -------- -------- Gross profit 87,261 95,136 108,206 Selling, general and administrative (73,114) (75,181) (79,069) Royalty income 5,528 4,398 4,063 Goodwill amortization (1,881) (1,881) (1,881) --------- -------- -------- Income from continuing operations before interest and income taxes 17,794 22,472 31,319 Interest expense, net (3,991) (4,060) (3,205) --------- -------- -------- Income from continuing operations before income taxes 13,803 18,412 28,114 Income taxes (5,522) (7,365) (11,246) --------- -------- -------- Net income $ 8,281 $ 11,047 $ 16,868 ========= ======== ======== PROJECTED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) FISCAL YEAR ENDING DEC. 31, ------------------------------ 1998 1999 2000 --------- -------- --------- ASSETS CURRENT ASSETS: Cash $ 2,218 $ 2,218 $ 2,218 Accounts Receivable (Net) 59,713 58,738 62,488 Inventories (Net) 91,204 91,537 99,100 Prepaid Expenses 4,597 4,449 4,627 --------- -------- --------- TOTAL CURRENT ASSETS 157,732 156,942 168,433 Net Fixed Assets 30,943 31,184 31,833 Other Assets 55,035 51,854 48,573 --------- -------- --------- TOTAL ASSETS $243,710 $239,980 $248,839 ========= ======== ========= LIABILITIES AND EQUITY CURRENT LIABILITIES: Loan Payable $26,166 $12,932 $ 6,009 Current Portion of Long-Term Debt 1,750 3,000 10,250 Accounts Payable 28,522 29,086 30,568 Accrued Expenses 11,120 10,762 11,195 Other 2,906 2,906 2,906 --------- -------- --------- TOTAL CURRENT LIABILITIES 70,463 58,686 60,927 Long-Term Debt 13,250 10,250 0 Other (deferred liab) 5,579 5,579 5,579 --------- -------- --------- TOTAL LIABILITIES 89,292 74,515 66,506 TOTAL SHAREHOLDERS' EQUITY 154,418 165,465 182,333 --------- -------- --------- TOTAL LIABILITIES AND EQUITY $243,710 $239,980 $ 248,839 ========= ======== ========= PROJECTED STATEMENTS OF CONSOLIDATED CASH FLOWS (In thousands) FISCAL YEAR ENDING DEC. 31, ----------------------------- 1998 1999 2000 -------- -------- -------- OPERATING ACTIVITIES: Net Income $8,281 $11,047 $16,868 Adjustment to reconcile net income to net cash used in operating activities: Accretion of interest on senior secured notes 11,012 0 0 Amortization of intangibles 3,004 3,181 3,281 Depreciation 7,188 7,580 7,187 Changes in operating assets and liabilities Net accounts receivable (1,058) 975 (3,749) Inventory 5,434 (332) (7,563) Prepaids and other assets (380) 148 (179) Accounts payable 776 564 1,482 Accrued expenses (507) (358) 432 Other current liabilities (4,394) 0 0 -------- -------- -------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES 29,356 22,805 17,759 INVESTING ACTIVITIES: Purchase of fixed assets, net (11,692) (7,821) (7,836) -------- -------- -------- NET CASH USED IN INVESTING ACTIVITIES (11,692) (7,821) (7,836) FINANCING ACTIVITIES: (Repayments) increase of loan payable (20,604) (13,234) (6,923) (Decrease) increase to equity (restructuring charges) (5,423) 0 0 (Repayments) increase of long-term debt 15,000 (1,750) (3,000) -------- -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (11,027) (14,984) (9,923) -------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 6,637 0 0 Cash and cash equivalents, beginning of year 2,218 8,855 8,855 ======== ======== ======== Cash and cash equivalents, end of year $8,855 $8,855 $8,855 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS: Conversion of debt to common stock $115,891 BUSINESS AND PROPERTIES OF THE COMPANY OVERVIEW Introduction The Company which was incorporated in Delaware in 1987, is the successor to a business founded in 1893 and incorporated in New York in 1919. The Company designs, manufactures, imports and markets to retailers throughout the United States brand name and private label apparel products primarily in three product categories: (i) menswear; (ii) children's sleepwear and underwear; and (iii) retail outlet stores, as described below. The Company sells its products to department and specialty stores, national chains, major discounters and mass volume retailers throughout the United States. (As used herein, the "Company" includes Salant and its subsidiaries, but excludes Salant's Made in the Shade and Vera Scarf divisions.) Men's Apparel The men's apparel business is comprised of the Perry Ellis division and Salant Menswear Group. The Perry Ellis division markets dress shirts, slacks and sportswear under the Perry Ellis, Portfolio By Perry Ellis and Perry Ellis America trademarks. Salant Menswear Group is comprised of the Accessories division, the Bottoms division and all dress shirt businesses other than those selling products bearing the Perry Ellis trademarks. The Accessories division markets neckwear, belts and suspenders under a number of different trademarks, including Portfolio By Perry Ellis, John Henry, Save The Children and Peanuts. The Bottoms division primarily manufactures men's and boys' jeans, principally under the Sears, Roebuck & Co. ("Sears") Canyon River Blues trademark, and men's casual slacks under Sears' Canyon River Blues Khakis trademark. The Salant Menswear Group also markets dress shirts, primarily under the John Henry and Manhattan trademarks. Children's Sleepwear and Underwear The children's sleepwear and underwear business is conducted by the Salant Children's Apparel Group (the "Children's Group"). The Children's Group markets blanket sleepers primarily using a number of well-known licensed cartoon characters created by, among others, Disney and Warner Bros. The Children's Group also markets pajamas under the OSHKOSH B'GOSH trademark, and sleepwear and underwear under the Joe Boxer trademark. At the end of the first quarter of 1998, the Company determined not to continue with its Joe Boxer sportswear line for Fall 1998. Instead, consistent with the approach that the Joe Boxer Corporation (Salant's licensor of the Joe Boxer trademark) has taken, the Company will focus on its core business of underwear and sleepwear. Retail Outlet Stores The retail outlet stores business of the Company consists of a chain of factory outlet stores (the "Stores division"), through which it sells products manufactured by the Company and other apparel manufacturers. In December 1997, the Company announced the restructuring of the Stores division, pursuant to which the Company closed all stores other than its Perry Ellis outlet stores. This resulted in the closing of 42 outlet stores. At the end of Fiscal 1997, the Company operated 17 Perry Ellis outlet stores. Commencing with the 1998 fiscal year, as a result of the restructuring of this division, the retail outlet stores will be reported as part of the men's apparel segment of Salant. Principal Product Lines The following table sets forth, for fiscal years 1995 through 1997, the percentage of the Company's total net sales contributed by each category of product: FISCAL YEAR ----------- 1995 1996 1997 ---- ---- ---- Men's Apparel 86% 83% 82% Children's Sleepwear and Underwear 8% 11% 12% Retail Outlet Stores 6% 6% 6% For more detailed information regarding the Company's product categories, see Note 11 to the Consolidated Financial Statements. In Fiscal 1997, approximately 17% of the Company's net sales were made to Sears, approximately 11% of the Company's net sales were made to Federated Department Stores, Inc. ("Federated") and approximately 10% of the Company's net sales were made to TJX Corporation ("TJX"). In 1996, approximately 13% of the Company's net sales were made to Sears. In 1996 and 1995, net sales to Federated represented approximately 11% and 12% of the Company's net sales, respectively. In 1995, approximately 11% of the Company's net sales were made to TJX. In 1995, approximately 13% of the Children's Group's net sales were made to Dayton Hudson Corporation. No other customer accounted for more than 10% of the net sales of the Company or any of its business segments during 1995, 1996 or 1997. The markets in which the Company operates are highly competitive. The Company competes primarily on the basis of brand recognition, quality, fashion, price, customer service and merchandising expertise. A significant factor in the marketing of the Company's products is the consumer perception of the trademark or brand name under which those products are marketed. Approximately 76% of the Company's net sales for Fiscal 1997 was attributable to products sold under Company owned or licensed designer trademarks and other internationally recognized brand names and the balance was attributable to products sold under retailers' private labels, including Sears' Canyon River Blues. The following table lists the principal owned or licensed trademarks under which the Company's products were sold in Fiscal 1997 and the product lines associated with those trademarks. Trademarks used under license are indicated with an asterisk; all other listed trademarks are owned by the Company. TRADEMARK PRODUCT LINES Disney characters * Children's sleepwear and underwear Dr. Denton Children's sleepwear and underwear Gant * Men's dress shirts, neckwear, belts and suspenders Joe Boxer * Children's sleepwear, underwear and sportswear; men's neckwear John Henry Men's dress shirts, neckwear, belts, suspenders and jeans Looney Tunes characters * Children's sleepwear Manhattan Men's dress shirts Oshkosh B'gosh * Children's sleepwear Peanuts * Men's dress shirts and neckwear Perry Ellis * Men's sportswear, dress shirts, neckwear, belts and suspenders Perry Ellis America * Men's casual sportswear and jeans Portfolio By Perry Ellis * Men's dress slacks, dress shirts, neckwear, belts and suspenders Save The Children * Men's neckwear and suspenders Thomson Men's casual and dress slacks Unicef * Men's neckwear During Fiscal 1997, 44% of the Company's net sales was attributable to products sold under the Perry Ellis, Portfolio By Perry Ellis and Perry Ellis America trademarks; these products are sold through leading department and specialty stores. Products sold to Sears under its exclusive brand Canyon River Blues accounted for 14% of the Company's net sales during Fiscal 1997. No other line of products accounted for more than 10% of the Company's net sales during Fiscal 1997. Trademarks Owned by the Company and Related Licensing Income The Company owns the Dr. Denton, John Henry, Lady Manhattan, Manhattan and Thomson trademarks, among others. All of the significant brand names owned by the Company have been registered or are pending registration with the United States Patent and Trademark Office. The Company has sought to capitalize on the consumer recognition of and interest in its trademarks by licensing various of those trademarks to others. As of the end of Fiscal 1997, licenses were outstanding to approximately 18 licensees to make or sell apparel products and accessories in the United States and to 34 licensees in 30 other countries under the Manhattan, Lady Manhattan, John Henry, and Vera trademarks, which produced royalty income of approximately $5.6 million in Fiscal 1997. Products under license include men's belts, dress shirts, leather accessories, neckwear, optical frames, outerwear, pajamas, robes, scarves, shorts, slacks, socks, sportcoats, sunglasses, suspenders and underwear, and women's blouses and tops, gloves, intimate apparel, lingerie, optical frames, scarves and shirts. Trademarks Licensed to the Company The name Perry Ellis and related trademarks are licensed to the Company under a series of license agreements with Perry Ellis International, Inc. ("PEI"). The license agreements contain renewal options, which, subject to compliance with certain conditions contained therein, permit the Company to extend the terms of such license agreements. Assuming the exercise by the Company of all available renewal options, the license agreements covering men's apparel and accessories will expire on December 31, 2015. The Company also has rights of first refusal worldwide for certain new licenses granted by PEI for men's apparel and accessories. The Company is also a licensee of various trademarks, including certain Disney characters (including Disney Babies, Mickey For Kids, Winnie The Pooh and The Lion King-Simba's Pride), Gant, Joe Boxer, Oshkosh B'gosh, Peanuts, Save The Children, Unicef and certain Warner Bros. characters (including certain Looney Tunes characters, such as Bugs Bunny, Daffy Duck and Porky Pig), for various categories of products under license agreements expiring between 1998 and 2002. The agreements under which the Company is licensed to use trademarks owned by others typically provide for royalties at varying percentages of net sales under the licensed trademark, subject to a minimum annual royalty payable irrespective of the level of net sales. The Company anticipates that it should be able to extend, if it so desires, the term of any material licenses when they expire. Design and Manufacturing Products sold by the Company's various divisions are manufactured to the designs and specifications (including fabric selections) of designers employed by those divisions. In limited cases, the Company's designers may receive input from one or more of the Company's licensors on general themes or color palettes. During Fiscal 1997, approximately 12% of the products produced by the Company (measured in units) were manufactured in the United States, with the balance manufactured in foreign countries. Facilities operated by the Company accounted for approximately 75% of its domestic-made products and 37% of its foreign-made products; the balance in each case was attributable to unaffiliated contract manufacturers. In Fiscal 1997, approximately 47% of the Company's foreign production was manufactured in Mexico, approximately 18% was manufactured in Guatemala and approximately 12% was manufactured in the Dominican Republic. 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. Although the Company's operations have not been materially adversely affected by any of such factors to date, any substantial disruption of its relationships with its foreign suppliers could adversely affect its 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 amounts 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 allocations could adversely affect the Company's operations. Raw Materials The raw materials used in the Company's manufacturing operations consist principally of finished fabrics made from natural, synthetic and blended fibers. These fabrics and other materials, such as leathers used in the manufacture of various accessories, are purchased from a variety of sources both within and outside the United States. The Company believes that adequate sources of supply at acceptable price levels are available for all such materials. Substantially all of the Company's foreign purchases are denominated in U.S. currency. No single supplier accounted for more than 10% of Salant's raw material purchases during Fiscal 1997. In Fiscal 1997, the Company entered into forward foreign exchange contracts, relating to 80% of its projected 1998 Mexican peso needs, to fix its cost of acquiring pesos and diminish the risk of foreign currency fluctuation. Employees As of the end of Fiscal 1997, the Company employed approximately 3,800 persons, of whom 3,200 were engaged in manufacturing and distribution operations and the remainder were employed in executive, marketing and sales, product design, engineering and purchasing activities and in the operation of the Company's retail outlet stores. Substantially all of the manufacturing employees are covered by collective bargaining agreements with various unions, which expire between 1998 and 2000. The Company believes that its relations with its employees are satisfactory. 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 larger 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 seeks to maintain its competitive position in the markets for its branded products on the basis of the strong brand recognition associated with those products and, with respect to all of its products, on the basis of styling, quality, fashion, price and customer service. Environmental Regulations Current environmental regulations have not had, and in the opinion of the Company, assuming the continuation of present conditions, are not expected to have a material effect on the business, capital expenditures, earnings or competitive position of the Company. Made in the Shade - Discontinued Operation In June 1997, the Company discontinued the operations of the Made in the Shade division, which produced and marketed women's junior sportswear under the Company owned trademarks Made In The Shade and Prime Time. The financial statements of the Company included in this report treat the Made in the Shade division as a discontinued operation. Vera Scarf Division - Discontinued Operation In February 1995, the Company discontinued its Vera Scarf division, which imported and marketed women's scarves under (i) the Company-owned trademarks Vera and Acute, (ii) trademarks licensed to the Company, including Perry Ellis, and (iii) retailers' private labels. The Company closed the Vera Scarf division in 1995. The financial statements of the Company included in this report treat the Vera Scarf division as a discontinued operation. Acquisition of J.J. Farmer On June 10, 1994, the Company acquired all the capital stock of J.J. Farmer Clothing Inc. (a Canadian corporation) and the assets of J.J. Farmer International Limited (a Hong Kong corporation) (collectively "J.J. Farmer") for approximately $5,311 in cash, subject to adjustment based on a number of items, including the future profitability of J.J.. Farmer. As part of the acquisition, the company agreed to pay to the former owners of J.J. Farmer, certain minimum amounts in the years 1996 through 1999. The acquisition has been accounted for as a purchase, and accordingly, J.J.. Farmer's operating results have been included in the Company's consolidated results of operations commencing June 11, 1994. J.J. Farmer's net sales for the five months ended May 31, 1994 were $3,392. The excess of cost over the book value of net assets acquired ($4,589 subject to adjustment) was being amortized over a period of not more than 15 years on a straight-line basis. In the second quarter of 1996, the Company discontinued the J.J. Farmer product line and recorded a restructuring charge of $5.7 million, primarily related to the write-off of goodwill and the write-down of other assets. The Company also entered into an agreement with the former owners of J.J. Farmer, which eliminated all future minimum payments. As of January 3, 1998, any assets or liabilities related to J.J. Farmer were not material. Bankruptcy Court Cases On February 22, 1985, Salant NY and its two largest subsidiaries, Thomson Company, Inc. and Obion Company, Inc., filed with the Bankruptcy Court separate voluntary petitions for relief under Chapter 11 of the Bankruptcy Code (Case Nos. 85-B-10229 (PBA) through 85-B-10231 (PBA), inclusive). Salant NY's other United States, Canada and Mexico subsidiaries did not seek relief under the Bankruptcy Code or other foreign insolvency laws, respectively. On May 19, 1987, the Bankruptcy Court issued an order confirming the 1987 Chapter 11 Plan. The 1987 Chapter 11 Plan was consummated on June 2, 1987. On June 2, 1987, pursuant to the provisions of the 1987 Chapter 11 Plan, the assets and liabilities of Salant NY, Thomson and Obion were substantively consolidated, and Salant NY, Thomson and Obion and the inactive subsidiaries of Salant NY merged with a wholly-owned subsidiary of Salant NY. The Company is the surviving corporation of such merger. On June 27, 1990, Salant and its wholly owned subsidiary, Denton Mills, Inc., each filed with the Bankruptcy Court a separate voluntary petition for relief under chapter 11 of title 11 of the Bankruptcy Code (Case Nos. 90-B-12037 (CB) and 90-B-12038 (CB)). The Company's other United States subsidiaries did not seek relief under the Bankruptcy Code. On July 30, 1993, the Bankruptcy Court issued an order confirming the 1993 Chapter 11 Plan. The 1993 Chapter 11 Plan was consummated on September 20, 1993. Recent Events For a discussion of recent events, see "BACKGROUND OF RESTRUCTURING." PROPERTIES The Company's principal executive offices are located at 1114 Avenue of the Americas, New York, New York 10036. The Company's principal properties consist of three domestic manufacturing facilities located in Alabama, New York and Tennessee, four manufacturing facilities located in Mexico, and five distribution centers; one in New York, two in South Carolina and two in Texas. At the end of Fiscal 1997, the Company was in the process of closing one distribution facility in South Carolina. The Company owns approximately 1,067,000 square feet of space devoted to manufacturing and distribution and leases approximately 497,000 square feet of such space. The Company owns approximately 69,000 square feet of office space and leases approximately 210,000 square feet of combined office, design and showroom space. The Children's Group has exclusive use of the Tennessee manufacturing facility, shares one of the Mexican manufacturing facilities with the Salant Menswear Group Bottoms division and has its distribution center in a building in Texas. As of the end of Fiscal 1997, the Company's Stores division operated 17 factory outlet stores, comprising approximately 45,000 square feet of selling space, all of which are leased. Except as noted above, substantially all of the owned and leased property of the Company is used in connection with its men's apparel business or general corporate administrative functions. The Company believes that its plant and equipment are adequately maintained, in good operating condition, and are adequate for the Company's present needs. LEGAL PROCEEDINGS (a) Chapter 11 Cases. On June 27, 1990, Salant and Denton Mills each filed with the Bankruptcy Court a separate voluntary petition for relief under chapter 11 of the Bankruptcy Code. On July 30, 1993, the Bankruptcy Court issued an order confirming the 1993 Chapter 11 Plan. The 1993 Chapter 11 Plan was consummated on September 20, 1993. From that date through January 3, 1998 (approximately 51 months), the Company made cash payments of $9.7 million, issued $111.9 million of Senior Notes, and issued 11.1 million shares of common stock in settlement of certain undisputed and disputed claims in the chapter 11 proceedings. The Company anticipates that an additional $1.8 million in cash and an additional 206 thousand shares of common stock will ultimately be distributed in connection with the resolution of all remaining claims. Provisions for such distributions were made in the consolidated financial statements at the time of emergence from the bankruptcy during the year ended January 1, 1994. The process of resolving claims is continuing and, pursuant to the 1993 Chapter 11 Plan, remains under the jurisdiction of the Bankruptcy Court. (b) Other. The Company is a defendant in several other legal actions. In the opinion of the Company's management, based upon the advice of the respective attorneys handling such cases, such actions are not expected to have a material adverse effect on the Company's consolidated financial position, results of operations or cash flow. SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION (Amounts in thousands except share, per share and ratio data) Set forth below are summary consolidated historical financial data of the Company. The summary financial data for each of the years in the five year period ended January 3, 1998 have been derived from the audited Consolidated Financial Statements of the Company. The summary financial data for the six month periods ended July 4, 1998 and June 28, 1997 have been derived from the unaudited financial statements of the Company and include all adjustments of a normal recurring nature which are necessary to present fairly such financial statements. The data presented below is qualified by, and should be read in conjunction with, the Consolidated Financial Statements and related notes thereto, and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The Company's fiscal year ends on the Saturday closest to December 31.
FOR THE SIX MONTHS ENDED FOR THE FISCAL YEAR ENDED ------------------------ ------------------------- JULY 4, JUNE 28, JAN. 03, DEC. 28, DEC. 30, DEC. 31, JAN. 1, 1998 1997 1998 1996 1995 1994 1994 (52 Weeks) (52 Weeks) (52 Weeks) (52 Weeks) (52 Weeks) ------------------------------------------------------------------------------------------------------ CONTINUING OPERATIONS: Net sales $ 159,343 $ 169,601 $ 396,832 $ 417,711 $ 485,825 $398,990 $ 379,012 Reversal of /(Provision for) Restructuring 160 1,164 (2,066) (11,730) (3,550) -- (5,500) costs(a) Income/(loss) from continuing operations (6,835) (9,540) (10,722) (8,958) (362) 3,398 7,865 DISCONTINUED OPERATIONS:(e) -- Loss from operations, net of income taxes -- (8,136) (8,136) (365) (136) (9,639) (638) Estimated loss on disposal, net of income -- 580 (1,330) -- -- (1,796) -- taxes Reversal of estimated loss on disposal, net of income taxes -- -- -- -- 11,772 Extraordinary gain (b) -- 600 2,100 -- 1,000 63 24,707 Net income/(loss)(a) (6,835) (17,656) (18,088) (9,323) 502 (7,865) 43,706 BASIC EARNINGS/(LOSS PER SHARE: Earnings/(loss) per share from continuing operations before extraordinary gain $ (.45) $ (.68) $ (0.71) $ (0.60) $ (0.02) $ (0.23) $ 1.18 Earnings/(loss) per share from discontinued operations -- $ (.58) $ $ $ $ $ 1.68 Earnings per share from extraordinary gain -- .04 0.14 -- 0.06 -- 3.72 Basic earnings/(loss) per (.45) (1.17) (1.19) (0.62) 0.03 (0.53) 6.58 share (a) DILUTED EARNINGS/(LOSS) PER SHARE: Earnings/(loss) per share from continuing $ (.45) $ (.68) $ (0.71) $ (0.60) $ (0.02) $ 0.23 $ 1.10 operations before extraordinary gain Earnings/(loss) per share from discontinued -- 1.57 operations (.58) (0.62) (0.02) (0.01) (0.76) Earnings per share from 0.14 -- 0.06 -- 3.48 extraordinary gain -- .04 Diluted earnings/(loss) (.45) (1.17) (1.19) (0.62) 0.03 (0.53) 6.15 per share (a) CASH DIVIDENDS PER SHARE -- -- -- -- -- -- -- WEIGHTED AVERAGE SHARES: Shares used in computing basic earnings per share 15,170 15,108 15,139 15,078 15,008 14,954 6,638 Add - Common stock (d) (d) (d) (d) 110 (d) 465 equivalents Shares used in computing diluted earnings per share 15,170 15,108 15,139 1,5078 15,118 14,954 7,103 AT END OF PERIOD: Current assets $ 158,808 $ 168,929 $ 148,899 $ 150,986 $163,799$ 172,234 $161,375 Total assets 242,289 256,635 233,377 235,251 253,970 266,157 251,946 Current liabilities (c) 201,481 100,190 185,692 59,566 61,704 71,104 44,427 Long-term debt (c) -- 104,879 -- 106,231 110,040 109,908 111,851 Deferred liabilities 5,340 8,453 5,382 8,863 11,373 13,479 16,766 Working capital/(deficiency) (42,673) 68,739 (36,793) 91,420 102,095 101,130 116,948 Current ratio 0.8:1 1.7:1 0.8:1 2.5:1 2.7:1 2.4:1 3.61:1 Shareholders' equity $ 35,468 $ 43,113 42,303 60,591 70,853 71,666 78,902 Book value per share $ 2.34 $ 2.85 $ 2.79 $ 4.01 $ 4.71 $ 4.78 $ 5.34 Number of shares 15,170 15,108 15,170 15,094 15,041 15,008 14,781 outstanding
(a) Includes, for the three month periods ended July 4, 1998 and June 28, 1997, a reversal of a previously recorded restructuring provision of $160 and $1.164, respectively, related to the excess portion of net liabilities set up for the closure of all retail outlet stores other than Perry Ellis outlet stores and the closure of the J.J. Farmer sportswear product line, respectively; for the year ended January 3, 1998, a provision of $2,066 (14 cents per share; tax benefit not available) for restructuring costs principally related to (i) $3,530 related to the decision in the fourth quarter to close all retail outlet stores other than Perry Ellis outlet stores and (ii) the reversal of previously recorded restructuring provisions of $1,464, primarily resulting from the settlement of liabilities for less than the carrying amount, resulting in the reversal of the excess portion of the provision; for the year ended December 28, 1996, a provision of $11,730 (78 cents per share; tax benefit not available) for restructuring costs principally related to (i) the write-off of goodwill and the write-down of other assets for a product line which has been put up for sale, (ii) the write-off of certain assets and accrual for future royalties for a licensed product line and (iii) employee costs related to closing certain facilities; for the year ended December 30, 1995, a provision of $3,550 (24 cents per share; tax benefit not available) for restructuring costs principally related to (i) fixed asset write-downs at locations to be closed and (ii) inventory markdowns for discontinued product lines; and for the year ended January 1, 1994, a provision of $5,500 (Basis loss per share of 83 cents; tax benefit not available) for restructuring costs principally related to the costs incurred in connection with the closure of certain unprofitable operations, including (i) inventory markdowns associated with those product lines and (ii) fixed asset write-downs at closed locations. (b) Includes, for the six month period ended June 28, 1997 a gain of $600 for the reversal of excess liabilities previously provided for the anticipated settlement of claims arising from the prior chapter 11 proceedings; for the year ended January 3, 1998, a gain of $2,100 (14 cents per share) related to the reversal of excess liabilities previously provided for the anticipated settlement of claims arising from the Chapter 11 proceeding; for the year ended December 30, 1995, a gain of $1,000 (6 cents per share) related to the reversal of excess liabilities previously provided for the anticipated settlement of claims arising from the Chapter 11 proceeding; for the year ended December 31, 1994, a gain of $63 (no per share effect) related to the purchase and retirement of a portion of the Senior Notes at a price below the principal amount thereof; and for the year ended January 1, 1994, a gain of $24,707 (basic earnings per share of $3.72) related to the settlement and anticipated settlement of claims arising from the Chapter 11 proceeding. (c) At July 4, 1998 and January 3, 1998, long-term debt of $104,879 had been classified as a current liability. See Note 1 to the Consolidated Financial Statements at page F-6 and page F-26 of the Company's Registration Statement of which this Exchange Restructuring Prospectus is a part. (d) Common stock equivalents have not been included in these periods as their inclusion would be anti-dilutive to the calculation. (e) 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 in 1997 was $8,136, which included a charge of $4,459 for the write-off of goodwill. Net sales of the division were $2,822, $20,408 and $15,696 in 1997, 1996 and 1995, respectively. Additionally, in 1997, the Company recorded a charge of $1,330 to accrue for expected operating losses during the phase-out period through March 1998. No income tax benefits have been allocated to the division's 1997, 1996 and 1995 losses. In February 1995, the Company discontinued the operations of the Vera Scarf division, which imported and marketed women's scarves. The loss from operations of the division in 1994 was $9,639, which included a fourth quarter charge of $9,004 for the write-off of goodwill and other intangible assets. Net sales of the division were $1,673 and $5,087 in 1995 and 1994, respectively. Additionally, in 1994 the Company recorded a fourth quarter charge of $1,796 to accrue for expected operating losses during the phase-out period through June 1995. No income tax benefits have been allocated to the division's 1994 loss. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW In Fiscal 1997, the Company continued to implement and enhance its plan (i) to concentrate the Company's resources on a limited number of key menswear brand names (including continuing to emphasize and cohesively market the Company's leading Perry Ellis brand), (ii) to further expand the Company's private label business and (iii) to correct operational issues that have hampered the Company in the past. In accordance with these objectives, in Fiscal 1997, the Company (i) discontinued its Made in the Shade women's junior sportswear business, (ii) closed all non-Perry Ellis retail outlet stores and (iii) made significant changes to management. In Fiscal 1997, the Company hired a new Chairman and Chief Executive Officer, Chief Financial Officer, Senior Vice President of Human Resources, President of its Salant Menswear division, and Vice Presidents for Distribution, Manufacturing and Information Services. As part of the Company's business restructuring from Fiscal 1997 the Company closed all retail outlet stores other than Perry Ellis outlet stores. The Company anticipates an improvement in operating income, as a result of closing the retail stores, of approximately $1,591 which represents the three year average operating loss from those closed stores. In March 1998, the Company announced that it had reached an agreement in principle with its major note and equity holders to restructure its existing indebtedness under the Company's 10 1/2% Senior Notes due December 31, 1998 (the "Senior Notes"). Under this proposed restructuring, the Company would convert the entire $104.879 million outstanding aggregate principal amount of, and all accrued and unpaid interest on, its Senior Notes into New Common Stock. RESULTS OF OPERATIONS Second Quarter of 1998 Compared with Second Quarter of 1997 - ----------------------------------------------------------- Net Sales The following table sets forth the net sales of each of the Company's principal business segments for the three months ended July 4, 1998 and June 28, 1997 and the percentage contribution of each of those segments to total net sales: Three Months Ended Percentage ------------------ Increase/ July 4, 1998 June 28, 1997 (Decrease) ------------ ------------- ---------- (dollars in millions) Men's Apparel $69.4 93% $75.9 93% (9%) Children's Sleepwear and Underwear 5.1 7% 5.5 7% (7%) ----- --- ----- --- ---- Total $74.5 100% $81.4 100% (9%) ===== ==== ===== ==== Sales of men's apparel decreased by $6.5 million, or 9%, in the second quarter of 1998, as compared to the second quarter of 1997. This decrease primarily resulted from (a) a $2.4 million decrease in dress shirts, primarily due to a reduction of off-price sales for Perry Ellis dress shirts and reduced sales of Gant dress shirts, (b) a $2.2 million decrease related to the closure of all non-Perry Ellis retail stores in the fourth quarter of 1997 and (c) a $2.0 million decrease in sales of men's slacks due to initial shipments of the Canyon River Khakis program in the second quarter of 1997 and the discontinuance of sales under the Thomson brand in 1998. Sales of children's sleepwear and underwear decreased by $0.4 million, or 7%, in the second quarter of 1998, as compared to the second quarter of 1997. This decrease was primarily a result of lower sales of licensed character sleepwear, partially offset by higher off-price sales related to the disposal of the Joe Boxer sportswear line. As previously announced, the Company determined not to continue with its Joe Boxer sportswear line for Fall 1998. This line accounted for net sales of $0.8 million in the second quarter of 1998 and $0.3 million in the second quarter of 1997. The Company will continue with its Joe Boxer sleepwear and underwear product lines. Gross Profit The following table sets forth the gross profit and gross profit margin (gross profit as a percentage of net sales) for each of the Company's business segments for the three months ended July 4, 1998 and June 28, 1997: Three Months Ended ------------------ July 4, 1998 June 28, 1997 ------------ ------------- (dollars in millions) Men's Apparel $16.9 24.3% $16.0 21.1% Children's Sleepwear and Underwear (0.4) (7.0%) 0.6 10.3% Total $16.5 22.2% $16.6 20.4% ===== ===== The increase in gross profit and gross profit margin in the men's apparel segment was primarily attributable to the change in sales mix, reflecting decreased off-price sales in the second quarter of 1998, and the continuing elimination of unprofitable programs. The decline in gross profit and gross profit margin in children's sleepwear and underwear was primarily attributable to the higher off-price sales discussed above and increased inventory markdowns related to the discontinuance of the Joe Boxer sportswear line. Selling, General and Administrative Expenses As a result of initiatives begun in 1997, selling, general and administrative ("SG&A") expenses for the second quarter of 1998 decreased to $17.2 million (23.1% of net sales) from $20.8 million (25.6% of net sales) for the second quarter of 1997. The decrease primarily resulted from (a) a $2.0 million decrease related to the closure of all non-Perry Ellis retail stores in the fourth quarter of 1997 and (b) a continuing focus by the Company on cost saving opportunities. Reversal of Provision for Restructuring In the second quarter of 1997, the Company reversed a previously recorded restructuring provision by $0.4 million, as these amounts were no longer needed. This provision was for estimated liabilities related to the previously disclosed closure of a manufacturing facility. The cash portion of the remaining reserve for restructuring of $0.9 million is expected to be expended in the last half of 1998. Income/(Loss) from Operations Before Interest and Income Taxes The following table sets forth income/(loss) from operations before interest and income taxes for each of the Company's business segments, expressed both in dollars and as a percentage of net sales, for the three months ended July 4, 1998 and June 28, 1997: Three Months Ended ------------------ July 4, 1998 June 28, 1997 ------------ ------------- (dollars in millions) Men's Apparel(a) $4.0 5.9% ($0.1) (0.1%) Children's Sleepwear and Underwear (2.1) (41.8%) (1.2) (22.8%) --- ---- 1.9 2.6% (1.3) (1.6%) Corporate expenses (2.7) (2.6) Licensing division income 1.3 1.1 --- --- Income/(loss) from operations before interest and income taxes $0.5 0.7% ($2.8) (3.4%) ==== ===== (a) Includes the reversal of restructuring charges of $0.4 million in the second quarter of 1997. Interest Expense, Net Net interest expense was $4.1 million for the second quarter of 1998, compared with $3.9 million for the second quarter of 1997. The increase in interest expense resulted from higher average borrowings during the second quarter of 1998, primarily due to the loss from operations over the past year. Discontinued Operations In the second quarter of 1997, the Company recognized a charge of $7.9 million, or $(0.53) per share, related to the discontinuance of the Made in the Shade division. This charge included a write-off of goodwill of $4.5 million and an accrual of $580 thousand for estimated operating losses during the phase-out period. Net sales of the division for the three months ended June 28, 1997 were $0.9 million. Extraordinary Gain In the second quarter of 1997, the Company recorded an extraordinary gain of $0.6 million related to the reversal of excess liabilities previously provided for the anticipated settlement of claims arising from the Company's prior chapter 11 cases. Net Loss In the second quarter of 1998, the Company reported a net loss of $3.6 million, or ($0.24) per share, as compared with a net loss of $14.1 million, or ($0.94) per share, in the second quarter of 1997. Earnings/(Loss) Before Interest, Taxes, Depreciation, Amortization, Restructuring Charges, Discontinued Operations and Extraordinary Gain Earnings/(loss) before interest, taxes, depreciation, amortization, restructuring charges, discontinued operations and extraordinary gain was $2.9 million (3.9% of net sales) in the second quarter of 1998, compared to ($1.0) million ((1.2%) of net sales) in the second quarter of 1997, an increase of $3.9 million. 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 1998 Compared with Year to Date 1997 - ------------------------------------------------- Net Sales The following table sets forth the net sales of each of the Company's principal business segments for the six months ended July 4, 1998 and June 28, 1997 and the percentage contribution of each of those segments to total net sales: Percentage Three Months Ended Increase/ July 4, 1998 June 28, 1997 (Decrease) ------------ ------------- ---------- (dollars in millions) Men's Apparel $146.3 92% $159.7 94% (8%) Children's Sleepwear and Underwear 13.0 8% 9.9 6% (32%) ----- --- ----- --- ---- Total $159.3 100% $169.6 100% (6%) ====== ==== ===== ==== Sales of men's apparel decreased by $13.4 million, or 8%, in the first half of 1998, as compared to the first half of 1997. This decrease primarily resulted from (i) a $4.6 million reduction in dress shirt sales, of which $3.4 million was related to lower Perry Ellis off-price sales and $1.2 million related to reduced Gant sales, (ii) a $4.3 million reduction related to the closure of all non-Perry Ellis retail stores in the fourth quarter of 1997, (iii) a $2.3 million reduction for Canyon River Blues jeans, resulting from higher initial shipments for new loose fit and wide leg programs, which began in the first half of 1997, and (iv) a $2.0 million reduction for sales under the discontinued Thomson brand in 1998. Sales of children's sleepwear and underwear increased by $3.1 million, or 32%, in the first half of 1998, as compared to the first half of 1997. This increase was primarily a result of (i) increased sales of Joe Boxer sportswear in 1998 and (ii) an increase in the sale of prior season goods carried over from last year. As previously announced, the Company determined not to continue with its Joe Boxer sportswear line for Fall 1998. This line accounted for net sales of $2.3 million in the first half of 1998, as compared to $0.3 million in the first half of 1997. The Company will continue with its Joe Boxer sleepwear and underwear product lines. Gross Profit The following table sets forth the gross profit and gross profit margin (gross profit as a percentage of net sales) for each of the Company's business segments for the six months ended July 4, 1998 and June 28, 1997: Six Months Ended ------------------ July 4, 1998 June 28, 1997 ------------ ------------- (dollars in millions) Men's Apparel(a) $33.2 22.7% $35.0 21.9% Children's Sleepwear and Underwear (0.2) 1.2% 1.4 13.8% --- --- Total $33.4 21.0% $36.4 21.4% ==== ==== The decline in gross profit in the men's apparel segment was primarily attributable to the reduction in net sales discussed above. The increase in gross profit margin was primarily due to the elimination of unprofitable programs as discussed above. The decline in gross profit margin in children's sleepwear and underwear was primarily attributable to (i) the underabsorption of manufacturing costs in the first half of 1998 related to the planned shift of production closer to the order taking process and (ii) the discontinuance and sell-off of the Joe Boxer sportswear line at significantly reduced margins. Selling, General and Administrative Expenses As a result of initiatives begun in 1997, selling, general and administrative ("SG&A") expenses for the first half of 1998 decreased to $34.3 million (21.5% of net sales) from $41.4 million (24.4% of net sales) for the first half of 1997. The decrease primarily resulted from (a) a $4.0 million decrease related to the closure of all non-Perry Ellis retail stores in the fourth quarter of 1997 and (b) a continuing focus by the Company on cost saving opportunities. Reversal of Provision for Restructuring In the first half of 1997, the Company reversed previously recorded restructuring provisions of $1.2 million, primarily resulting from the settlement of liabilities for less than the carrying amount. Income/(Loss) from Operations Before Interest and Income Taxes The following table sets forth income/(loss) from operations before interest and income taxes for each of the Company's business segments, expressed both in dollars and as a percentage of net sales, for the six months ended July 4, 1998 and June 28, 1997: Six Months Ended ---------------- July 4, 1998 June 28, 1997 ------------ ------------- (dollars in millions) Men's Apparel (a) $7.8 5.4% $3.0 1.9% Children's Sleepwear (3.6) (27.8%) (2.3) (22.7%) and Underwear 4.2 2.7% 0.7 0.4% Corporate expenses (5.2) (4.7) Licensing division income 2.2 1.9 ---- ---- Income/(loss) from operations before interest and income taxes $1.2 0.7% ($2.1) (1.2%) ==== ==== (a) Includes the reversal of restructuring charges of $1.2 million in 1997. Interest Expense, Net Net interest expense was $8.0 million for the first half of 1998, compared with $7.8 million for the first half of 1997. The increase in interest expense resulted from higher average borrowings during the first half of 1998, primarily due to the loss from operations over the past year. Discontinued Operations In the first half of 1997, the Company recognized a charge of $8.7 million, or $(0.58) per share, related to the discontinuance of the Made in the Shade division. This charge included a write-off of goodwill of $4.5 million and an accrual of $580 thousand for estimated operating losses during the phase-out period. Net sales of the division for the six months ended June 28, 1997 were $2.2 million. Extraordinary Gain In the first half of 1997, the Company recorded an extraordinary gain of $0.6 million related to the reversal of excess liabilities previously provided for the anticipated settlement of claims arising from the Company's prior chapter 11 cases. Net Loss In the first half of 1998, the Company reported a net loss of $6.9 million, or ($0.45) per share, as compared with a net loss of $17.7 million, or $1.17 per share, in the first half of 1997. 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 $5.8 million (3.6% of net sales) in the first half of 1998, compared to $1.2 million (0.7% of net sales) in the first half of 1997, an increase of $4.6 million. 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. Fiscal 1997 Compared with Fiscal 1996 - ------------------------------------- Net Sales The following table sets forth the net sales of each of the Company's three principal business segments for the fiscal years ended January 3, 1998 ("Fiscal 1997") and December 28, 1996 ("Fiscal 1996") and the percentage contribution of each of those segments to total net sales: Fiscal 1997 Fiscal 1996 Three Months Ended Percentage ------------------ Increase/ July 4, 1998 June 28, 1997 (Decrease) ------------ ------------- ---------- (dollars in millions) Men's $325.8 82% $344.7 83% (5.5%) Children's 49.2 12% 45.8 11% 7.5% Retail Outlet Stores 21.8 6% 27.2 6% (19.8%) ------- ------ -------- ------ Total $396.8 100% $417.7 100% (5.0%) ====== ===== ====== ==== Sales of men's apparel decreased by $18.9 million, or 5.5%, in Fiscal 1997. This decrease resulted from (a) a $12.4 million reduction in sales of men's slacks, of which $8.4 reflected the elimination of unprofitable programs and the balance was primarily due to operational difficulties experienced in the first quarter of Fiscal 1997 related to the move of manufacturing and distribution out of the Company's facilities in Thomson, Georgia, (b) a $5.7 million reduction in sales of men's sportswear, which includes the elimination of $16.7 million of the Company's J.J.. Farmer and Manhattan sportswear lines net sales, offset by an $11.0 million increase in sales of Perry Ellis sportswear products, (c) a $5.1 million decrease in sales of men's accessories, primarily due to the slow-down of the novelty neckwear business and (d) a $4.7 million reduction in sales of certain dress shirt lines, which reflected the elimination of unprofitable businesses. These sales decreases were partially offset by a $9.5 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. The total sales reduction attributable to the elimination of unprofitable programs was $29.8 million. Sales of children's sleepwear and underwear increased by $3.4 million, or 7.5%, in Fiscal 1997. This increase was primarily a result of the continuing expansion of the Joe Boxer children's product lines in Fiscal 1997. At the end of the first quarter of 1998, the Company determined not to continue with its Joe Boxer sportswear line for Fall 1998. Instead, consistent with the approach that the Joe Boxer Corporation (Salant's licensor of the Joe Boxer trademark) has taken, the Company will focus on its core business of underwear and sleepwear. Sales of the retail outlet stores division decreased by $5.4 million, or 19.8%, in Fiscal 1997. This decrease was due to (i) a decrease in the number of stores in the first 10 months of Fiscal 1997 and (ii) the decision in November 1997 to close all non-Perry Ellis outlet stores. The Company ceased to operate the non-Perry Ellis outlet stores in November 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 each of Fiscal 1997 and Fiscal 1996: Fiscal 1997 Fiscal 1996 ----------- ------------ (dollars in millions) Men's $69.5 21.3% $74.2 21.5% Children's 7.5 15.2% 11.5 25.1% Retail Outlet Stores 7.5 34.6% 9.2 33.9% ------- ------ Total $ 84.5 21.3% $ 94.9 22.7% ====== ====== The decline in gross profit in the men's apparel segment was primarily attributable to the reduction in net sales discussed above. The gross profit margin of the children's sleepwear and underwear segment declined as a result of (i) a slowdown in sales of certain licensed products, requiring a greater percentage of off-price sales, as well as an increase in discounts and allowances, (ii) an increase in reserves for remaining inventory and (iii) higher distribution and product handling costs. The gross profit of the retail outlet stores decreased primarily as a result of inventory markdowns of $1.6 million (7.3% of net sales) related to the closing of the non-Perry Ellis stores. Excluding these inventory markdowns, the gross profit margin increased 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 ("S,G&A") expenses for Fiscal 1997 were $80.6 million (20.3% of net sales) compared with $83.1 million (19.9% of net sales) for Fiscal 1996. While implementation of the Company's strategic plan resulted in the elimination of certain S,G&A expenses in Fiscal 1997, such eliminations were partially offset by higher amortization costs attributable to the installation of new store fixtures for Perry Ellis sportswear shops in department stores which commenced in 1995. The amortization of these store fixtures accounted for approximately $2.5 million of the total S,G&A expenses in Fiscal 1997, compared with $1.6 million in Fiscal 1996. Other Income Other income for Fiscal 1996 included a gain of $2.7 million related to the sale of a leasehold interest in a facility located in Glen Rock, New Jersey. Provision for Restructuring In Fiscal 1997, the Company recorded a provision for restructuring charge of $2.1 million, consisting of (i) $3.5 million related to the decision in the fourth quarter to close all retail outlet stores other than Perry Ellis outlet stores and (ii) the reversal of previously recorded restructuring provisions of $1.4 million, including $300 thousand in the fourth quarter, primarily resulting from the settlement of liabilities for less than the carrying amount, as a result of a settlement agreement and license arrangement with the former owners of the J.J. Farmer trademark, resulting in the reversal of the excess portion of the provision. The Company recorded a restructuring charge of $11.7 million in Fiscal 1996. Of this amount, (i) $5.7 million was primarily related to the write-off of goodwill and the write-down of other assets of the J.J. Farmer product line, (ii) $2.9 million was attributable to the write-off of certain assets related to the licensing of the Gant brand name for certain of the Company's dress shirt and accessories product lines and the accrual of a portion of future royalties payable under the Gant licenses that are not expected to be covered by future sales, (iii) $1.8 million was primarily related to employee costs associated with the closing of a manufacturing and distribution facility in Thomson, Georgia, (iv) $0.7 million was primarily related to employee costs associated with the closing of a manufacturing facility in Americus, Georgia and (v) $0.6 million related to other severance costs. The Fiscal 1997 restructuring charge related to the retail outlet store closings was comprised of $1.3 million of non-cash charges and $2.2 million requiring cash payments over a period of time. Of the cash portion, $0.6 million was expended during Fiscal 1997 and the balance is expected to be expended in 1998. Income from Continuing Operations Before Interest, Income Taxes and Extraordinary Gain The following table sets forth 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 each of Fiscal 1997 and Fiscal 1996: Fiscal 1997 Fiscal 1996 ----------- ----------- (dollars in millions) Men's (a) $ 19.5 6.0% $ 6.2 1.8% Children's (0.3) (0.6%) 5.4 11.8% Retail Outlet Stores (b) (8.4) (38.4%) (4.2) (15.4%) --------- -------- 10.8 2.7% 7.4 1.8% Corporate expenses (c) (9.3) (5.8) Licensing division income 4.6 5.0 --------- -------- Income from continuing operations before interest, income taxes and extraordinary gain $ 6.1 1.5% $ 6.6 1.6% ======= ======= (a) Includes the reversal of restructuring charges of $1.5 million in Fiscal 1997 and restructuring charges of $11.7 million in Fiscal 1996. (b) Includes restructuring charges of $3.5 million in Fiscal 1997. (c) Includes other income of $2.7 million in Fiscal 1996 related to the sale of a leasehold interest. The $0.5 million decrease in income from continuing operations before interest, income taxes and extraordinary gain in Fiscal 1997 was primarily a result of the significant decline in profitability of the Children's segment. This decline was a result of (i) the decline in gross profit as previously noted and (ii) increased occupancy costs related to new office, design and showroom space acquired in Fiscal 1997. The decline in retail outlet stores operating income is due to the restructuring and inventory markdown costs related to the closing of the non-Perry Ellis stores, offset by the higher gross profit related to the change in transfer pricing, as previously discussed. The increase in corporate expenses is primarily due to costs associated with the significant management changes previously discussed. Interest Expense, Net Net interest expense was $16.7 million for Fiscal 1997 compared with $15.5 million for Fiscal 1996. The $1.2 million increase is a result of higher average borrowings during Fiscal 1997 primarily due to the loss from operations and spending on capital expenditures and store fixtures. Loss from Continuing Operations In Fiscal 1997, the Company reported a loss from continuing operations before extraordinary gain of $10.7 million, or $0.71 per share, compared with a loss from continuing operations of $9.0 million, or $0.60 per share, in Fiscal 1996. Extraordinary Gain The extraordinary gain of $2.1 million recorded in Fiscal 1997, including $1.5 million in the fourth quarter, related to the reversal of excess liabilities previously provided for the anticipated settlement of claims arising from the Company's prior chapter 11 cases. Earnings Before Interest, Taxes, Depreciation, Amortization, Restructuring Charges and Extraordinary Gain Earnings before interest, taxes, depreciation, amortization, restructuring charges and extraordinary gain was $17.1 million (4.3% of net sales) in Fiscal 1997, compared to $26.5 million (6.4% of net sales) in Fiscal 1996, a decrease of $9.4 million, or 35%. The Company believes this information is helpful in understanding cash flow from operations that is available for debt service and capital expenditures. This measure is not contained in Generally Accepted Accounting Principles and is not a substitute for operating income, net income or net cash flows from operating activities. Fiscal 1996 Compared with Fiscal 1995 - ------------------------------------- Net Sales The following table sets forth the net sales of each of the Company's three principal business segments for the fiscal years ended December 28, 1996 ("Fiscal 1996") and December 30, 1995 ("Fiscal 1995") and the percentage contribution of each of those segments to total net sales: Percentage Increase/ Fiscal 1996 Fiscal 1995 (Decrease) ------------ ------------- ---------- (dollars in millions) Men's $344.7 83% $416.7 86% (17.3%) Children's 45.8 11% 39.9 8% 14.8% Retail Outlet Stores 27.2 6% 29.2 6% (7.0%) ------- ------ -------- ------ Total $417.7 100% $485.8 100% (14.0%) ====== ===== ====== ==== The decline in net sales in the men's apparel segment was $72.0 million. Of this amount, $58.8 million was attributable to the planned discontinuation of various product lines and the redirection of other product lines to different channels of distribution. Of the balance, $7.4 million resulted from a decision by Sears, Roebuck & Co. ("Sears") to source its knit and woven Canyon River Blues tops through its own internal sourcing operations and $3.6 million was due to reduced sales of Perry Ellis sportswear as a result of a reduction of $12.3 million in sales to off-price retailers, partially offset by an increase of $8.7 million in sales to department stores. Sales of children's sleepwear and underwear increased by $5.9 million, or 14.8%, in Fiscal 1996. This increase was primarily a result of the continuing expansion of the Joe Boxer children's product lines. Gross Profit The following table sets forth the gross profit and gross profit margin (gross profit as a percentage of net sales) for each of the Company's business segments for each of Fiscal 1996 and Fiscal 1995: Fiscal 1997 Fiscal 1996 ----------- ----------- (dollars in millions) Men's $74.2 21.5% $79.1 19.0% Children's 11.5 25.1% 10.8 26.9% Retail Outlet Stores 9.2 33.9% 10.7 36.7% ------ ------- Total $94.9 22.7% $100.6 20.7% ===== ===== ====== The decline in gross profit in the men's apparel segment and for the Company as a whole was primarily attributable to the reduction in net sales discussed above. The gross profit margin for the men's apparel segment and the Company as a whole, however, improved significantly, primarily as a result of (i) a greater percentage of sales of the Company's higher margin Perry Ellis product lines as a percentage of net sales, (ii) planned reductions in sales of lower-margin brands and products, (iii) increased efficiencies at the Company's manufacturing facilities in Mexico, and (iv) reduced markdowns of accessories due to improved consumer acceptance of the Company's neckwear product lines. The gross profit margin for the men's apparel segment was adversely affected, however, by charges of (i) $3.0 million (0.8% of men's apparel net sales) for markdowns related to the discontinuation of the J.J. Farmer and Manhattan sportswear product lines and a change in the primary channel of distribution for products sold under the John Henry label and (ii) $1.9 million (0.5% of men's apparel net sales) related to the closing of manufacturing and distribution facilities in Americus and Thomson, Georgia. The gross profit margin of the children's sleepwear and underwear segment declined as a result of an increased percentage of off-price sales of licensed character products in that segment's total sales mix. The gross profit margin of the Company's retail outlet stores business declined primarily as a result of margin pressures as well as charges of $0.3 million (1.0% of net sales) due to markdowns of discontinued product lines at the Company's outlet stores. Selling, General and Administrative Expenses Selling, general and administrative ("S,G&A") expenses for Fiscal 1996 were $83.1 million (19.9% of net sales) compared with $82.6 million (17.0% of net sales) for Fiscal 1995. While implementation of the Company's strategic plan resulted in the elimination of certain S,G&A expenses in Fiscal 1996, such eliminations were partially offset by higher amortization costs attributable to the installation of new store fixtures for Perry Ellis sportswear shops in department stores and Canyon River Blues shops in Sears stores, which installations commenced in 1995. The amortization of these store fixtures accounted for approximately $1.6 million of the total S,G&A expenses in Fiscal 1996 as compared with $0.4 million in Fiscal 1995. The Company's merchandise coordinator and retail specialist programs, which provide support for the presentation and coordination of the Company's products in retail stores was also enlarged in 1996, primarily to support the expansion of the Perry Ellis sportswear shop program; this increase accounted for a further $1.2 million of the S,G&A expense increase in Fiscal 1996. Total expenses related to these programs were $3.3 million in Fiscal 1996, as compared with $2.1 million in Fiscal 1995. Other Income Other income for Fiscal 1996 included a gain of $2.7 million related to the sale of a leasehold interest in a facility located in Glen Rock, New Jersey. Provision for Restructuring The Company recorded a restructuring charge of $11.7 million in Fiscal 1996. Of this amount, (i) $5.7 million was primarily related to the write-off of goodwill and the write-down of other assets of the J.J. Farmer product line, (ii) $2.9 million was attributable to the write-off of certain assets related to the licensing of the Gant brand name for certain of the Company's dress shirt and accessories product lines and the accrual of a portion of future royalties payable under the Gant licenses that are not expected to be covered by future sales, (iii) $1.8 million was primarily related to employee costs associated with the closing of a manufacturing and distribution facility in Thomson, Georgia, (iv) $0.7 million was primarily related to employee costs associated with the closing of a manufacturing facility in Americus, Georgia and (v) $0.6 million related to other severance costs. Income from Continuing Operations Before Interest, Income Taxes and Extraordinary Gain The following table sets forth 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 each of Fiscal 1996 and Fiscal 1995: Fiscal 1996 Fiscal 1995 ----------- ----------- (dollars in millions) Men's (a) $6.2 1.8% $19.6 4.7% Children's 5.4 11.8% 5.2 13.0% Retail Outlet Stores (4.2) (15.4%) (2.7) (9.2%) ------- --------- 7.4 1.8% 22.1 4.6% Corporate expenses (b) (5.8) (8.8) Licensing division income 5.0 5.6 ------- --------- Income from continuing operations before interest, income taxes and extraordinary gain $6.6 1.6% $18.9 3.9% ==== ===== (a) Includes restructuring charges of $11.7 million in Fiscal 1996 and $3.6 million in Fiscal 1995. (b) Includes other income of $2.7 million in Fiscal 1996 related to the sale of a leasehold interest. The $12.3 million reduction in income from continuing operations before interest, income taxes and extraordinary gain in Fiscal 1996 was primarily a result of the $11.7 million restructuring charge (compared with $3.6 million in Fiscal 1995) and $6.3 million of other charges associated with the implementation of the strategic business plan, which was partially offset by a $2.7 million gain on the sale of a leasehold interest, as previously discussed. Interest Expense, Net Net interest expense was $15.5 million for Fiscal 1996 compared with $19.0 million for Fiscal 1995. The $3.5 million decrease is a result of lower average borrowings during Fiscal 1996 primarily due to reduced average levels of inventory. Loss from Continuing Operations In Fiscal 1996, the Company reported a loss from continuing operations of $9.0 million, or $0.60 per share, as compared with a loss from continuing operations before extraordinary gain of $0.4 million, or $0.02 per share, in Fiscal 1995. Extraordinary Gain The extraordinary gain of $1.0 million recorded in the fourth quarter of Fiscal 1995 related to the reversal of excess liabilities previously provided for the anticipated settlement of claims arising from the Company's prior chapter 11 cases. Earnings Before Interest, Taxes, Depreciation, Amortization, Restructuring Charges and Extraordinary Gain Earnings before interest, taxes, depreciation, amortization, restructuring charges and extraordinary gain was $26.5 million (6.4% of net sales) in Fiscal 1996, compared to $30.4 million (6.3% of net sales) in Fiscal 1995, a decrease of $3.9 million, or 12.8%. The Fiscal 1996 amount was negatively affected by $6.3 million of charges primarily associated with the implementation of the Company's strategic business plan. 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 the Credit Agreement with CIT. The Credit Agreement provides the Company with working capital financing, in the form of direct borrowings and letters of credit, up to an aggregate of $120 million (the "Maximum Credit"), subject to an asset-based borrowing formula. As collateral for borrowings under the Credit Agreement, the Company has granted to CIT a security interest in substantially all of the assets of the Company. On March 3, 1998, the Company announced that it had reached an agreement in principle with its major note and equity holders to restructure its existing indebtedness under the Senior Notes pursuant to the Letter Agreement upon which the Restructuring is based. Implementation of the Restructuring will result in the elimination of $11.0 million of annual interest expense to the Company. In connection with the execution of the Letter Agreement, the Company and CIT executed the Twelfth Amendment. See "BACKGROUND OF RESTRUCTURING--The Waiver and Forbearance Under the Credit Agreement and Commitment for New Credit Agreement." In addition, as discussed below, in furtherance of the Restructuring, the Company and CIT executed the Thirteenth Amendment. See "BACKGROUND OF RESTRUCTURING--The Waiver and Forbearance Under the Credit Agreement and Commitment for New Credit Agreement." On June 1, 1998, the Company and CIT executed the Thirteenth Amendment to the Credit Agreement. The Thirteenth Amendment reduced the interest rate on direct borrowings, increased borrowings allowed against eligible inventory, eliminated factoring of accounts receivable and modified the covenant related to maximum net loss. Under the Thirteenth Amendment, CIT also agreed to continue to forbear until November 30, 1998, subject to certain conditions, from exercising any of its rights or remedies under the Credit Agreement arising by virtue of the Company's failure to pay interest on its Senior Notes. The Company has also received a commitment from CIT, under the CIT Commitment Letter, for a new $140 million secured credit facility to become effective upon completion of the Restructuring. The new credit facility will provide financing through December 31, 2001, and is comprised of a $125 million revolving credit facility and a $15 million term loan facility, and includes terms consistent with the Thirteenth Amendment. The closing of the new credit facility with CIT is subject to the satisfaction of a number of conditions. Pursuant to the Credit Agreement, the interest rate charged on direct borrowings is 0.25 percent in excess of the prime rate of The Chase Manhattan Bank, N.A. (the "Prime Rate", which was 8.5% at July 4, 1998) or 2.25% above the London Late Eurodollar rate (the "Eurodollar Rate", which was 5.69% at July 4, 1998). Prior to the Thirteenth Amendment to the Credit Agreement, the Company sold to CIT, without recourse, certain eligible accounts receivable. The credit risk for such accounts was thereby transferred to CIT. Pursuant to the Thirteenth Amendment, new accounts receivable are no longer sold to CIT. The credit risk for accounts receivable previously sold to CIT remains with CIT. The amounts due from CIT have been offset against the Company's direct borrowings from CIT in the accompanying balance sheets. The amounts that have been offset were $9.8 million at July 4, 1998 and $9.7 million at June 28, 1997. On July 4, 1998, direct borrowings (including borrowings under the Eurodollar option) and letters of credit outstanding under the Credit Agreement were $52.2 million, respectively, and the Company had unused availability of $0.1 million. On June 28, 1997, direct borrowings and letters of credit outstanding under the Credit Agreement were $53.4 million and $25.3 million, respectively, and the Company had unused availability of $13.8 million. During the first half of 1998, the maximum aggregate amount of direct borrowings and letters of credit outstanding under the Credit Agreement was $84.6 million at which time the Company had unused availability of $7.0 million. During the first half of 1997, the maximum aggregate amount of direct borrowings and letters of credit outstanding under the Credit Agreement was $92.8 million at which time the Company had unused availability of $10.3 million. On April 4, 1998, direct borrowings (including borrowings under the Eurodollar option) and letters of credit outstanding under the Credit Agreement were $44.6 million and $23.0 million, respectively, and the Company had unused availability of $15.2 million. On March 29, 1997, direct borrowings and letters of credit outstanding under the Credit Agreement were $32.9 million and $32.8 million, respectively, and the Company had unused availability of $12.4 million. During the first quarter of 1998, the maximum aggregate amount of direct borrowings and letters of credit outstanding under the Credit Agreement was $81.1 million at which time the Company had unused availability of $15.2 million. During the first quarter of 1997, the maximum aggregate amount of direct borrowings and letters of credit outstanding under the Credit Agreement was $71.8 million at which time the Company had unused availability of $11.9 million. The Company's cash used in operating activities for the first half of 1998 was $15.6 million, which primarily reflects a $10.5 million increase in inventory and the loss from continuing operations of $6.9 million. The Company's cash used in operating activities for the first quarter of 1998 was $10.6 million, which primarily reflects a $5.5 million increase in accounts receivable and the loss from operations of $3.3 million. Cash used for investing activities in the first quarter of 1998 was $0.8 million, which represented capital expenditures of $0.5 million and the installation of store fixtures in department stores of $0.3 million. Cash used for investing activities in the first half of 1998 was $3.8 million, which represented capital expenditures of $3.4 million and the installation of store fixtures in department stores of $0.4 million. During 1998, the Company plans to make capital expenditures of approximately $11.6 million and to spend an additional $1.7 million for the installation of store fixtures in department stores. Cash provided by financing activities in the first half of 1998 was $18.4 million, which represented short-term borrowings under the Credit Agreement. Cash provided by financing activities in the first quarter of 1998 was $10.8 million, which represented short-term borrowings under the Credit Agreement. At the end of Fiscal 1997, direct borrowings and letters of credit outstanding under the Credit Agreement were $33.8 million and $23.2 million, respectively, and the Company had unused availability of $17.5 million. At the end of Fiscal 1996, direct borrowings and letters of credit outstanding under the Credit Agreement were $7.7 million and $33.6 million, respectively, and the Company had unused availability of $23.6 million. During Fiscal 1997, the maximum aggregate amount of direct borrowings and letters of credit outstanding at any one time under the Credit Agreement was $112.9 million, at which time the Company had unused availability of $10.5 million. During Fiscal 1996, the maximum aggregate amount of direct borrowings and letters of credit outstanding at any one time under the Credit Agreement was $101.0 million, at which time the Company had unused availability of $19.6 million. The Company's cash used in operating activities for Fiscal 1997 was $9.8 million, which primarily reflects the operating loss of $10.7 million and an increase in accounts receivable of $5.7 million, offset by non-cash charges, such as depreciation and amortization, of $8.9 million. Cash used in Fiscal 1997 for investing activities was $10.2 million, of which $7.1 million was related to capital expenditures and $3.1 million to the installation of store fixtures in department stores. During Fiscal 1998, the Company plans to make capital expenditures of approximately $6.4 million and to spend an additional $2.0 million for the installation of store fixtures in department stores. Cash provided by financing activities in Fiscal 1997 was $22.9 million, which represented short-term borrowings under the Credit Agreement of $26.1 million, offset by the retirement of long-term debt of $3.4 million. On October 28, 1996, the Company completed the sale of a leasehold interest in a facility located in Glen Rock, New Jersey. Pursuant to the Indenture governing the Senior Notes, the $3,372,000 net cash proceeds of that sale were applied to the repurchase of a like principal amount of the Senior Notes immediately following the end of the 1996 fiscal year. The instruments governing the Company's outstanding debt contain numerous financial and operating covenants, including restrictions on incurring indebtedness and liens, making investments in or purchasing the stock, or all or a substantial part of the assets of another person, selling property and paying cash dividends. In addition, under the Credit Agreement, the Company is required to maintain a minimum level of unused availability. As of July 4, 1998, the Company was in compliance with this covenant. The Indenture governing the Senior 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 Notes. In contemplation of the Restructuring, the Company elected not to pay the interest payment of approximately $5.5 million that was due and payable under the Senior Notes on March 2, 1998, subject to a 30 day grace period. As of July 4, 1998, interest accrued on the Senior Notes was $9.3 million. Because the Company elected not to pay the interest due on the Senior Notes by the expiration of the applicable grace period, an event of default has occurred with respect to the Senior Notes entitling the Noteholders to accelerate the maturity thereof. Pursuant to the Letter Agreement, Magten has, in accordance with Section 6.5 of the Indenture, caused a written direction to be provided to the Trustee under the Indenture, to forbear during the term of the Letter Agreement from taking any action under the Indenture in connection with the failure by the Company to make the interest payment on the Senior Notes that was due and payable on March 2, 1998. On April 8, 1998, the Trustee issued a Notice of Default stating that as a result of the Company's failure to make the interest payment due on the Senior Notes, an event of default under the Indenture had occurred on April 1, 1998. Pursuant to an amendment to the Letter Agreement, Magten has also agreed to provide a similar written forbearance direction to the Trustee upon the failure by the Company to make the interest payment on the Senior Notes that is due and payable on August 31, 1998. Failure to consummate the Restructuring could result in the acceleration of all of the indebtedness under the Senior Notes and/or the Credit Agreement. The Company's principal sources of liquidity, both on a short-term and a long-term basis, are cash flow from operations and borrowings under the Credit Agreement. Based upon its analysis of its consolidated financial position, its cash flow during the past twelve months and the cash flow anticipated from its future operations, the Company believes that its future cash flows together with funds available under the Credit Agreement, will be adequate to meet the financing requirements it anticipates during the next twelve months, provided that the Company consummates the Restructuring and secures the New Credit Agreement. There can be no assurance, however, (i) that the Company will consummate the Restructuring and secure the New Credit Agreement, or (ii) that future developments and general economic trends will not adversely affect the Company's operations and, hence, its anticipated cash flow. RECENTLY ISSUED ACCOUNTING STANDARDS The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", during the year ending January 2, 1999. SFAS 130 establishes standards for reporting comprehensive income and its components in a full set of general-purpose financial statements. This Statement requires that an enterprise (i) classify items of other comprehensive income by their nature in a financial statements, and (ii) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Adoption of this Statement required the Company to report changes in the excess of additional pension liability over unrecognized prior service cost and foreign currency translation adjustment accounts, previously shown in the stockholders' equity section of the balance sheet, as an increase or decrease to reported net income in arriving at comprehensive income. The Company is required to adopt SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" during the year ending January 2, 1999. The Statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement supersedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise", but retains the requirement to report information about major customers. It amends FASB Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries", to remove the special disclosure requirements for previously unconsolidated subsidiaries. The Company is currently considering what effect adoption of this statement will have on the Company. The Company is required to adopt SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", for the period ended January 2, 1999. This statement revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer as useful. The statement is effective for fiscal year ending January 2, 1999. Restatement of disclosures for earlier periods provided for comparative purposes is required. The Company has not yet determined the impact the adoption of this statement will have on the Company's financial statements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The statement establishes accounting and reporting standards requiring that derivative instruments (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at fair value. The statement requires that changes in a derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999; however, it may be adopted earlier. It cannot be applied retroactively to financial statements of prior periods. The Company has not yet quantified the impact of adopting SFAS No. 133 on their financial statements and has not determined the timing of or method of adoption. FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION This Exchange Restructuring Prospectus 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: 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 the Company's overall operations. The Company's current software systems, without modification, will be adversely affected by the inability of the systems to appropriately interpret date information after 1999. As part of the process of (i) improving the Company's IS to provide and enhance support to all operating areas and (ii) resolving year 2000 issues, the Company entered into a working agreement (the "EDS Agreement") with Electronic Data Systems Corporation ("EDS"). The EDS Agreement constituted the initial phase of a long-term project to outsource the Company's IS and to remedy year 2000 issues. As part of this initial phase, the Company and EDS identified the ability of one of the two major enterprise systems in the Company to be modified to make such system Year 2000 compliant and to migrate the operations of the Company to one enterprise system (the "System Conversion"). As a result of the ability to implement the System Conversion and after reviewing the cost of outsourcing the IS function to EDS, Salant has determined not to outsource the IS functions to EDS. Instead, the Company will use internal resources for the System Conversion and other consultants for the implementation of new software. The Company anticipates that the System Conversion, as well as the implementation of new software, will be completed by the first quarter of 1999. The Company anticipates that the cost of the System Conversion and new software will be approximately $10 million, to be incurred during 1998 and 1999. If the Company fails to complete such conversion in a timely manner, such failure will have a material adverse effect on the business, financial condition and results of operations of the Company. SEASONALITY Although the Company typically introduces and withdraws various individual products throughout the year, its principal products are organized into the customary retail Spring, Fall and Holiday seasonal lines. 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. BACKLOG The Company does not consider the amount of its backlog of orders to be significant to an understanding of its business primarily due to increased utilization of EDI technology, which provides for the electronic transmission of orders from customers' computers to the Company's computers. As a result, orders are placed closer to the required delivery date than had been the case prior to EDI technology. At March 7, 1998, the Company's backlog of orders was approximately $94.9 million, 2.3% less than the backlog of orders of approximately $97.1 million that existed at March 1, 1997. SUBSTANTIAL LEVEL OF INDEBTEDNESS AND THE ABILITY TO RESTRUCTURE DEBT The Company had current indebtedness of $157.1 million and $149.5 million and $138.7 million as of July 4, 1998 and April 4, 1998 and January 3, 1998, respectively. Of this amount, $104.9 million represents the principal amount of the Senior Notes. The Company will not generate sufficient cash flow from operations to repay this amount at maturity. Accordingly, the Company has entered into the Letter Agreement as described above. Given the Company's past inconsistent operating performance, together with the reluctance of investors to invest in companies suffering from high debt-to-equity ratios and the Company's inability to raise funds in the capital markets to recapitalize the Company, absent the Restructuring, the Company does not believe it will be able to refinance its indebtedness under the Senior Notes. Failure by the Company to consummate the Restructuring as contemplated could result in the acceleration of all of the indebtedness under the Senior Notes and/or the Credit Agreement, and, thus, would be likely to have a material adverse effect on the Company. COMPETITION The apparel industry in the United States is highly competitive and characterized by a relatively small number of multi-line manufacturers (such as the Company) and a large number of specialty manufacturers. The Company faces substantial competition in its markets from manufacturers in both categories. Many of the Company's competitors have greater financial resources than the Company. The Company also competes for private label programs with the internal sourcing organizations of many of its own customers. APPAREL INDUSTRY CYCLES AND OTHER ECONOMIC FACTORS The apparel industry historically has been subject to substantial cyclical variation, with consumer spending on apparel tending to decline during recessionary periods. A decline in the general economy or uncertainties regarding future economic prospects may affect consumer spending habits, which, in turn, could have a material adverse effect on the Company's results of operations and financial condition. RETAIL ENVIRONMENT Various retailers, including some of the Company's customers, have experienced declines in revenue and profits in recent periods and some have been forced to file for bankruptcy protection. To the extent that these financial difficulties continue, there can be no assurance that the Company's financial condition and results of operations would not be adversely affected. SEASONALITY OF BUSINESS AND FASHION RISK The Company's principal products are organized into seasonal lines for resale at the retail level during the Spring, Fall and Holiday Seasons. Typically, the Company's products are designed as much as one year in advance and manufactured approximately one season in advance of the related retail selling season. Accordingly, the success of the Company's products is often dependent on the ability of the Company to successfully anticipate the needs of the Company's retail customers and the tastes of the ultimate consumer up to a year prior to the relevant selling season. FOREIGN OPERATIONS The Company's foreign sourcing operations are subject to various risks of doing business abroad, including currency fluctuations (although the predominant currency used is the U.S. dollar), quotas and, in certain parts of the world, political instability. Any substantial disruption of its relationship with its foreign suppliers could adversely affect the Company's operations. Some of the Company's imported merchandise is subject to United States Customs duties. In addition, bilateral agreements between the major exporting countries and the United States impose quotas, which limit the amount of certain categories of merchandise that may be imported into the United States. Any material increase in duty levels, material decrease in quota levels or material decrease in available quota allocation could adversely affect the Company's operations. The Company's operations in Asia, including those of its licensees, are subject to certain political and economic risks including, but not limited to, political instability, changing tax and trade regulations and currency devaluations and controls. The Company's risks associated with the Company's Asian operations may be higher in 1998 than has historically been the case, due to the fact that financial markets in East and Southeast Asia have recently experienced and continue to experience difficult conditions, including a currency crisis. As a result of recent economic volatility, the currencies of many countries in this region have lost value relative to the U.S. dollar. Although the Company has experienced no material foreign currency transaction losses since the beginning of this crisis, its operations in the region are subject to an increased level of economic instability. The impact of these events on the Company's business, and in particular its sources of supply and royalty income cannot be determined at this time. DEPENDENCE ON CONTRACT MANUFACTURING In 1997, the Company produced 59% of all of its products (in units) through arrangements with independent contract manufacturers. The use of such contractors and the resulting lack of direct control could subject the Company to difficulty in obtaining timely delivery of products of acceptable quality. In addition, as is customary in the industry, the Company does not have any long-term contracts with its fabric suppliers or product manufacturers. While the Company is not dependent on one particular product manufacturer or raw material supplier, the loss of several such product manufacturers and/or raw material suppliers in a given season could have a material adverse effect on the Company's performance. 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. DESCRIPTION OF NEW COMMON STOCK The following summary description of the New Common Stock does not purport to be complete and is qualified in its entirety by this reference to the Company's Charter Amendment, which is described below. The New Common Stock is identical in all material respects to the Old Common Stock except for the effects of the Reverse Split. Immediately after the Restructuring, the Company will have 50,000,000 authorized shares of stock consisting of 45,000,000 shares of New Common Stock and 5,000,000 shares of preferred stock, par value $2.00 per share. As of such time, 19,952,811 shares of New Common Stock will be issued and outstanding to approximately [ ] holders of record, and no shares of preferred stock will be issued and outstanding. 18,456,350 shares of New Common Stock will be issued to Noteholders as of immediately after the Restructuring and 1,496,461 shares of New Common Stock will be issued to Stockholders as of immediately after the Restructuring in connection with the Restructuring (not including Warrant Shares and shares issuable upon the exercise of stock options granted to the Company's employees and directors under the Stock Award and Incentive Plan and, in the event the Exchange Restructuring is consummated, the Old Plans). All of the New Common Stock issued and outstanding as of the Restructuring Date will be fully paid and nonassessable. DISTRIBUTIONS Subject to such preferential rights as may be granted by the Board in connection with future issuances of preferred stock, holders of shares of New Common Stock will be entitled to receive ratably such dividends as may be declared by the Board in its discretion from funds legally available therefor. The Credit Agreement contains negative covenants that restrict, among other things, the ability of the Company to pay dividends and the Company believes that the New Credit Agreement will contain similar restrictions. In the event of a liquidation, dissolution or winding up of the Company, the holders of New Common Stock will be entitled to share ratably in all assets remaining after payment of liabilities and any liquidation preference owed to holders of any preferred stock. Holders of New Common Stock will have no preemptive rights and have no rights to convert their New Common Stock into any other securities. VOTING Subject to any preferential rights of holders of preferred stock, Stockholders are entitled to one vote per share on all matters to be voted on by Stockholders. Matters submitted for Stockholder approval require a majority vote of the shares, except where the vote of a greater number is required by the DGCL. Article Sixth of the Certificate of Incorporation provides that any action required or permitted to be taken by the Stockholders of the Company must be effected at a duly called annual or special meeting of such holders and may not be effected by written consent of the Stockholders. Article Sixth may not be repealed or amended in any respect except with the approval of 67% of the outstanding shares of New Common Stock. ELECTION OF DIRECTORS Article Fifth of the Certificate of Incorporation divides the Board into three classes, with each class serving a three year term. Any vacancies in the Board, for any reason, and any directorships resulting from any increase in the number of directors, may be filled only by the affirmative vote of a majority of the Board, although less than a quorum. Article Fifth may not be repealed or amended in any respect except with the approval of 67% of the outstanding shares of New Common Stock and subject to the provisions of any preferred stock outstanding. SHARES RESERVED IN CONNECTION WITH 1993 CHAPTER 11 PLAN In accordance with the 1993 Chapter 11 Plan, the Company reserved for issuance a certain number of shares of Old Common Stock in order to satisfy certain claims that had been asserted in the 1990 Chapter 11 Case pursuant to the terms and conditions of the 1993 Chapter 11 Plan. As of the date hereof, the Company continues to have 206,392 shares of Old Common Stock reserved for such purpose. Upon the consummation of the Restructuring, such shares will be canceled and the Company intends to reserve for issuance approximately 20,639 shares of New Common Stock (reflecting the Reverse Split) for the purpose of settling any remaining claims in the 1990 Chapter 11 Case for which a settlement of stock may be appropriate. For a discussion of the claims settlement process, see "BUSINESS AND PROPERTIES OF THE COMPANY -- Legal Proceedings." DESCRIPTION OF CHARTER AMENDMENT The Board has unanimously adopted resolutions proposing that the Company's Certificate of Incorporation be amended by the Charter Amendment. The Charter Amendment will effect (i) the Reverse Split and (ii) an increase in the number of shares of New Common Stock authorized. Magten has advised the Company that it may request additional changes to the Company's Certificate of Incorporation and, in such event, the Proxy Statement/Prospectus will, upon approval of the Board, be amended to reflect such changes. Should the Exchange Restructuring be accepted by the Stockholders and the requisite 100% of Noteholders and thereafter consummated, an aggregate of 18,456,350 shares of New Common Stock will be issued to the Noteholders in exchange for their Senior Notes and 1,496,461 shares of New Common Stock will be issued to existing Stockholders. In addition, 2,216,979 Warrants, exercisable for an aggregate of 2,216,979 shares of New Common Stock (subject to adjustment), will be issued to Stockholders. The Charter Amendment will provide that the total number of shares of all classes of stock which the Company shall have authority to issue is fifty million shares, of which forty-five million shall be common stock, par value $1.00 per share, and five million shall be preferred stock, par value $2.00 per share. The number of authorized shares of preferred stock may be increased or decreased by the affirmative vote of the holders of a majority of the stock of the Company entitled to vote generally in the election of directors, voting together as a single class, without a separate vote of holders of preferred stock as a class, except to the extent that any such vote may be required by the resolution providing for the issuance of any series of preferred stock. At the time the Charter Amendment becomes effective, and without any further action on the part of the Company or its stockholders, each ten shares of common stock, then issued and outstanding, shall be changed and reclassified into one fully paid and nonassessable share of common stock, par value $1.00, and each holder of record of ten shares of the Old Common Stock with a par value of $1.00 will have, or be entitled to, a certificate representing one share of New Common Stock with par value $1.00. In lieu of the issuance of any fractional shares that would otherwise result from the Reverse Split, the Company will issue one additional share of New Common Stock. The Charter Amendment will not be effective unless and until it is filed with the Secretary of State of Delaware. Even if each of the Restructuring Proposals is approved by the Stockholders, the Board has reserved the right to abandon the Charter Amendment and each other Restructuring Proposal in the event that any other condition to the Restructuring is not satisfied, including, but not limited to, the Minimum Tender Condition. However, the Board intends to file the Charter Amendment with the Secretary of State of Delaware if the Exchange Restructuring is consummated. The Charter Amendment, if filed with the Secretary of State of Delaware, would amend the Certificate of Incorporation to effect a ten-to-one reverse stock split of the Company's outstanding shares of Old Common Stock such that each share of Old Common Stock immediately prior to the Exchange Restructuring Date will automatically convert into one-tenth of one share of New Common Stock immediately thereafter. The final text of the Charter Amendment is subject to change in order to meet the requirements as to form that may be requested or required by the Secretary of State's Office of the State of Delaware. The Company currently has authorized 30,000,000 shares of common stock (including 14,964,608 issued and outstanding shares of Old Common Stock), par value $1.00 per share, and 5,000,000 shares of preferred stock, par value $2.00 per share. As of the date of this Exchange Restructuring Prospectus, there were no shares of preferred stock issued and outstanding. If the Charter Amendment is effected pursuant to the Exchange Restructuring, the number of shares of New Common Stock authorized will be increased to 45,000,000 shares. The Board is authorized to fix the relative rights and preferences of the shares of preferred stock, including voting powers, dividend rights, liquidation preferences, redemption rights and conversion privileges. Pursuant to a resolution adopted by the Board on December 8, 1987, in connection with the Company's implementation of the Rights Plan, the Company created a series of 50,000 shares of preferred stock designated as "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") having the powers, preferences and rights described in the Certificate of Incorporation of the Company. See "DESCRIPTION OF RIGHTS PLAN." Without Stockholder approval, the Board could adversely affect the voting power of the holders of common stock and, by issuing shares of preferred stock with certain voting, conversion and/or redemption rights, could discourage any attempt to obtain control of the Company. As of [__________], no shares of Series A Preferred Stock were issued and outstanding. If the requisite approval by the Stockholders is obtained, the Charter Amendment will be effective upon the close of business on the date of filing of the Charter Amendment with the Delaware Secretary of State. Each certificate representing shares of Old Common Stock immediately prior to the Exchange Restructuring will be deemed automatically, without any action on the part of the Stockholders, to represent one-tenth the number of shares of New Common Stock immediately after the Exchange Restructuring Date. A Stockholder's proportionate ownership interest in the Company will remain unchanged by the Charter Amendment. The New Common Stock issued pursuant to the Charter Amendment will be fully paid and nonassessable. The voting and other rights of the Old Common Stock will not be altered by the Charter Amendment except that each share of the Old Common Stock will represent one-tenth of a share of New Common Stock. When the Charter Amendment becomes effective, Stockholders will be asked to surrender certificates representing shares of Old Common Stock in accordance with the procedures set forth in a Letter of Transmittal to be sent by the Company. Upon such surrender, a certificate representing the shares of New Common Stock will be issued and forwarded to the Stockholders; however, each certificate representing shares of Old Common Stock will continue to be valid and represent shares of New Common Stock equal to one-tenth the number of shares of Old Common Stock (rounded up to the nearest whole number). Persons who hold their shares in brokerage accounts or "street name" will not be required to take any further actions to effect the exchange of their certificates. Each of the Restructuring Proposals is conditioned upon the approval by the Stockholders of each of the other Restructuring Proposals. If any or all of the Restructuring Proposals are not approved by the Stockholders at the Stockholders' Meeting, then none of the Restructuring Proposals will become effective. SALANT CORPORATION 1998 STOCK AWARD AND INCENTIVE PLAN Pursuant to a resolution of the Board, the Board has adopted the Salant Corporation 1998 Stock Award and Incentive Plan (the "Stock Award and Incentive Plan"), which provides for the grant of various types of stock-based compensation to directors, officers and employees of the Company and its subsidiaries. The Stock Award and Incentive Plan has become effective as of the date of such resolution, however, the Stock Award and Incentive Plan and any grants thereunder are subject to subsequent approval by the Company's stockholders. The Stock Award and Incentive Plan is designed with the intention that compensation resulting from options, stock appreciation rights and certain other awards may qualify as "performance-based compensation" under Section 162(m) ("Section 162(m)") of the Internal Revenue Code of 1986, as amended (the "Tax Code"), and to comply with the conditions for exemption from the short-swing profit recovery rules under Rule 16b-3 ("Rule 16b-3") of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The summary that follows is not intended to be complete and is qualified in its entirety by the actual terms of the Stock Award and Incentive Plan, a copy of which is filed as Exhibit 10.50 to the Company's Registration Statement. Noteholders may request a copy of the Stock Award and Incentive Plan by contacting Todd Kahn, General Counsel and Executive Vice President of the Company, at (212) 221-7500. Capitalized terms used but not otherwise defined in the summary that follows shall have the respective meanings ascribed to them in the Stock Award and Incentive Plan. PURPOSE OF THE STOCK AWARD AND INCENTIVE PLAN The purpose of the Stock Award and Incentive Plan is to strengthen the Company by providing an incentive to its directors, officers and employees and thereby encouraging them to devote their abilities and industry to the success of the Company's business enterprise. ELIGIBILITY Awards may be made by the Committee of the Board of Directors of the Company from and after the Restructuring Date (the "Committee"), in its discretion, to directors, officers and employees of the Company and its subsidiaries. Directors of the Company who are not also employees of the Company or any of its subsidiaries are entitled to automatic option grants as provided in the Stock Award and Incentive Plan and described below. PLAN ADMINISTRATION AND SHARES SUBJECT TO THE STOCK AWARD AND INCENTIVE PLAN 2,463,310 shares of New Common Stock (subject to adjustment as provided in the Stock Award and Incentive Plan), representing, on a fully diluted basis (inclusive of the Warrants), 10% of the aggregate shares of New Common Stock to be issued and reserved on the Restructuring Date, will be reserved for Awards to be granted under the Stock Award and Incentive Plan. Subject to stockholder approval, these Awards will be granted by the Committee comprised solely of two or more "non-employee directors" within the meaning of Rule 16b-3(b)(3) (or any successor rule) of the Exchange Act, and unless otherwise determined by the Board of Directors of the Company, "outside directors" within the meaning of Treasury Regulation Section 1.162-27(e)(3) and Section 162(m) of the Tax Code, which will administer the Stock Award and Incentive Plan. No individual may be granted Options or Awards with respect to more than a total of 500,000 shares during any one calendar year period under the Stock Award and Incentive Plan. In addition, the maximum dollar amount of cash or the Fair Market Value of shares of New Common Stock that any individual may receive in any calendar year in respect of Performance Units denominated in dollars may not exceed $3,000,000. Shares of New Common Stock subject to the Stock Award and Incentive Plan may either be authorized and unissued shares or previously issued shares acquired or to be acquired by the Company and held in its treasury. Subject to the terms of the Stock Award and Incentive Plan, the Committee has the right to grant Awards to eligible participants and to determine the terms and conditions of Agreements evidencing Awards, including the vesting schedule and exercise price of such Awards, and the effect, if any, of a Change in Control (as defined in the Stock Award and Incentive Plan) on such Awards. Upon the occurrence of a Change in Capitalization, the Stock Award and Incentive Plan permits the Committee to make appropriate adjustments to the type and aggregate number of shares subject to the Stock Award and Incentive Plan or any Award, and to the purchase or exercise price to be paid or the amount to be received in connection with the realization of any Award. AWARDS Stock Options. Stock options granted pursuant to the Stock Award and Incentive Plan may either be incentive stock options within the meaning of Section 422 of the Tax Code ("ISOs"), or non-qualified stock options ("NQSOs") as determined by the Committee. The exercise price for each share of New Common Stock subject to an option will be determined by the Committee at the time of grant and set forth in an Agreement, provided that the exercise price may not be less than the Fair Market Value of the New Common Stock on the date the option is granted. The option exercise price may be paid in the discretion of the Committee on the date of the grant, in cash or by the delivery of shares then owned by the participant or as otherwise determined by the Committee. No option will be exercisable later than ten years after the date on which it is granted, provided that the Committee may (and in the case of a Formula Option shall) provide that an NQSO may, upon the death of a participant, be exercised for up to one year following the date of such participant's death, even if such period extends beyond ten years from the date such option is granted. ISOs may not be granted to any participant who owns stock possessing (after application of the attribution rules of Section 424(d) of the Tax Code) more than 10% of the total combined voting power of all outstanding classes of stock of the Company, unless the option price is at least 110% of the Fair Market Value at the date of grant and the option is not exercisable after five years from the date of grant. The Stock Award and Incentive Plan provides for automatic option grants ("Formula Options") to certain directors of the Company who are not also employees of the Company and its subsidiaries. Such directors will be granted initial Formula Options in respect of [ ] Shares (on the date of consummation of the Restructuring or, if applicable, when becoming a director for the first time) as well as annual Formula Options in respect of [ ] shares at each subsequent annual stockholders meeting of the Company. Formula Options will be granted with per share exercise prices equal to the Fair Market Value on the date of grant, with ten year terms and subject to the vesting schedule set forth in the Stock Award and Incentive Plan. Stock Appreciation Rights. Under the Stock Award and Incentive Plan, a stock appreciation right in respect of a share of New Common Stock represents the right to receive payment in cash and/or New Common Stock in an amount equal to the excess of the Fair Market Value of such share of New Common Stock on the date the right is exercised over the Fair Market Value on the date the right is granted. The Committee may grant stock appreciation rights to the holders of any options under the Stock Award and Incentive Plan. Such rights may also be granted independently of options. Restricted Stock. The Committee will determine the terms and conditions applicable to Restricted Stock at the time of grant, including the price, if any, to be paid by the grantee for the Restricted Stock, the restrictions placed on the shares, and the time or times when the restrictions will lapse. In addition, at the time of grant, the Committee, in its discretion, may decide: (i) whether any deferred dividends will be held for the account of the grantee or deferred until the restrictions thereon lapse, (ii) whether any deferred dividends will be reinvested in additional Shares or held in cash, (iii) whether interest will be accrued on any dividends not reinvested in additional shares of Restricted Stock and (iv) whether any stock dividends paid will be subject to the restrictions applicable to the Restricted Stock Award. Performance Units and Performance Shares. Performance Units and Performance Shares will be awarded as the Committee may determine, and the vesting of Performance Units and Performance Shares will be based upon the Company's attainment within an established period of specified performance objectives to be determined by the Committee. Upon granting Performance Units or Performance Shares, the Committee may provide, to the extent permitted under Section 162(m) of the Tax Code, the manner in which performance will be measured against the performance objectives, or may adjust the performance objectives to reflect the impact of specified corporate transactions, accounting or tax law changes, and other similar extraordinary and nonrecurring events. Performance Units may be denominated in dollars or in Shares, and payments in respect of Performance Units will be made in cash, Shares, shares of Restricted Stock or any combination of the foregoing, as determined by the Committee. The Agreement evidencing Performance Shares or Performance Units will set forth the terms and conditions thereof. Unless otherwise determined by the Committee at the time of grant, such awards that can be so granted, may be granted in a manner which is intended to qualify for the performance based compensation exemption of Section 162(m). In such event, either the granting or vesting of such awards will be based upon one or more of the following factors: earnings per share, New Common Stock share price, pre-tax profit, net earnings, return on stockholders' equity or assets or any combination of the foregoing. CHANGE IN CONTROL In the event of a Change in Control, the vesting of options and stock appreciation rights will accelerate and, if so provided by the Committee in an Agreement, the restrictions on Restricted Stock, Performance Units and Performance Shares will lapse. TRANSFERABILITY Awards under the Stock Award and Incentive Plan will not be transferable except by will or the laws of descent or distribution. Awards will only be exercisable during the lifetime of a participant by such participant only. However, at the discretion of the Committee, any option, other than an ISO, may permit the transfer of such option by a participant to certain family members or trusts for the benefit of such family members by such persons. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS THE FOLLOWING DISCUSSION OF CERTAIN RELEVANT FEDERAL INCOME TAX EFFECTS APPLICABLE TO CERTAIN AWARDS GRANTED UNDER THE STOCK AWARD AND INCENTIVE PLAN IS A SUMMARY ONLY, AND REFERENCE IS MADE TO THE TAX CODE FOR A COMPLETE STATEMENT OF ALL RELEVANT FEDERAL TAX PROVISIONS. HOLDERS OF AWARDS SHOULD CONSULT THEIR TAX ADVISORS BEFORE REALIZATION OF ANY SUCH AWARDS, AND HOLDERS OF COMMON STOCK PURSUANT TO AWARDS SHOULD CONSULT THEIR TAX ADVISORS BEFORE DISPOSING OF ANY SUCH SHARES. SECTION 16 INDIVIDUALS SHOULD NOTE THAT SOMEWHAT DIFFERENT RULES THAN THOSE DESCRIBED BELOW MAY APPLY TO THEM. ISOs. In general, a recipient will not recognize income upon the grant or exercise of an ISO, and the Company will not be entitled to any business expense deduction with respect to the grant or exercise of an ISO. However, upon the exercise of an ISO, the excess of the fair market value on the date of exercise of the shares received over the exercise price of the option will be treated as an adjustment to alternative minimum taxable income. In order for the exercise of an ISO to qualify as an ISO, a recipient generally must be an employee of the Company or a subsidiary (within the meaning of Section 422 of the Tax Code) from the date the ISO is granted through the date three months before the date of exercise (one year preceding the date of exercise in the case of a recipient whose employment is terminated due to disability). The employment requirement does not apply where a recipient's employment is terminated due to his or her death. If a recipient has held the shares acquired upon exercise of an ISO for at least two years after the date of grant and for at least one year after the date of exercise, when the recipient disposes of the shares, the difference, if any, between the sales price of the shares and the exercise price of the option will be treated as long-term capital gain or loss, provided that any gain will be subject to reduced rates of tax if the shares were held for more than twelve months and will be subject to further reduced rates if the shares were held for more than eighteen months. If a recipient disposes of the shares prior to satisfying these holding period requirements (a "Disqualifying Disposition"), the recipient will recognize ordinary income (treated as compensation) at the time of the Disqualifying Disposition, generally in an amount equal to the excess of the fair market value of the shares at the time the option was exercised over the exercise price of the option. The balance of the gain realized, if any, will be short-term or long-term capital gain, depending upon whether the shares have been held for at least twelve months after the date of exercise. If the recipient sells the shares in a Disqualifying Disposition at a price below the fair market value of the shares at the time the option was exercised, the amount of ordinary income (treated as compensation) will be limited to the amount realized on the sale over the exercise price of the option. In general, the Company will be allowed a business expense deduction to the extent a recipient recognizes ordinary income. NQSOs. In general, a recipient who receives a NQSO will not recognize income at the time of the grant of the option. Upon exercise of a NQSO, a recipient will recognize ordinary income (treated as compensation) in an amount equal to the excess of the fair market value of the shares on the date of exercise over the exercise price of the option. The basis in shares acquired upon exercise of a NQSO will equal the fair market value of such shares at the time of exercise, and the holding period of the shares (for capital gain purposes) will begin on the date of exercise. In general, if the Company complies with the applicable income reporting requirements, it will be entitled to a business expense deduction in the same amount and at the same time as the recipient recognizes ordinary income. In the event of a sale of the shares received upon the exercise of a NQSO, any appreciation or depreciation after the exercise date generally will be taxed as capital gain or loss, provided that any gain will be subject to reduced rates of tax if the shares were held for more than twelve months and will be subject to further reduced rates if the shares were held for more than eighteen months. The foregoing discussion assumes that at the time of exercise, the sale of the shares at a profit would not subject a recipient to liability under Section 16(b) of the Exchange Act. Special rules may apply with respect to persons who may be subject to Section 16(b) of the Exchange Act. Participants who are or may become subject to Section 16 of the Exchange Act should consult with their own tax advisors in this regard. Excise Taxes. Under certain circumstances, the accelerated vesting or exercise of options in connection with a change in control of the Company might be deemed an "excess parachute payment" for purposes of the golden parachute tax provisions of Section 280G of the Tax Code. To the extent it is so considered, a recipient may be subject to a 20% excise tax and the Company may be denied a tax deduction. Section 162(m) Limitation. Section 162(m) generally disallows a federal income tax deduction to any publicly held corporation for compensation paid in excess of $1 million in any taxable year to each of the chief executive officer and the four other most highly compensated executive officers (other than the chief executive officer) who are employed by such corporation on the last day of such corporation's taxable year. The Company has structured the Stock Award and Incentive Plan with the intention that compensation resulting from options, stock appreciation rights, Performance Shares and Performance Units may qualify as "performance-based compensation" and, if so qualified, would be deductible. TREATMENT OF OPTIONS UNDER OLD PLANS Options to purchase shares of Old Common Stock granted under the Old Plans will be treated differently depending upon whether the Restructuring is consummated by means of the Exchange Restructuring or the Prepackaged Restructuring. For a discussion of such treatment, see "POST RESTRUCTURING STOCK OPTION GRANTS." NEW PLAN BENEFITS Except with respect to automatic option grants to Eligible Directors as described above and in the Stock Award and Incentive Plan, benefits will be granted under the Stock Award and Incentive Plan at the sole discretion of the Committee and performance criteria, if any, may vary from year to year and from participant to participant. Therefore, benefits under the Stock Award and Incentive Plan are not determinable. The approval of the Stock Award and Incentive Plan by the Stockholders may be required by the applicable rules of the NYSE. DESCRIPTION OF REGISTRATION RIGHTS PLAN In connection with the Restructuring, the Company will also enter into, on the date of consummation of the Restructuring, the Registration Rights Agreement. Under the terms and conditions of the Registration Rights Agreement, the Company must use commercially reasonable efforts to register the New Common Stock pursuant to a "shelf-registration" and to keep such shelf registration continuously effective for three years (subject to a two-year extension of such period to the extent that a registration statement on Form S-3 is available to the Company at the end of such initial three-year period), subject to the right to suspend the use of the prospectus constituting part of such registration statement for designated corporate purposes. Thereafter, holders who did not resell New Common Stock during the three-year period, but whose resales would have been covered by the registration statement, will be entitled to exercise, over a two-year period, up to three demand registrations and will be entitled to piggyback registration rights as well during such period. In the event that the shelf registration does not become effective within one hundred days after the date that the registration statement is filed, holders whose resales would have been covered by the registration statement will be entitled to exercise, over a two-year period, up to four demand registrations and will be entitled to piggyback registration rights as well during such period. A copy of the Registration Rights Agreement is attached as Exhibit 10.51 to the Company's Registration Statement. Noteholders may obtain a copy of the Registration Rights Agreement by contacting Todd Kahn, General Counsel and Executive Vice President of the Company, at (212) 221-7500. DESCRIPTION OF RIGHTS PLAN The Company is a party to the Rights Plan, which provides for a dividend distribution of one Right for each share of Old Common Stock to holders of record of the Old Common Stock at the close of business on December 23, 1997. With certain exceptions, the Rights will become exercisable only in the event that an acquiring party accumulates 20 percent or more of the Company's voting stock, or if a party announces an offer to acquire 30 percent or more of such voting stock. Each Right, when exercisable, will entitle the holder to buy one-hundredth of a share of the Company's Series A Preferred Stock at a price of $30 per right or, upon the occurrence of certain events, to purchase either common stock of the Company or shares in an Acquiring Entity (as defined in the Rights Plan) at half the market value thereof. The Company will generally be entitled to redeem the Rights at a redemption price of $0.03 per Right at any time until the 10th day following the acquisition of a 20 percent position in its shares of Old Common Stock. In July 1993, the Rights Plan was amended to provide that an acquisition or offer by Apollo, or any of Apollo's Subsidiaries (as defined in the Rights Plan), will not cause the Rights to become exercisable. Pursuant to the December 10, 1997 amendment to the Rights Plan, the expiration date of the Rights was extended to December 23, 2002. On [ ], 1998, in connection with the Restructuring and consistent with the terms of the Letter Agreement, the Company amended the Rights Plan to provide, among other things, that the Rights will expire under the Rights Plan immediately prior to consummation of the Restructuring. DESCRIPTION OF CERTAIN EXISTING INDEBTEDNESS OF THE COMPANY The following summary of the principal terms of certain of the existing indebtedness of the Company does not purport to be complete and is qualified in its entirety by reference to the documents governing such indebtedness, including the definitions of certain terms therein, copies of which have been filed or incorporated as exhibits to the Registration Statement of which this Exchange Restructuring Prospectus is a part. Whenever particular provisions of such documents are referred to herein, such provisions are incorporated by reference, and the statements are qualified in their entirety by such reference. GENERAL The following is a summary of certain existing indebtedness and other financing arrangements of the Company or its Subsidiaries. The descriptions of the loans outstanding under the Credit Agreement and the Senior Notes are qualified in their entirety by reference to the agreements and instruments governing such financing arrangements. Noteholders are referred to the Credit Agreement and the Indenture for a statement of their terms. REVOLVING CREDIT AGREEMENT The Company is a party to the Credit Agreement with CIT. The Credit Agreement provides the Company with general working capital financing, in the form of direct borrowings and letters of credit, up to the Maximum Credit (as defined in the Credit Agreement), subject to an asset-based borrowing formula. As collateral for borrowings under the Credit Agreement, the Company has granted to CIT a security interest in substantially all of the assets of the Company. The Credit Agreement imposes a number of restrictive covenants that affect the Company and its subsidiaries with respect to, among others things: (i) creating liens; (ii) incurring indebtedness and contingent obligations; (iii) paying dividends and redeeming capital stock; (iv) merging and selling assets; (v) engaging in sale and lease back transactions; (vi) making investments in other persons; (vii) engaging in certain affiliate transactions; (viii) making capital expenditures; (ix) selling accounts receivable; and (x) amending certain of its debt instruments and making payment in respect of the obligations represented thereby. The Credit Agreement contains a number of events of default, including the following: (i) failure to make payments of interest and principal when due; (ii) material error in any representation or warranty or certificate made under the Credit Agreement; (iii) failure of the Company to perform any of its respective agreements under the Credit Agreement; (iv) a default in the payment of any obligation of the Company or its subsidiaries on indebtedness in excess of $750,000 owing to any one person other than CIT; (v) entry of a judgment in excess of $500,000 in the aggregate and the same remains undischarged for a period in excess of 30 days; (vi) certain events of insolvency and bankruptcy of the Company or its subsidiaries; (vii) certain events in respect of pension plans; (viii) the incurrence of environmental liability; (ix) certain change of control events; and (x) a material adverse change in the condition (financial or otherwise) of the Company. On March 2, 1998, the Company entered into the Twelfth Amendment with CIT, wherein CIT (i) waived, as of January 3, 1998, the Company's failure to meet the financial covenants related to stockholders' equity and maximum loss, as set forth in the Credit Agreement; (ii) agreed to forbear (subject to certain conditions) from exercising any of its rights or remedies arising under the Credit Agreement arising from the Company's failure to make the interest payment on the Senior Notes due and payable on March 2, 1998; (iii) agreed to continue making loans, advances and other financial accommodations to the Company, subject to the terms and conditions of the Twelfth Amendment; (iv) increased the borrowings allowed against eligible inventory to 60%; (v) provided the Company with a discretionary $3 million seasonal overadvance; and (vi) reduced the Maximum Credit from $135 million to $120 million. Under the Twelfth Amendment and prior to the effectiveness of the Thirteenth Amendment, to the extent that the Company failed to maintain certain levels of borrowing under its asset-based borrowing formula, the Company was required to maintain a certain minimum interest coverage ratio and was subject to a covenant limiting the maximum loss the Company could incur in any twelve consecutive calendar months. In consideration for CIT's entering into the Twelfth Amendment, the Company agreed to pay CIT certain fees. See "BACKGROUND TO THE RESTRUCTURING -- The Waiver and Forbearance Agreement Under the Credit Agreement and Commitment for New Credit Agreement." Under the Twelfth Amendment, such agreement to forbear by CIT was to terminate on July 1, 1998 or earlier upon the happening of (a) the occurrence of any Event of Default (as defined in the Credit Agreement) other than a Payment Default (as defined in the Twelfth Amendment), or (b) the failure of the Company to execute and deliver to CIT before June 1, 1998, (i) a commitment letter executed by CIT providing for the agreement between CIT and the Company to enter into a new $135 million syndicated credit facility (in replacement of the financing and factoring arrangements provided by CIT pursuant to the Credit Agreement) on terms and conditions satisfactory to CIT or (ii) a copy of a commitment letter executed between another lender and the Company providing for a credit facility to the Company which by its terms provides for closing and funding thereof on or before July 1, 1998, and enabling the Company upon such closing and funding to simultaneously terminate the Credit Agreement and all other Financing Agreements (as defined in the Credit Agreement) and to satisfy in full all of its then existing Obligations (as defined in the Credit Agreement) to CIT; (c) the exercise of any right or remedy with respect to any of the Collateral (as defined in the Credit Agreement) by any holder of any Senior Notes or by the Trustee under the Indenture; or (d) the payment of any interest on the Senior Notes in respect of the Company's failure to make the March 2, 1998 interest payment or otherwise. In addition, the Twelfth Amendment created two new Events of Default under the Credit Agreement: (i) the termination of E&Y as business consultant to the Company and the failure to replace E&Y with another business consultant satisfactory to CIT within 5 business days, and (ii) any event occurring after March 2, 1998 which materially and adversely affects the Company's businesses. In conjunction with obtaining the financing commitment under the CIT Commitment Letter, CIT has agreed to further support the Restructuring by entering into the Thirteenth Amendment, dated as of June 1, 1998, wherein CIT agreed (i) to continue to forbear (subject to certain conditions) from exercising any of its rights or remedies under the Credit Agreement arising from the Company's failure to make the interest payment on the Senior Notes due and payable on March 2, 1998 or by virtue of an event of default arising from the failure of the Company to make the interest payment on the Senior Notes due and payable on August 31, 1998; (ii) to continue to make loans, advances and other financial accommodations to the Company through the earlier of the Restructuring Date and November 30, 1998, subject to the terms and conditions of the Thirteenth Amendment; and (iii) to amend certain provisions of the Credit Agreement, including a reduction of the rate of interest charged on the revolving credit loans, an increase in the advance rate for revolving credit loans made under the Credit Agreement and the elimination of any and all provisions providing for the factoring of the Company's accounts receivable. Under the Thirteenth Amendment, such agreement to forbear by CIT will terminate on November 30, 1998 or earlier upon the happening of (a) the occurrence of any Event of Default (as defined in the Credit Agreement), other than by virtue of the Company's failure to make the March 2, 1998 or August 31, 1998 interest payment on the Senior Notes or the commencement or continuation of a chapter 11 case to effectuate the Restructuring; or (b) the exercise of any right or remedy with respect to any of the Collateral by any holder of the Senior Notes or by the Trustee under the Indenture; or (c) the payment of any interest on the Senior Notes in respect of the Company's non-payment of the interest that was payable on March 2, 1998 or that will be payable on August 31, 1998 or otherwise; or (d) the occurrence of an Agreement Termination Event (as defined in the Letter Agreement), except under certain circumstances. In accordance with the Twelfth Amendment, no additional closing fees, facility fees or amendment fees were charged to the Company by CIT in consideration of the execution and delivery of the Thirteenth Amendment. Pursuant to the Thirteenth Amendment, CIT also agreed (i) to reduce the interest rate on direct borrowings from .75% in excess of the Prime Rate or 3.00% in excess of the Eurodollar Rate to .25% and 2.25%, respectively; and (ii) to increase the borrowings allowed against eligible inventory to 65% for the period from June 1, 1998 through September 20, 1998. The Thirteenth Amendment also amends the Credit Agreement to include a maximum net loss covenant that provides that, if on the last day of June, July or August 1998, the Company fails to maintain Excess Availability (as defined in the Credit Agreement) of at least an amount equal to five percent of the value of Eligible Inventory (as defined in the Credit Agreement), then the aggregate cumulative net loss (exclusive of certain costs incurred in connection with the Restructuring) incurred by the Company during Fiscal 1998 through the end of any such month on which the Company failed to maintain at least such Excess Availability, shall not exceed $8,850.000. The Thirteenth Amendment also provides that in the event that the Company seeks to consummate the Restructuring by filing a chapter 11 case, (i) the Credit Agreement will remain in full force and effect (subject to certain conditions) and (ii) immediately upon commencement of the chapter 11 case, the Company and CIT will seek an order of Bankruptcy Court approving and authorizing the extension of post-petition financing by CIT to the Company on the same terms and conditions as set forth in the Credit Agreement (the "Financing Order"). In addition, the Thirteenth Amendment created two new Events of Default under the Credit Agreement as follows: if, in the event a chapter 11 case is commenced to effectuate the Prepackaged Plan, (i) there is a violation of the Financing Order or (ii) the chapter 11 case is converted to a proceeding under chapter 7 of the Bankruptcy Code, or is terminated or dismissed prior to the consummation of the transactions contemplated by the Restructuring, or a plan of reorganization other than the Prepackaged Plan is confirmed. THE SENIOR NOTES The Company is the obligor on the Senior Notes outstanding pursuant to the Indenture, dated September 20, 1993, as amended, between the Company and Bankers Trust Company, as Trustee. Pursuant to the Indenture, the Senior Notes bear interest at a rate of 10-1/2% per annum. As of March 2, 1998, the aggregate principal face amount of Senior Notes outstanding was $104,879,000. The Indenture requires that 100% of the principal be repaid on December 31, 1998. The Indenture also requires the Company to pay interest semi-annually on the last day of February and August of each year, commencing February 28, 1994. In addition, the Indenture also requires the Company to use a portion of the proceeds from certain asset sales to pay amounts outstanding under the Senior Notes. The relative priority of liens in and upon the Company's collateral as between CIT and the Noteholders is governed by the Intercreditor Agreement, dated September 20, 1993 (the "Intercreditor Agreement"), by and between CIT and Bankers Trust Company, as Trustee. Pursuant to the Intercreditor Agreement, (i) CIT has a first priority lien upon all of the Company's accounts, chattel paper, instruments, documents (other than chattel paper, instruments and documents constituting general intangibles), inventory, equipment, books and records and real property (other than two parcels (the "Excepted Property")) and any proceeds of the foregoing (collectively, the "CIT Priority Collateral"), and (ii) the Noteholders have a first priority lien upon all of the Company's general intangibles, certain pledged stock, the Excepted Property and any proceeds of the foregoing (collectively, the "Noteholder Priority Collateral"). In addition, CIT holds a junior lien on all of the Noteholder Priority Collateral and the Noteholders hold a junior lien on all of the CIT Priority Collateral. However, the Intercreditor Agreement provides that upon a written declaration by CIT that an Event of Default under the Credit Agreement has occurred and all obligations thereunder are due and payable and an exercise by CIT of its rights and remedies, CIT is entitled to the first $15 million of proceeds from the Company's general intangibles (the "CIT Intangibles Limited Priority"). Under the agreement, the CIT Intangibles Limited Priority is of no further force and effect (i) from and after the release by CIT of its lien upon any of the CIT Priority Collateral (other than any such release in consideration of the contemporaneous delivery to CIT of all of the net proceeds arising from the sale, transfer or other disposition of such released CIT Priority Collateral and the application of such net proceeds by CIT to payment to such extent of the then outstanding CIT obligations) or (ii) in the event that the Company refinances the CIT obligations without liens on all of the CIT Priority Collateral. The Intercreditor Agreement also provides that, except as set forth in the immediately preceding sentence with respect to the CIT Intangibles Limited Priority, the priority of liens set forth in that agreement "shall not be altered or otherwise affected by any modification, renewal, restatement, extension or refinancing" of any obligations owed to CIT or the Noteholders. The Indenture imposes a number of restrictive covenants that affect the Company and its subsidiaries with respect to, among other things: (i) incurring indebtedness; (ii) creating liens; (iii) merging and selling assets; (iv) engaging in certain intercompany transactions; (v) permitting changes of control to occur; and (vi) engaging in transactions with stockholders and affiliates. The Indenture contains a number of events of default, including the following: (i) failure to make payments of interest when due, and the continuation of such failure for 30 days; (ii) failure to pay principal when due; (iii) default in the payment of any obligation of the Company or any of its subsidiaries on indebtedness in the aggregate principal amount of $3,000,000 or more; (iv) failure of the Company to comply with any of its covenants or agreements under the Indenture; (v) entry of a judgment in excess of $3,000,000; and (vi) certain events of insolvency and bankruptcy of the Company of any and its subsidiaries. On March 2, 1998, the Company elected not to pay the interest payment of $5.5 million that was due and payable under the Senior Notes, subject to a 30 day grace period. Because the Company elected not to pay the interest due on the Senior Notes by the expiration of the applicable grace period, an event of default has occurred with respect to the Senior Notes entitling the Noteholders to accelerate the maturity thereof. Holders of at least 25% in the aggregate principal face amount of the Senior Notes may accelerate all outstanding indebtedness under the Senior Notes pursuant to the terms of the Indenture. If such holders accelerate the indebtedness under the Senior Notes, the Company may be required to commence a proceeding under the Federal bankruptcy laws without having solicited acceptances for the prepackaged plan prior to commencement of such proceeding. Pursuant to the Letter Agreement, Magten has, in accordance with Section 6.5 of the Indenture, caused a written direction to be provided to the Trustee, to forbear during the term of the Letter Agreement from taking any action under the Indenture in connection with the failure by the Company to make the interest payment on the Senior Notes that was due and payable on March 2, 1998. On April 8, 1998, the Trustee issued a Notice of Default stating that as a result of the Company's failure to make the interest payment due on the Senior Notes, an event of default under the Indenture had occurred on April 1, 1998. DESCRIPTION OF THE CHAPTER 11 CASE TIMETABLE FOR THE CHAPTER 11 CASE In the event that the Company pursues the Restructuring pursuant to the Prepackaged Plan, following the Filing Date, the Company expects the Chapter 11 Case to proceed on the following estimated timetable. There can be no assurance, however, that the Bankruptcy Court's orders to be entered on or after the Filing Date or actions that may be taken by various parties-in-interest will permit the Chapter 11 Case to proceed as expeditiously as anticipated. On the Filing Date, the Company intends to seek an order that the hearing to consider the adequacy of the disclosure made to Noteholders and Stockholders, at which the Bankruptcy Court would consider whether the Solicitation of votes to accept or reject the Prepackaged Plan complied with Section 1126(b) of the Bankruptcy Code so as to permit the prepetition votes on the Prepackaged Plan to be counted towards confirmation, be held immediately prior to the hearing on the Confirmation of the Prepackaged Plan. The Company anticipates that the hearing on confirmation of the Prepackaged Plan would occur on or about 30 days after the commencement of the Chapter 11 Case. The Company anticipates that at least 25 days' notice of the Confirmation Hearing and of the time for filing objections to confirmation of the Prepackaged Plan will be given to all creditors and interest holders. Assuming that the Prepackaged Plan is confirmed at the initial Confirmation Hearing, the Prepackaged Plan provides that the Effective Date will be a date which is 11 days after the Confirmation Date, or, if such date is not a Business Day, the next succeeding Business Day, or such earlier date after the Confirmation Date as agreed to in writing between the Company and Magten so long as no stay of the Confirmation Order is in effect on such date; provided, however, that if, on or prior to such date, all conditions to the Effective Date set forth in Article Thirteen of the Prepackaged Plan have not been satisfied, or waived, then the Effective Date will be the first Business Day following the day on which all such conditions to the Effective Date have been satisfied or waived. Under the foregoing timetable, the Company would emerge from the Chapter 11 Case within 45 to 60 days after the Filing Date. There can be no assurance, however, that this projected timetable will be achieved. ADEQUACY OF DISCLOSURE In order for the Prepackaged Plan to be consummated, among other things, the Bankruptcy Court must determine that the Solicitation of acceptances for the Prepackaged Plan was in compliance with section 1126(b) of the Bankruptcy Code. Section 1126(b) provides, in pertinent part, that the solicitation of acceptances or rejections on a plan of reorganization must be in compliance with any applicable nonbankruptcy law, rule, or regulation governing the adequacy of disclosure in connection with such solicitation. Thus, the Bankruptcy Court must determine that the Solicitation of acceptances for the Prepackaged Plan was in compliance with applicable non-bankruptcy laws rules and regulations, including, but not limited to, the Securities Act, the Exchange Act and state "blue sky" securities laws. COMMITTEES To facilitate negotiations and otherwise provide for a unified and efficient representation of unsecured creditors and equity interest holders with similar rights and interests, the United States Trustee will generally appoint one or more statutory committees as soon as practicable after the Filing Date, pursuant to section 1102 of the Bankruptcy Code. Ordinarily, one committee will be appointed to represent unsecured creditors, but the United States Trustee may appoint additional committees to represent equity interest holders and/or creditors if deemed necessary to assure adequate representation of creditors or equity interest holders. A creditors' committee will ordinarily consist of those creditors willing to serve who hold the seven largest unsecured claims against the debtor of those claims to be represented by the committee, or of the members of a prepetition committee if it was fairly chosen and is representative. The fees and expenses of such committees, including those of legal counsel and financial advisors, are paid for from the debtor's estate subject to Bankruptcy Court approval. However, given the prepackaged nature of the Prepackaged Plan and the unimpaired treatment of unsecured creditors, the United States Trustee may elect not to appoint an unsecured creditors' committee in the Chapter 11 Case. Holders of equity interests are not ordinarily represented by an official committee, but such a committee may be appointed if the United States Trustee deems it appropriate or if the Bankruptcy Court determines such an official committee to be necessary to assure the adequate representation of interest holders. Committees appointed by the United States Trustee would be considered parties-in-interest and would have a right to be heard on all matters concerning the Chapter 11 cases, including the confirmation of a plan of reorganization and, additionally, would be entitled to consult with the debtor concerning the administration of the Chapter 11 case and perform such other functions and services that would further the interests of those creditors or interest holders they represent. ACTIONS TO BE TAKEN UPON COMMENCEMENT OF CASE The Company does not expect the Chapter 11 Case to be protracted. To expedite its emergence from Chapter 11, the Company intends to seek the relief detailed below, among other relief, from the Bankruptcy Court on the Filing Date. Such relief, if granted, will facilitate the administration of the Chapter 11 Case, but there can be no assurance, however, that the Bankruptcy Court will grant the relief sought. Applications to Retain Professionals Upon commencement of the Chapter 11 Case, the Company intends to file applications to retain the reorganization professionals who will assist and advise the Company in connection with administration of the Chapter 11 Case. The Company also may seek authority to retain certain professionals to assist with the operation of its businesses in the ordinary course. Such so-called "ordinary course professionals" will not be involved in the administration of the Chapter 11 Case. Motion to Waive Filing of Schedules and Statement of Financial Affairs Section 521 of the Bankruptcy Code and Bankruptcy Rule 1007 direct that debtors must prepare and file certain schedules of claims, executory contracts and unexpired leases and related information (the "Schedules") and a statement of financial affairs (the "Statement") when a Chapter 11 case is commenced. The purpose of filing the Schedules and the Statement is to provide a debtor's creditors, equity interest holders and other interested parties with sufficient information to make informed decisions regarding the debtor's reorganization. However, a bankruptcy court may modify or dispense with the filing of the Schedules and the Statement pursuant to Section 521 of the Bankruptcy Code. The Company believes that the Chapter 11 Case constitutes an ideal case wherein the filing of the Statement and the Schedules should not be required. Therefore, the Company intends to request that the Bankruptcy Court order that the Company not be required to file the Schedules and the Statement. Motion To Mail Notices And To Provide Only Publication Notice Of Meeting Of Creditors To Unimpaired Creditors Pursuant to the Bankruptcy Rules, the Clerk of the Bankruptcy Court, or another party that the Bankruptcy Court may direct, must provide notice of the commencement of the Chapter 11 Case and of the meeting of creditors held pursuant to section 341 of the Bankruptcy Code (the "Section 341 Meeting") to all creditors. In addition, at least two other notices, notice of the hearing on approval of confirmation of the Prepackaged Plan and notice of the entry of an Order confirming the Prepackaged Plan, must be given to all creditors and equity security holders. Due to the size of the Chapter 11 Case and the large number of creditors and equity security holders, the Company will request that the Company, or its noticing agent, be authorized to mail all required notices in the Chapter 11 Case. Motion to Continue Using Existing Bank Accounts, Payroll Accounts and Business Forms Because the Company expects the Chapter 11 Case to be pending for less than two months, and because of the administrative hardship that any operating changes would impose on it, the Company intends to seek authority to continue using its existing bank accounts, payroll accounts and business forms and to follow its internal investment and deposit guidelines. Absent the Bankruptcy Court's authorization of the continued use of the Company's current bank accounts, payroll accounts and business forms, the Company's normal business activities would be disrupted, to the detriment of the Company's estate and its creditors. Continued use of its existing bank accounts, payroll accounts and business forms will facilitate the Company's smooth and orderly transition into Chapter 11, minimize the disruption to its businesses while in Chapter 11, and expedite the Company's emergence from Chapter 11. Requiring the Company to cancel its existing bank accounts, payroll accounts and establish new accounts or create new business forms would likely increase the costs of the Chapter 11 Case and only frustrate the Company's efforts to reorganize expeditiously. Motion for Authority to Pay Prepetition Employee Wages and Associated Benefits The Company believes that any delay in paying prepetition compensation or benefits to its employees would destroy the Company's relationships with employees and irreparably harm employee morale at a time when the dedication, confidence and cooperation of the Company's employees are most critical. Accordingly, in order to ensure the continuity of its work force and to further accommodate the unimpaired treatment of employee benefits, the Company intends to seek the approval of the Bankruptcy Court, immediately upon commencement of the Chapter 11 Case, to honor payroll checks outstanding as of the Filing Date (or to issue replacement checks), to permit the Company's employees to utilize their paid vacation time which was accrued prior to the commencement of the Chapter 11 Case (so long as they remain employees of the Company) and to continue paying medical and other benefits under all applicable employee health and insurance plans. The Company also intends to seek authorization from the Bankruptcy Court to honor, pay and/or perform in the ordinary course, wages, salaries, paid vacation and other employee benefits which accrue after the Filing Date. There can be no assurance, however, that any necessary approval will be obtained. Employee claims and benefits not paid or honored, as the case may be, prior to the consummation of the Prepackaged Plan will be paid or honored upon consummation of the Prepackaged Plan or as soon thereafter as such payment or other obligation becomes due or performable. The Company also intends to leave unaltered all other legal, equitable and contractual rights of employees under its employment and severance policies, compensation and benefit plans and all other agreements, contracts and programs applicable to its employees, other than any equity or equity-based incentive plans. See "DESCRIPTION OF THE PREPACKAGED PLAN." Motion for Authority to Maintain Workers' Compensation Insurance Policies and to Pay Prepetition Workers' Compensation Claims To ensure that the Company's workers' compensation, automobile and general liability insurance coverages remain in effect, the Company shall seek authority to maintain its workers' compensation, automobile and general liability insurance policies. Likewise, to the extent necessary, the Company shall also seek authority to pay retroactive prepetition premiums on certain other workers' compensation insurance policies and to honor prepetition workers' compensation claims. The failure to maintain such insurance by the payment of the premiums could subject the Company or their officers to criminal penalties. Chapter 11 Financing In order to ensure that the Company's business operations can continue without interruption during the Chapter 11 Case, in accordance with the terms of the Company's existing pre-bankruptcy working capital facility with CIT under the Credit Agreement, the Company intends, subject to Bankruptcy Court approval, to enter into a debtor-in-possession financing arrangement with CIT on the same terms and conditions as the facility provided under the Credit Agreement. Motion to Honor Commission and Expense Checks Prior to the commencement of the Chapter 11 Case and in the ordinary course of business, the Company owed its sales agents (the "Agents") certain prepetition commissions and expenses accrued in the rendition of services of its Agents. The Company needs to be authorized to pay and reimburse its Agents for all current, accrued and unpaid commissions and expenses. The Company believes that it is essential to the continued operation of its business and to a successful restructuring that it retain its Agents, therefore, the Company will request that it be allowed to pay those certain prepetition commissions and expenses. Motion Restraining and Enjoining Utilities from Discontinuing Service In connection with its ongoing business operations, the Company obtains electricity, natural gas, water, telephone services, trash removal and other utility services from various utility companies. The Company will seek an order directing the utility companies not to refuse or discontinue service. If services are disrupted, even for a brief period, irreparable harm will be caused to the Company's efforts to restructure, therefore, the Company will request that the utilities be enjoined from interrupting and discontinuing service. Motion to Pay Custom Duties, Broker Charges, Shipping Charges and Related Possessory Liens It is essential to the Company's efforts to reorganize that the flow of goods into the United States continue uninterrupted. Any failure to pay custom duties, broker charges, shipping charges and related possessory liens will likely result in a refusal by the U.S. Customs Service to clear goods and, in addition, overseas carriers, storage facilities and port authorities may refuse to release goods, thereby hindering the delivery of merchandise to the Company or its customers at a critical point in its Restructuring. The Company intends to forestall any break in the flow of goods by requesting that it be allowed to pay the appropriate charges described herein. Hearing to Consider the Adequacy of Disclosure Pursuant to ss.1126/Confirmation Hearings As discussed above, the Company anticipates that as soon as practicable after commencing its Chapter 11 Case, it will seek an order of the Bankruptcy Court scheduling concurrent hearings to consider (i) the adequacy of the disclosure made to Noteholders pursuant to this Exchange Restructuring Prospectus and made to Stockholders pursuant to the Proxy Statement/Prospectus, and the Company's solicitation of votes on the Prepackaged Plan under ss. 1126 of the Bankruptcy Code and (ii) confirmation of the Prepackaged Plan. The Company anticipates that notice of these hearings will be published in The New York Times (National Edition), and will be mailed to all known Holders of Claims and Interests, at least twenty-five days before the date by which objections must be filed with the Bankruptcy Court. See "FEASIBILITY OF THE PREPACKAGED PLAN AND THE BEST INTERESTS OF CREDITORS TEST." DESCRIPTION OF THE PREPACKAGED PLAN BRIEF EXPLANATION OF CHAPTER 11 Chapter 11 is the principal business reorganization chapter of the Bankruptcy Code. Under Chapter 11 of the Bankruptcy Code, a debtor is authorized to reorganize its business for the benefit of itself and its creditors and stockholders. In addition to permitting rehabilitation of the debtor, another goal of Chapter 11 is to promote equality of treatment of creditors and equity security holders, respectively, who hold substantially similar claims or interests with respect to the distribution of the value of a debtor's assets. In furtherance of these two goals, upon the filing of a petition for relief under Chapter 11, Section 362 of the Bankruptcy Code generally provides for an automatic stay of substantially all acts and proceedings against the debtor and its property, including all attempts to collect claims or enforce liens that arose prior to the commencement of the debtor's Chapter 11 case. The consummation of a plan of reorganization is the principal objective of a Chapter 11 case. A plan of reorganization sets forth the treatment of claims against and interests in a debtor. Confirmation of a plan of reorganization by the Bankruptcy Court makes the plan binding upon the debtor, any issuer of securities under the plan, any person or entity acquiring property under the plan and any creditor of or equity security holder in the debtor, whether or not such creditor or equity security holder (i) is impaired under or has accepted the plan or (ii) receives or retains any property under the plan. Subject to certain limited exceptions, and except as provided in the plan itself or the confirmation order, confirmation discharges the debtor from any debt that arose prior to the date of confirmation of the plan and substitutes therefor the obligations specified under the confirmed plan, and terminates all rights and interests of prepetition equity security holders. The following is an overview of certain material provisions of the Prepackaged Plan. The following summaries of the material provisions of the Prepackaged Plan do not purport to be complete and are qualified in their entirety by reference to all the provisions of the Prepackaged Plan, including all exhibits thereto, all documents described therein and the definitions therein of certain terms used below. GENERAL INFORMATION CONCERNING TREATMENT OF CLAIMS AND INTERESTS The Prepackaged Plan provides for (i) payment in full or other treatment as agreed upon by the Holders of allowed Administrative Expenses, Allowed Priority Tax Claims, Allowed Priority Claims, and the Allowed CIT Claim, and (ii) reinstatement or other treatment as agreed upon by the Holders of Allowed Miscellaneous Secured Claims and Allowed General Unsecured Claims or the Miscellaneous Secured Claims and/or General Unsecured Claims will remain unaltered. The Prepackaged Plan provides that Holders of Allowed Senior Note Claims will receive New Common Stock in exchange for their Allowed Senior Note Claims. The Prepackaged Plan also provides that Holders of Allowed Old Common Stock Interests, which will be canceled pursuant to the Prepackaged Plan, will receive New Common Stock and Warrants on account of their Allowed Old Common Stock Interests. Holders of Other Interests will receive no distribution under the Prepackaged Plan. See "DESCRIPTION OF NEW COMMON STOCK" and "DESCRIPTION OF WARRANTS" for a description of the New Common Stock and the Warrants. The Company intends that pre-Filing Date Claims of vendors will be paid in full in Cash no later than on the Effective Date or the date after the Effective Date that such payment is due in the ordinary course of business, consistent with past practice. To allow the Company to complete a financial restructuring in the manner which will maximize its enterprise value, the Company is soliciting prepetition acceptances of the Prepackaged Plan from Holders of Senior Notes Claims and Old Common Stock Interests prior to filing the Chapter 11 Case. Holders of Other Interests do not receive or retain any property under the Prepackaged Plan. Under Section 1126(g) of the Bankruptcy Code, the Holders of Other Interests are deemed not to have accepted the Prepackaged Plan, and the acceptance of such Holders will not be solicited. The Company presently intends to seek to consummate the Prepackaged Plan and to cause the Effective Date to occur as soon as practicable. There can be no assurance, however, as to when the Effective Date will actually occur. Procedures for the distribution of cash and securities pursuant to the Prepackaged Plan, including matters that are expected to affect the timing of the receipt of distributions by Holders of Claims and Interests in certain Classes and that could affect the amount of distributions ultimately received by such Holders. Management of the Company believes that the Prepackaged Plan provides treatment for all Classes of Claims and Interests reflecting an appropriate resolution of their Claims and Interests, taking into account the differing nature of such Claims and Interests. The Bankruptcy Court must find, however, that a number of statutory tests are met before it may confirm the Prepackaged Plan. Many of these tests are designed to protect the interest of Holders of Claims or Interests who do not vote to accept the Prepackaged Plan, but who will be bound by the provisions of the Plan if it is confirmed by the Bankruptcy Court. The "cramdown" provisions of Section 1129(b) of the Bankruptcy Code, for example, permit confirmation of a Chapter 11 plan of reorganization in certain circumstances even if the plan is not accepted by all impaired classes of claims and interests. See "VOTING AND CONFIRMATION OF THE PREPACKAGED PLAN." The Company will request that the Bankruptcy Court confirm the Prepackaged Plan under Bankruptcy Code section 1129(b). Section 1129(b) permits confirmation of the Prepackaged Plan despite rejection by one or more impaired classes if the Bankruptcy Court finds that the Prepackaged Plan "does not discriminate unfairly" and is "fair and equitable" as to the rejecting class or classes. Because Class 7 is deemed not to have accepted the Prepackaged Plan, the Company will request that the Bankruptcy Court find that the Prepackaged Plan is fair and equitable and does not discriminate unfairly as to Class 7 (and any other class that fails to accept the Prepackaged Plan). For a more detailed description of the requirements for acceptance of the Prepackaged Plan and of the criteria for confirmation notwithstanding rejection by certain classes, see "FEASIBILITY OF THE PREPACKAGED PLAN AND BEST INTERESTS OF CREDITORS TEST." CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS One of the key concepts under the Bankruptcy Code is that only claims and equity interests that are "allowed" may receive distributions under a Chapter 11 plan. The term is used throughout the Prepackaged Plan and the descriptions below. In general, an "allowed" claim or "allowed" equity interest simply means that the debtor agrees, or in the event of a dispute, that the Bankruptcy Court determines, that the claim or equity interest, including the amount, is in fact a valid obligation of the debtor; in other words, that the claim or equity interest exists. Section 502(a) of the Bankruptcy Code provides that a timely-filed claim or equity interest is automatically "allowed" unless the debtor or other party-in-interest objects. However, section 502(b) of the Bankruptcy Code specifies certain claims that may not be "allowed" in bankruptcy even if a proof of claim is filed. These include claims that are unenforceable under the governing agreement or applicable nonbankruptcy law, claims for unmatured interest, property tax claims in excess of the debtor's equity in the property, certain claims for services that exceed their reasonable value, lease and employment contract rejection damage claims in excess of specified amounts, late-filed claims, and contingent claims for contribution and reimbursement. In addition, Bankruptcy Rule 3003(c)(2) prohibits the allowance of any claim or equity interest that either is not listed on the debtor's schedules or is listed as disputed, contingent, or unliquidated, if the holder has not filed a proof of claim or equity interest before the established deadline. Senior Note Claims in Class 3 shall be deemed Allowed as provided below. Section 1123 of the Bankruptcy Code requires that, for purposes of treatment and voting, a Chapter 11 plan divide the different claims against, and equity interests in, the debtor into separate classes based upon their legal nature. In accordance with Section 1123 of the Bankruptcy Code, claims of a substantially similar legal nature are usually classified together, as are equity interests which give rise to the same legal rights; the "claims" and "equity interests" themselves, rather than their holders, are classified. Under a Chapter 11 plan, the separate classes of claims and equity interests must be designated either as "impaired" or "unimpaired" by the plan. If a class of claims is "impaired," the Bankruptcy Code affords certain rights to the holders of such claims, such as the right to vote on the plan (unless the plan provides for no distribution to the holders, in which case, the holder is deemed to reject the plan), and the right to receive under the Chapter 11 plan, no less value than the holder would receive if the debtor were liquidated under Chapter 7. Under Section 1124 of the Bankruptcy Code, a class of claims or interests is "impaired" unless the plan (i) does not alter legal, equitable, and contractual rights of the holders or (ii) irrespective of the holders' acceleration rights, cures all defaults (other than those arising from the debtor's insolvency, the commencement of the case, or nonperformance of a nonmonetary obligation), reinstates the maturity of the claims or interests in the class, compensates the holders for actual damages incurred as a result of their reasonable reliance upon any acceleration rights, and does not otherwise alter their legal, equitable, and contractual rights. Typically, this means the holder of an unimpaired claim will receive on the later of the effective date or the date on which amounts owing are due and payable, payment in full, in cash, with postpetition interest to the extent appropriate and provided under the governing agreement (or if there is no agreement, under applicable nonbankruptcy law), and the remainder of the debtor's obligations, if any, will be performed as they come due in accordance with their terms. Thus, other than its right to accelerate the debtor's obligations, the holder of an unimpaired claim will be placed in the position it would have been in had the debtor's case not been commenced. As discussed above, Section 1123 of the Bankruptcy Code provides that a plan of reorganization shall classify the claims of a debtor's creditors and equity interest holders. In compliance therewith, the Prepackaged Plan divides Claims and Interests into seven Classes and sets forth the treatment for each Class. In accordance with Section 1123(a), Administrative Expenses and Priority Tax Claims have not been classified. The Company also is required, as discussed above under Section 1122 of the Bankruptcy Code, to classify Claims against and Interests in the Company into Classes that contain Claims and Interests that are substantially similar to the other Claims and Interests in such Classes. The Company believes that the Prepackaged Plan has classified all Claims and Interests in compliance with the provisions of Section 1122 of the Bankruptcy Code, but once the Chapter 11 Case has been commenced, it is possible that a Holder of a Claim or Interest may challenge the classification of Claims and Interests and that the Bankruptcy Court may find that a different classification is required for the Prepackaged Plan to be confirmed. In such event, the Company intends, to the extent permitted by the Bankruptcy Court and the Prepackaged Plan, to make such reasonable modifications of the classifications under the Prepackaged Plan to permit confirmation and to use the Prepackaged Plan acceptances received in this Solicitation for the purpose of obtaining the approval of the reconstituted Class or Classes of which the accepting Holder is ultimately deemed to be a member. Any such reclassification could adversely affect the Class in which such Holder was initially a member, or any other Class under the Prepackaged Plan, by changing the composition of such Class and the vote required of that Class for approval of the Prepackaged Plan. Furthermore, a reclassification of a Claim or Interest after solicitation of acceptances of the Prepackaged Plan could necessitate a resolicitation of acceptances of the Prepackaged Plan. The classification of Claims and Interests and the nature of distributions to Holders of Impaired Claims or Impaired Interests in each Class are summarized below. See "DESCRIPTION OF NEW COMMON STOCK" and "DESCRIPTION OF WARRANTS" for a description of the manner in which the number of shares of New Common Stock and number of Warrants will be determined and "DISCUSSION OF RISK FACTORS," for a discussion of various other factors that could materially affect the value of the New Common Stock, Warrants and Warrant Shares distributed pursuant to the Prepackaged Plan. Except for Disputed Claims, distributions will be deemed made on the Effective Date if made on the Effective Date or as soon as practicable thereafter. See "PROVISIONS COVERING DISTRIBUTIONS" for a discussion of Prepackaged Plan provisions that may affect the timing of distributions under the Prepackaged Plan. Distributions on account of Claims that become Allowed Claims after the Effective Date will be made pursuant to Article Ten of the Prepackaged Plan (relating to timing and calculation of amounts to be distributed under the Prepackaged Plan) and Article Eleven of the Prepackaged Plan (relating to distributions on account of Disputed Claims once they are Allowed). UNCLASSIFIED CLAIMS The Bankruptcy Code does not require classification of certain priority claims against a debtor. In this case, these unclassified claims include Administrative Expenses and Priority Tax Claims. All distributions referred to below that are scheduled for the Effective Date will be made on the Effective Date or as soon as practicable thereafter. ADMINISTRATIVE EXPENSES Administrative Expenses are the actual and necessary costs and expenses of the Company's Chapter 11 Case that are allowed under Sections 503(b) and 507(a)(1) of the Bankruptcy Code. Those expenses will include the postpetition salaries and other employee benefits, postpetition rents, amounts owed to vendors providing goods and services to the Company during the Chapter 11 Case, tax obligations incurred after the Filing Date, and certain statutory fees and charges assessed under section 1930 of title 28 of the United States Code. Other Administrative Expenses include the actual, reasonable fees and expenses of the Company's advisors and the advisors to any official committees appointed in, and incurred during, the Chapter 11 Case. Administrative Expenses representing liabilities incurred in the ordinary course of business, consistent with past practice, by the Company or liabilities arising under loans or advances to the Company after the Filing Date, whether or not incurred in the ordinary course of business, will be paid by the Company in accordance with the terms and conditions of the particular transaction and any related agreements and instruments. All other Allowed Administrative Expenses will be paid, in full, in cash, on the Effective Date or as soon thereafter as is practicable, or on such other terms as to which the Company and the Holder of such Administrative Expense agree. The Company anticipates that most Administrative Expenses will be paid as they come due during the Chapter 11 Case and that the Administrative Expenses to be paid on the Effective Date of the Prepackaged Plan will, for the most part, comprise the allowed fees and expenses incurred by professionals retained in the case and the costs attendant to the Company's assumption of executory contracts and unexpired leases under the Prepackaged Plan. The Company estimates that, assuming the Effective Date occurs forty-five days after the commencement of the Chapter 11 Case, allowed Administrative Expenses will approximate $[______] (of which approximately $[______] is estimated for the fees and expenses of the Company's professionals). All payments to professionals for compensation and reimbursement of expenses and all payments to reimburse expenses of members of statutory committees will be made in accordance with the procedures established by the Bankruptcy Code and the Bankruptcy Rules relating to the payment of interim and final compensation and expenses. The Bankruptcy Court will review and determine all such requests. In addition to the foregoing, Section 503(b) of the Bankruptcy Code provides for payment of compensation to creditors, indenture trustees, and other persons making a "substantial contribution" to a Chapter 11 case, and to attorneys for, and other professional advisors to, such persons. Requests for such compensation must be approved by the Bankruptcy Court after notice and a hearing at which the Company and other parties-in-interest may participate, and if appropriate, object to the allowance thereof. Under the Prepackaged Plan, each Holder of an allowed Administrative Expense will be paid in full in Cash on the later of (i) the Effective Date and (ii) the date on which the Bankruptcy Court enters an order allowing such Administrative Expense; provided, however, that allowed Administrative Expenses representing obligations incurred in the ordinary course of business, consistent with past practice, or assumed by the Company shall be paid in full or performed by the Company or Reorganized Salant in the ordinary course of business, consistent with past practice; provided further, however, that allowed Administrative Expenses incurred by the Company or Reorganized Salant after the Confirmation Date, including (without limitation) claims for professionals' fees and expenses, shall not be subject to application and may be paid by the Company or Reorganized Salant, as the case may be, in the ordinary course of business and without further Bankruptcy Court approval. PRIORITY TAX CLAIMS Priority Tax Claims essentially consist of unsecured claims by federal and state governmental units for taxes specified in Section 507(a)(8) of the Bankruptcy Code, such as certain income taxes, property taxes, excise taxes, and employment and withholding taxes. These unsecured claims are given a statutory priority in right of payment. The Company estimates that on the Effective Date, the Allowed Priority Tax Claims will aggregate no more than $[____]. At the sole option of the Company, each Holder of an Allowed Priority Tax Claim shall receive (i) Cash payments made in equal annual installments beginning on or before the first anniversary following the Effective Date with the final installment being payable no later than the sixth anniversary of the date of the assessment of such Allowed Priority Tax Claim, together with interest on the unpaid balance of such Allowed Priority Tax Claim from the Effective Date calculated at the Market Rate; or (ii) such other treatment agreed to by the Holder of such Allowed Priority Tax Claim and the Company or Reorganized Salant, as the case may be. The foregoing treatment of Allowed Priority Tax Claims is consistent with the provisions of Section 1129(a)(9)(C) of the Bankruptcy Code, and the Holders of Allowed Priority Tax Claims are not entitled to vote on the Prepackaged Plan. CLASSIFIED CLAIMS AND INTERESTS Class 1-Priority Claims Class 1 Claims are Unimpaired. Class 1 consists of all Allowed Priority Claims. A Priority Claim is a Claim for an amount entitled to priority under Sections 507(a)(3), 507(a)(4), 507(a)(5) or 507(a)(6) of the Bankruptcy Code, and does not include any Administrative Expense or Priority Tax Claim. These Priority Claims include, among others: (a) unsecured Claims for accrued employee compensation earned within 90 days prior to the Filing Date, to the extent of $4,300 per employee; and (b) contributions to employee benefit plans arising from services rendered within 180 days prior to the Filing Date, but only for such plans to the extent of (i) the number of employees covered by such plans multiplied by $4,300, less (ii) the aggregate amount paid to such employees under Section 507(a)(3) of the Bankruptcy Code, plus the aggregate amount paid by the estate on behalf of such employees to any other employee benefit plan. The Prepackaged Plan provides that, on the latest of (i) the Effective Date, (ii) the date on which such Priority Claim becomes an Allowed Priority Claim, or (iii) the date on which the Company and the Holder of such Allowed Priority Claims otherwise agree, each Holder of an Allowed Priority Claim will be entitled to receive Cash in an amount sufficient to render such Allowed Priority Claim Unimpaired under Section 1124 of the Bankruptcy Code. Allowed Priority Claims in Class 1 are not Impaired under the Prepackaged Plan and the Holders of Allowed Priority Claims in Class 1 will be deemed to have accepted the Prepackaged Plan. Class 2-CIT Claim Class 2 Claims are Unimpaired. Class 2 consists of the CIT Claim. The CIT Claim is any and all Claims in respect of all or any portion of the aggregate outstanding and unpaid amount of principal and interest due and owing under, and subject to the terms and provisions of, the Credit Agreement and any and all related documents. Under the Prepackaged Plan, at the election of the Company prior to the Effective Date, on the Effective Date or as soon as practicable thereafter, CIT will be entitled to receive on account of the CIT Claim one of the following treatments: (i) CIT will receive a distribution in Cash equal to 100% of its Allowed CIT Claim, (ii) the Allowed CIT Claim shall be otherwise rendered Unimpaired in accordance with Section 1124 of the Bankruptcy Code, or (iii) such other treatment as mutually agreed to by the Company and CIT. The Class 2 CIT Claim is Unimpaired and, accordingly, the Holder of such Claims is not entitled to vote for or against the Prepackaged Plan and will be deemed to have accepted the Prepackaged Plan. Class 3- Senior Notes Claims Class 3 Claims are Impaired. Class 3 consists of all Senior Note Claims. The Senior Note Claims are any and all Claims in respect of all or any portion of the aggregate outstanding and unpaid principal and interest due and owing under, and subject to the terms and provisions of, the Senior Notes, and any other indebtedness of the Company due and owing under the Indenture or the Senior Notes as of the Filing Date. Under the Prepackaged Plan, each Holder of an Allowed Class 3 Senior Note Claim will receive on the Effective Date, or as soon as practicable thereafter, on account of such Holder's Allowed Senior Note Claim, such Holder's pro rata share of 18,456,350 shares of New Common Stock (or 175.977555 shares of New Common Stock for each $1,000 principal face amount of Senior Notes held by such Holder). The aggregate Senior Note Claims in Class 3 shall be deemed Allowed in the aggregate amount of $110,379,000, plus interest in the amount of $30,590 for each day after February 28, 1998, until and including the Filing Date. The Senior Note Claims are not disputed, contingent or unliquidated, and no Holder of a Senior Note Claim or the Trustee shall be required to file a proof of claim in order for such Claims to be Allowed pursuant to the Prepackaged Plan. Any Claims filed with respect to the Senior Note Claims shall be disallowed as duplicative of the Claim deemed filed and Allowed as provided in Section 6.3(c) of the Prepackaged Plan. The reasonable fees, costs and expenses of the Trustee as provided for pursuant to the Indenture shall be paid in cash in accordance with Section 14.10 of the Prepackaged Plan. Class 4-Miscellaneous Secured Claims Class 4 Claims are Unimpaired. Class 4 consists of all Miscellaneous Secured Claims. Miscellaneous Secured Claims are any Claims, other than the CIT Claim and the Senior Note Claims, that is a Secured Claim within the meaning of, and to the extent provided in, Section 506 of the Bankruptcy Code. To the extent, if any, that the value of the collateral securing a Class 4 Miscellaneous Secured Claim is less than the amount of such Allowed Miscellaneous Secured Claim, the difference will be treated as a Class 5 General Unsecured Claim. Under the Prepackaged Plan, at the election of the Company prior to the Effective Date, on the Effective Date, or as soon as practicable thereafter, each Holder of an Allowed Class 4 Miscellaneous Secured Claim, will be entitled to receive one of the following treatments: (i) the legal, equitable and contractual rights to which such Allowed Miscellaneous Secured Claim entitles such Holder will remain unaltered, (ii) such Holder's Allowed Class 4 Miscellaneous Secured Claim will be reinstated and rendered Unimpaired in accordance with Section 1124(2) of the Bankruptcy Code, or (iii) such other treatment as mutually agreed to by the Company and such Holder. Class 4 Miscellaneous Secured Claims are Unimpaired and, accordingly, the Holders of such Claims are not entitled to vote for or against the Prepackaged Plan and will be deemed to have accepted the Prepackaged Plan. Class 5--General Unsecured Claims Class 5 Claims are Unimpaired. Class 5 consists of all General Unsecured Claims. General Unsecured Claims are any Claim against the Company other than the CIT Claim, a Miscellaneous Secured Claim, a Senior Note Claim, a Priority Claim, a Priority Tax Claim or an Administrative Expense. The Prepackaged Plan provides that, at the election of the Company, prior to the Effective Date, on the Effective Date or as soon as practicable thereafter, each Holder of an Allowed General Unsecured Claim that has not been fully paid or satisfied prior to the Effective Date will be entitled to receive on account of such Holder's Allowed General Unsecured Claim one of the following treatments: (i) the legal, equitable and contractual rights to which such Allowed General Unsecured Claim entitles such Holder will remain unaltered; (ii) such Holder's Allowed General Unsecured Claim will be reinstated and rendered Unimpaired in accordance with Section 1124 of the Bankruptcy Code; or (iii) such other treatment as mutually agreed to by the Company and such Holder. Allowed General Unsecured Claims in Class 5 are not Impaired under the Prepackaged Plan and the Holders of General Unsecured Claims in Class 5 will be deemed to have accepted the Prepackaged Plan. Class 5 also includes any Claims of the Pension Benefit Guaranty Corporation (the "PBGC"). The Company intends that any such Claims of the PBGC will continue and remain unaffected by confirmation and consummation of the Prepackaged Plan. Upon commencement of the Chapter 11 Case, the Company intends that salaries or wages, as the case may be, accrued paid vacation, health related benefits, severance benefits, field management and executive/administrative management incentive plans and similar employee benefits will be unaffected. Employee benefit claims that accrue prior to the Filing Date will receive unimpaired treatment under the terms of the Prepackaged Plan. To ensure the continuity of the Company's work force and to further accommodate the unimpaired treatment of employee benefits, the Company intends to seek immediate authorization from the Bankruptcy Court to honor payroll checks outstanding as of the Filing Date (or to issue replacement checks), to permit employees to utilize paid vacation time accrued prior to the Filing Date (so long as they remain employees of the Company) and to continue paying medical and other benefits under all applicable employee health and insurance plans. The Company also intends to seek authorization from the Bankruptcy Court to honor, pay and/or perform in the ordinary course, wages, salaries, paid vacation and other employee benefits which accrue after the Filing Date. There can be no assurance, however, that any necessary approval will be obtained. Employee claims and benefits not paid or honored, as the case may be, prior to consummation of the Prepackaged Plan will be paid or honored upon consummation of the Prepackaged Plan or as soon thereafter as such payment or other obligation becomes due or performable. The Company also intends to leave unaltered all other legal, equitable and contractual rights of employees under its employment and severance policies, compensation and benefit plans and all other agreements, contracts and programs applicable to its employees, other than the Existing Equity-Based Plans. Class 6--Holders of Old Common Stock Interests Class 6 Interests are Impaired. Class 6 consists of all Old Common Stock Interests. Old Common Stock Interests are any Interests evidenced by Old Common Stock. Under the Prepackaged Plan, on the Effective Date or as soon as practicable thereafter, each Holder of an Allowed Class 6 Old Common Stock Interest will receive on account of such Holder's Allowed Old Common Stock Interest such Holder's pro rata share of: (i) 1,496,461 shares of New Common Stock, and (ii) the Warrants. Each Warrant entitles the holder to purchase one share of New Common Stock for $6.2648 per share, subject to adjustment. Class 7--Other Interests Class 7 Interests are Impaired. Class 7 consists of all Other Interests. Other Interests consist of any equity interests in the Company, including, without limitation, any rights, options, warrants, calls, subscriptions or other similar rights or agreements, commitments or outstanding securities obligating the Company to issue, transfer or sell any shares of capital stock of the Company, but excluding any Old Common Stock Interest. Under the Prepackaged Plan, on the Effective Date, all Other Interests will be extinguished and no distributions will be made in respect of such Other Interests. Class 7 Other Interests do not receive or retain any property under the Prepackaged Plan. Under Section 1126(g) of the Bankruptcy Code, the Holders of Other Interests are deemed not to have accepted the Prepackaged Plan, and the acceptance of such Holders will not be solicited. SOURCES OF CASH TO MAKE PREPACKAGED PLAN DISTRIBUTIONS Except as otherwise provided in the Prepackaged Plan or the Confirmation Order, all Cash necessary for Reorganized Salant to make payments pursuant to the Prepackaged Plan will be obtained from the new credit facility provided to Reorganized Salant under the New Credit Agreement. EXECUTORY CONTRACTS AND UNEXPIRED LEASES Generally Under Section 365 of the Bankruptcy Code, the Company has the right, subject to Bankruptcy Court approval, to assume or reject any executory contracts or unexpired leases. If an executory contract or unexpired lease entered into before the Filing Date is rejected by the Company, it will be treated as if the Company breached such contract or lease on the date immediately preceding the Filing Date, and the other party to the agreement may assert a General Unsecured Claim for damages incurred as a result of the rejection. In the case of rejection of employment agreements and real property leases, damages are subject to certain limitations imposed by Sections 365 and 502 of the Bankruptcy Code. See Article Eight of the Prepackaged Plan. Assumption and Rejection Pursuant to the Prepackaged Plan, each executory contract or unexpired lease that is not listed on Exhibit E to the Prepackaged Plan or has not been expressly assumed or rejected by order of the Bankruptcy Court on or prior to the Confirmation Date will, as of the Confirmation Date (subject to the occurrence of the Effective Date), be deemed to have been assumed by the Company unless there is then pending before the Bankruptcy Court a motion to reject such unexpired lease or executory contract. Each unexpired lease and executory contract listed on Exhibit E to the Prepackaged Plan will be specifically rejected pursuant to the Prepackaged Plan as of the Effective Date. Entry of the Confirmation Order by the clerk of the Bankruptcy Court will constitute an order approving such assumptions and rejections, as the case may be, pursuant to Section 365(a) of the Bankruptcy Code. Given that the achievement of the future operating results set forth in the Three-Year Business Plan is predicated upon, among other things, the current senior management of the Company remaining with Reorganized Salant after the Effective Date, the Company intends that the existing employment agreements with its senior management will be assumed pursuant to the Prepackaged Plan. Bar Date for Rejection Damages Pursuant to the Prepackaged Plan, unless otherwise provided by an order of the Bankruptcy Court entered prior to the Confirmation Date, proof of any Claim against the Company arising from the rejection of any executory contract or unexpired lease pursuant to an order of the Bankruptcy Court must be filed with the Bankruptcy Court within the later of (a) the time period established by the Bankruptcy Court in an order of the Bankruptcy Court approving such rejection, or (b) if no such time period is or was established, thirty (30) days from the date of entry of such order of the Bankruptcy Court approving such rejection. Any Entity that fails to file proof of its Claim arising from such a rejection within the period set forth above will be forever barred from asserting a Claim against the Company, Reorganized Salant, or the property or interests in property of the Company or Reorganized Salant. All Allowed Claims arising from the rejection of executory contracts or unexpired leases will be classified as a General Unsecured Claim (Class 5) under the Prepackaged Plan. IMPLEMENTATION OF THIS PLAN Vesting of Property Except as otherwise provided in the Prepackaged Plan, on the Effective Date, title to all property of the Company's estate shall pass to Reorganized Salant free and clear of all Claims, Interests and liens (including, without limitation, all liens securing the Senior Note Claims). Confirmation of the Prepackaged Plan (subject to the occurrence of the Effective Date) will be binding and the Company's debts, without in any way limiting the discharge and release provisions contained in Article Twelve of the Prepackaged Plan, will be discharged as provided in Section 1141 of the Bankruptcy Code. Transactions on Business Days Pursuant to the Prepackaged Plan, if the Effective Date or any other date on which a transaction may occur under the Prepackaged Plan will occur on a day that is not a Business Day, the transactions contemplated by the Prepackaged Plan to occur on such day will instead occur on the next succeeding Business Day. Restated Certificate of Incorporation; Restated By-laws Pursuant to the Prepackaged Plan, on the Effective Date or as soon thereafter as is practicable, Reorganized Salant will file with the Secretary of State of the State of Delaware, in accordance with Sections 103 and 303 of the DGCL, the Reorganized Salant Certificate of Incorporation and such certificate will be the certificate of incorporation for Reorganized Salant. Pursuant to the Prepackaged Plan, on the Effective Date, the Reorganized Salant By-Laws will become the by-laws of Reorganized Salant. Implementation Pursuant to the Prepackaged Plan, the Company will be authorized to take all necessary steps, and perform all necessary acts, to consummate the terms and conditions of the Prepackaged Plan. Pursuant to the Prepackaged Plan, on or before the Effective Date, the Company may file with the Bankruptcy Court such agreements and other documents as may be necessary or appropriate to effectuate or further evidence the terms and conditions of the Prepackaged Plan and the other agreements referred to herein. The Company or Reorganized Salant, as the case may be, may, and will, execute such documents and take such other actions as are necessary to effectuate the transactions provided for in the Prepackaged Plan. Issuance of New Securities Pursuant to the Prepackaged Plan, the issuance and distribution of the New Common Stock and the Warrants by Reorganized Salant is authorized and directed without the need for any further corporate action, under applicable law, regulation, order, rule or otherwise. Cancellation of Existing Securities and Agreements Pursuant to the Prepackaged Plan, on the Effective Date, the Senior Notes, the Old Common Stock, and any rights, options, warrants, calls, subscriptions, or other similar rights or other agreements or commitments, contractual or otherwise, obligating the Company to issue, transfer, or sell any shares of Old Common Stock or any other capital stock of the Company will be canceled. Except for purposes of effectuating the distributions under the Prepackaged Plan, on the Effective Date, the Indenture will be canceled. Board of Directors of Reorganized Salant Pursuant to the Prepackaged Plan, on the Effective Date, the operation of Reorganized Salant will become the general responsibility of its Board, subject to, and in accordance with, the Reorganized Salant Certificate of Incorporation and the Reorganized Salant By-Laws. The initial Board of Reorganized Salant will consist of the individuals identified on Exhibit D to the Prepackaged Plan. Such directors will be deemed elected or appointed, as the case may be, pursuant to the Confirmation Order, but will not take office and will not be deemed to be elected or appointed until the occurrence of the Effective Date. Those directors not continuing in office will be deemed removed therefrom as of the Effective Date pursuant to the Confirmation Order. Employee Benefit Plans Pursuant to the Prepackaged Plan and subject to the occurrence of the Effective Date, all employee benefit plans, policies, and programs of the Company, and the Company's obligations thereunder, will survive confirmation of the Prepackaged Plan, remain unaffected thereby, and not be discharged. Employee benefit plans, policies, and programs will include, without limitation, all savings plans, retirement pension plans, health care plans, disability plans, severance benefit plans, life, accidental death, and dismemberment insurance plans (to the extent not executory contracts assumed under the Prepackaged Plan), but will exclude all Existing Equity-Based Plans. The Stock Award and Incentive Plan Pursuant to the Prepackaged Plan, the Stock Award and Incentive Plan will remain in effect after the Effective Date; provided, that, if the Stock Award and Incentive Plan has not previously been approved by the stockholders of the Company, the Stock Award and Incentive Plan and any grants made thereunder shall be subject to the subsequent approval of the stockholders of Reorganized Salant. Survival of Indemnification Obligations Notwithstanding anything to the contrary contained in the Prepackaged Plan, the obligations of the Company to indemnify (i) its present or former directors, officers, agents, employees and representatives, pursuant to the Certificate of Incorporation, By-Laws, applicable statutes or contractual obligations, in respect of all past, present and future actions, suits and proceedings against any of such directors, officers, agents, employees and representatives, based upon any act or omission related to service with, for or on behalf of the Company, and (ii) Magten in accordance with and pursuant to paragraph 8 of the Letter Agreement, shall not be discharged or impaired by confirmation or consummation of the Prepackaged Plan but shall survive unaffected by the reorganization contemplated by the Prepackaged Plan and shall be performed and honored in full, pursuant to the Reorganized Salant By-Laws and Certificate of Incorporation, applicable statutes or contractual obligations, by Reorganized Salant regardless of such confirmation, consummation and reorganization. Listing of New Common Stock; Registration of Securities Pursuant to the Prepackaged Plan, Reorganized Salant will use its best efforts to (i) maintain its status as a reporting company under the Exchange Act and cause, on the Effective Date, the shares of New Common Stock issued hereunder to be listed on the NYSE, or, if Reorganized Salant is unable to have the shares of New Common Stock listed on the NYSE, on another national securities exchange, or, as to the New Common Stock, quoted in the national market system of the National Association of Securities Dealers' Automated Quotation System, (ii) in accordance with the terms of the Registration Rights Agreement, file and have declared effective as soon as possible thereafter a registration statement or registration statements under the Securities Act, for the offering on a continuous or delayed basis in the future of the shares of New Common Stock (the "Shelf Registration"), (iii) cause to be filed with the Commission on the Effective Date a registration statement on Form 10 under the Exchange Act with respect to the New Common Stock, (iv) keep the Shelf Registration effective for a three-year period, and (v) supplement or make amendments to the Shelf Registration, if required under the Securities Act or by the rules or regulations promulgated thereunder or in accordance with the terms of the Registration Rights Agreement, and have such supplements and amendments declared effective as soon as practicable after filing. In addition, on the Effective Date, Reorganized Salant will enter into the Registration Rights Agreement in the form of Exhibit B attached to the Prepackaged Plan. See "DESCRIPTION OF REGISTRATION RIGHTS AGREEMENT." Retention and Enforcement of Causes of Action Pursuant to the Prepackaged Plan and pursuant to Section 1123(b)(3) of the Bankruptcy Code, Reorganized Salant will retain and will have the exclusive right, in its discretion, to enforce against any Entity any and all Causes of Action of the Company, including all Causes of Action of a trustee and debtor-in-possession under the Bankruptcy Code, other than those released or compromised as part of, or under, the Prepackaged Plan. PROVISIONS COVERING DISTRIBUTIONS Timing of Distributions Under the Prepackaged Plan Pursuant to the Prepackaged Plan, except as otherwise provided therein, payments and distributions in respect of Allowed Claims and Allowed Interests which are required by the Prepackaged Plan to be made on the Effective Date will be made by the Company, Reorganized Salant or its designee or, in the case of the distributions to the Noteholders, by Reorganized Salant or its designee (with the assistance of the Trustee, if necessary), on, or as soon as practicable following, the Effective Date. Distributions of New Common Stock to the Noteholders will be made at the addresses of the registered Holders of the Senior Notes last provided in writing to the Trustee. Distributions of New Common Stock and Warrants to the Stockholders will be made at the addresses of the holders of record of the Old Common Stock as of the Distribution Record Date. Allocation of Consideration Pursuant to the Prepackaged Plan, the aggregate consideration to be distributed to the Holders of Allowed Claims in each Class under the Prepackaged Plan will be treated as first satisfying an amount equal to the stated principal amount of the Allowed Claim for such Holders and any remaining consideration as satisfying accrued, but unpaid, interest, if any. Cash Payments Pursuant to the Prepackaged Plan, cash payments made pursuant to the Prepackaged Plan will be in U.S. dollars. Cash payments of $1,000,000 or more to be made pursuant to the Prepackaged Plan will, to the extent requested in writing no later than five days after the Confirmation Date, be made by wire transfer from a domestic bank. Cash payments to foreign creditors may be made, at the option of the Company or Reorganized Salant, in such funds and by such means as are necessary or customary in a particular foreign jurisdiction. Cash payments made pursuant to the Prepackaged Plan in the form of checks issued by Reorganized Salant shall be null and void if not cashed within 120 days of the date of the issuance thereof. Requests for reissuance of any check shall be made directly to Reorganized Salant or its designee as set forth in the Prepackaged Plan. Payment of Statutory Fees Pursuant to the Prepackaged Plan, all fees payable to the United States Trustee pursuant to 28 U.S.C. ss. 1930 as determined by the Bankruptcy Court at the Confirmation Hearing will be paid by the Company on or before the Effective Date. No Interest Pursuant to the Prepackaged Plan, except with respect to holders of Unimpaired Claims entitled to interest under applicable non-bankruptcy law or as expressly provided herein, no Holder of an Allowed Claim or Interest will receive interest on the distribution to which such Holder is entitled hereunder, regardless of whether such distribution is made on the Effective Date or thereafter. Fractional Securities Pursuant to the Prepackaged Plan, and notwithstanding any other provision of the Prepackaged Plan, only whole numbers of shares of New Common Stock and Warrants will be issued or transferred, as the case may be, pursuant to the Prepackaged Plan. Reorganized Salant will not distribute any fractional shares of New Common Stock or fractional interests in Warrants. For purposes of distribution, fractional shares of New Common Stock and fractional Warrants will be rounded up to the nearest share of New Common Stock or Warrant, as the case may be. Withholding of Taxes Pursuant to the Prepackaged Plan, Reorganized Salant will withhold from any property distributed under the Prepackaged Plan any property which must be withheld for taxes payable by the Entity entitled to such property to the extent required by applicable law. As a condition to making any distribution under the Prepackaged Plan, Reorganized Salant or its designee, as the case may be, may request that the Holder of any Allowed Claim provide such Holder's taxpayer identification number and such other certification as may be deemed necessary to comply with applicable tax reporting and withholding laws. Pro Rata Distribution Pursuant to the Prepackaged Plan, where the Prepackaged Plan provides for pro rata distribution, the property to be distributed under the Prepackaged Plan will be divided pro rata among the Holders of Allowed Claims or Allowed Interests of the relevant Class based on the Allowed amount of all of such Claims or Interests in such Class. Distribution Record Date Pursuant to the Prepackaged Plan, as of the close of business on the Distribution Record Date, the transfer registers for the Senior Notes and Old Common Stock maintained by the Company, or its respective agents, will be closed. Reorganized Salant, and its designees and the Trustee will have no obligation to recognize the transfer of any Senior Notes or Old Common Stock occurring after the Distribution Record Date and will be entitled for all purposes relating to the Prepackaged Plan to recognize and deal only with those Holders of record as of the close of business on the Distribution Record Date. Persons Deemed Holders of Registered Securities Pursuant to the Prepackaged Plan, except as otherwise provided therein, the Company, Reorganized Salant or its designee or, in the case of the Noteholders, the Trustee, shall be entitled to treat the record holder of a registered security as the Holder of the Claim or Interest in respect thereof for purposes of all notices, payments or other distributions under the Prepackaged Plan unless the Company, Reorganized Salant, its designee or the Trustee, as the case may be, has received written notice specifying the name and address of any new Holder thereof (and the nature and amount of the interest of such new Holder) at least ten (10) Business Days prior to the date of such notice, payment or other distribution. In the event of any dispute regarding the identity of any party entitled to any payment or distribution in respect of any Claim or Interest under the Prepackaged Plan, no payments or distributions will be made in respect of such Claim or Interest until the Bankruptcy Court resolves that dispute pursuant to a Final Order. Surrender of Existing Securities Pursuant to the Prepackaged Plan, as a condition to receiving any distribution under the Prepackaged Plan, each Holder of a Senior Note, Old Common Stock Interest, or other instrument evidencing a Claim or Interest must surrender such Senior Note, Old Common Stock Interest, or other instrument to Reorganized Salant or its designee. Reorganized Salant appoints the Trustee under the Indenture as its designee to receive the Senior Notes. Any Holder of a Claim or Interest that fails to (a) surrender such instrument or (b) execute and deliver an affidavit of loss and/or indemnity reasonably satisfactory to Reorganized Salant and furnish a bond in form, substance, and amount reasonably satisfactory to Reorganized Salant before the later to occur of (i) the second anniversary of the Effective Date and (ii) six months following the date such Holder's Claim becomes an Allowed Claim, will be deemed to have forfeited all rights, Claims, and/or Interests and may not participate in any distribution under the Prepackaged Plan. Special Procedures for Lost, Stolen, Mutilated or Destroyed Instruments Pursuant to the Prepackaged Plan, in addition to any requirements under the Company's Certificate of Incorporation or By-laws, any Holder of a Claim or an Interest evidenced by an Instrument that has been lost, stolen, mutilated or destroyed will be required to, in lieu of surrendering such Instrument, deliver to Reorganized Salant or its designee: (a) evidence satisfactory to Reorganized Salant or its designee, as the case may be, of the loss, theft, mutilation or destruction; and (b) such security or indemnity as may be required by Reorganized Salant or its designee, as the case may be, to hold Reorganized Salant and/or its designee, as applicable, harmless from any damages, liabilities or costs incurred in treating such individual as a Holder of an Instrument. Upon compliance with the foregoing provision of the Prepackaged Plan, the Holder of a Claim or Interest evidenced by any such lost, stolen, mutilated or destroyed Instrument will, for all purposes under the Prepackaged Plan, be deemed to have surrendered such Instrument. Undeliverable or Unclaimed Distributions Pursuant to the Prepackaged Plan, any Entity that is entitled to receive a Cash distribution under the Prepackaged Plan but that fails to cash a check within 120 days of its issuance will be entitled to receive a reissued check from Reorganized Salant for the amount of the original check, without any interest, if such Entity requests Reorganized Salant or its designee to reissue such check and provides Reorganized Salant or its designee, as the case may be, with such documentation as Reorganized Salant or its designee requests to verify that such Entity is entitled to such check, prior to the second anniversary of the Effective Date. If an Entity fails to cash a check within 120 days of its issuance and fails to request reissuance of such check prior to the later to occur of (i) the second anniversary of the Effective Date and (ii) six months following the date such Holder's Claim becomes an Allowed Claim, such Entity will not be entitled to receive any distribution under the Prepackaged Plan. If the distribution to any Holder of an Allowed Claim or Allowed Interest is returned to Reorganized Salant or its designee (the "Distribution Agent") as undeliverable, no further distributions will be made to such Holder unless and until Reorganized Salant or its designee is notified in writing of such Holder's then-current address; provided, however, that in the case of an undeliverable distribution to a Holder of a Senior Note Claim or an Old Common Stock Interest, the Distribution Agent shall conduct two database searches using at least one information database service (as such term is defined in Rule 19b-4 of the Securities Act). The database searches will be conducted by using such Holder's tax identification number or name, if the tax identification number is not likely to locate such Holder, will be without charge to such Holder of the Allowed Claim or Allowed Interest and will be conducted (i) between three and twelve months after the date such distribution becomes undeliverable and (iii) between six and twelve months after the first search. The Distribution Agent need not conduct the database searches if (i) it has received documentation that the Holder of a Senior Note Claim or an Old Common Stock Interest is deceased, (ii) the aggregate value of accounts listed in the master Holder file or all accounts owned by such Holder as recorded in the Distribution Agent's master Holder files is less than $25, and (iii) such Holder is not a natural person. Undeliverable distributions will remain in the possession of Reorganized Salant or its designee pursuant to the Prepackaged Plan until such time as a distribution becomes deliverable. The Distribution Agent shall maintain information in a master Holder file with respect to the total number of lost Holder accounts and the percentage (as compared to the total number of accounts) of lost Holder accounts for Holders of Senior Note Claims or Old Common Stock Interests lost one year or less, three years or less, five years or less, more than five years and for assets which have ascheated to unclaimed property administrators. Such reports shall be filed with the Commission. Subject to the obligations of the Distribution Agent set forth above, all claims for undeliverable distributions will have to be made on or before the later to occur of (i) the second anniversary of the Effective Date and (ii) six months following the date such Holder's Claim or Interest becomes an Allowed Claim or Allowed Interest. After such date, all unclaimed property will revert to Reorganized Salant and the claim of any Holder or successor to such Holder with respect to such property will be discharged and forever barred notwithstanding any federal or state escheat laws to the contrary PROCEDURES FOR RESOLVING DISPUTED CLAIMS Objections to Claims Pursuant to the Prepackaged Plan, only the Company and Reorganized Salant will have the authority to file objections to Claims after the Effective Date. Subject to an order of the Bankruptcy Court providing otherwise, Reorganized Salant may object to a Claim by filing an objection with the Bankruptcy Court and serving such objection upon the Holder of such Claim not later than one hundred and twenty (120) days after the Effective Date or one hundred and twenty (120) days after the filing of the proof of such Claim, whichever is later, or such other date determined by the Bankruptcy Court upon motion to the Bankruptcy Court without further notice or hearing. Notwithstanding the foregoing, neither the Company nor Reorganized Salant shall object to the allowance of the Senior Note Claims as described in Section 6.3(c) of the Prepackaged Plan. Procedure Pursuant to the Prepackaged Plan, unless otherwise ordered by the Bankruptcy Court or agreed to by written stipulation of the Company or Reorganized Salant, or until an objection thereto by the Company or by Reorganized Salant is withdrawn, the Company or Reorganized Salant will litigate the merits of each Disputed Claim until determined by a Final Order; provided, however, that, (a) prior to the Effective Date, the Company, subject to the approval of the Bankruptcy Court, and (b) after the Effective Date, Reorganized Salant, subject to the approval of the Bankruptcy Court, may compromise and settle any objection to any Claim. Payments and Distributions With Respect to Disputed Claims Pursuant to the Prepackaged Plan, no payments or distributions will be made in respect of a Disputed Claim until such Disputed Claim becomes an Allowed Claim. Timing of Payments and Distributions With Respect to Disputed Claims Pursuant to the Prepackaged Plan, and subject to the provisions of the Prepackaged Plan, payments and distributions with respect to each Disputed Claim that becomes an Allowed Claim that would have otherwise been made had the Disputed Claim been an Allowed Claim on the Effective Date will be made within thirty (30) days after the date that such Disputed Claim becomes an Allowed Claim. Holders of Disputed Claims that become Allowed Claims will be bound, obligated and governed in all respects by the provisions of the Prepackaged Plan. Individual Holder Proofs of Interest Pursuant to the Prepackaged Plan, individual Holders of Allowed Old Common Stock Interests are not required to file proofs of such Interests unless they disagree with the number of shares set forth on the Company's stock register. DISCHARGE, INJUNCTION, RELEASES AND SETTLEMENTS OF CLAIMS Discharge of All Claims and Interests and Releases Pursuant to the Prepackaged Plan and except as otherwise specifically provided by the Prepackaged Plan, the confirmation of the Prepackaged Plan (subject to the occurrence of the Effective Date) will discharge and release the Company, Reorganized Salant, its successors and assigns and their respective assets and properties from any debt, charge, Cause of Action, liability, encumbrances, security interest, Claim, Interest, or other cause of action of any kind, nature or description (including, but not limited to, any claim of successor liability) that arose before the Confirmation Date, and any debt of the kind specified in Sections 502(g), 502(h) or 502(i) of the Bankruptcy Code, whether or not a proof of Claim is filed or is deemed filed, whether or not such Claim is Allowed, and whether or not the Holder of such Claim has accepted the Prepackaged Plan. Furthermore, except as otherwise specifically provided by the Prepackaged Plan, the distributions and rights that are provided in the Prepackaged Plan to Class 3 and Class 6 will be in complete satisfaction, discharge and release, effective as of the Effective Date of all Claims and Causes of Action against, liabilities of, liens on, charges, encumbrances, security interests, obligations of and Interests in the Company, Reorganized Salant, or the direct or indirect assets and properties of the Company or Reorganized Salant, whether known or unknown, based on the same subject matter as any Claim or Interest, or based on any act or omission, transaction or other activity or security, instrument or other agreement of any kind or nature occurring, arising or existing prior to the Effective Date that was or could have been the subject of any Claim or Interest, in each case regardless of whether a proof of Claim or Interest was filed, whether or not Allowed and whether or not the Holder of the Claim or Interest has voted to accept or reject the Prepackaged Plan. In addition, except as otherwise specifically provided by the Prepackaged Plan, any Holder of a Claim in Class 3 or Class 6 accepting any distribution pursuant to the Prepackaged Plan will be presumed conclusively to have released the Company and Reorganized Salant from any Cause of Action based on the same subject matter as the Claim on which the distribution is received. The release described in the preceding sentence shall be enforceable as a matter of contract against any Entity that accepts any distribution pursuant to the Prepackaged Plan. All injunctions or stays entered in the Chapter 11 Case and existing immediately prior to the Confirmation Date will remain in full force and effect until the Effective Date. Injunction Pursuant to the Prepackaged Plan, the satisfaction, release and discharge provisions of the Prepackaged Plan, will act as an injunction against any Entity commencing or continuing any action, employment of process, or act to collect, offset or recover any Claim or Cause of Action satisfied, released or discharged under the Prepackaged Plan. The injunction, discharge and releases provisions of the Prepackaged Plan will apply regardless of whether or not a proof of Claim or Interest based on any Claim, debt, liability or Interests is filed or whether or not a Claim or Interest based on such Claim, debt, liability or Interest is Allowed, or whether or not such Entity voted to accept or reject the Prepackaged Plan. Exculpation Pursuant to the Prepackaged Plan, in consideration of the distributions under the Prepackaged Plan, upon the Effective Date, each Holder of a Claim or Interest will be deemed to have released the Company and its directors, officers, employees, agents, attorneys, independent accountants, financial advisors, investment bankers and employees and representatives (as applicable) employed by the Company from and after the Filing Date and Magten and its attorneys, advisors, and financial advisors employed by Magten from and after the Filing Date, from any and all Causes of Action (other than the right to enforce the Company's obligations under the Prepackaged Plan and the right to pursue a Claim based on any willful misconduct) arising out of actions or omissions during the administration of the Company's estate. Guaranties and Claims of Subordination Pursuant to the Prepackaged Plan, the classification and the manner of satisfying all Claims under the Prepackaged Plan takes into consideration the possible existence of any alleged guaranties by the Company of obligations of any Entity or Entities, and that the Company may be joint obligors with another Entity or Entities with respect to the same obligation. All Claims against the Company based upon any such guaranties will be satisfied, discharged and released in the manner provided in the Prepackaged Plan and the Holders of Claims will be entitled to only one distribution with respect to any given obligation of the Company. Pursuant to the Prepackaged Plan, except as expressly provided for in the Prepackaged Plan, to the fullest extent permitted by applicable law, all Claims against and Interests in the Company, and all rights and Claims between or among Holders of Claims and Interests relating in any manner whatsoever to Claims against or Interests in the Company, based on any contractual, legal or equitable subordination rights, will be terminated on the Effective Date and discharged in the manner provided in the Prepackaged Plan, and all such Claims, Interests and rights so based and all such contractual, legal and equitable subordination rights to which any Entity may be entitled will be irrevocably waived by the acceptance by such Entity (or, unless the Confirmation Order provides otherwise, the Class of which such Entity is a member) of the Prepackaged Plan or of any distribution pursuant to the Prepackaged Plan. Except as otherwise provided in the Prepackaged Plan and to the fullest extent permitted by applicable law, the rights afforded and the distributions that are made in respect of any Claims or Interests hereunder will not be subject to levy, garnishment, attachment or like legal process by any Holder of a Claim or Interest by reason of any contractual, legal or equitable subordination rights, so that, notwithstanding any such contractual, legal or equitable subordination, each Holder of a Claim or Interest will have and receive the benefit of the rights and distributions set forth in the Prepackaged Plan. Pursuant to the Prepackaged Plan, and pursuant to Bankruptcy Rule 9019 and any applicable state law and as consideration for the distributions and other benefits provided under the Prepackaged Plan, the provisions regarding Claims of subordination of the Prepackaged Plan will constitute a good faith compromise and settlement of any Causes of Action relating to the matters described in such provisions of the Prepackaged Plan which could be brought by any Holder of a Claim or Interest against or involving another Holder of a Claim or Interest, which compromise and settlement is in the best interests of Holders of Claims and Interests and is fair, equitable and reasonable. This settlement will be approved by the Bankruptcy Court as a settlement of all such Causes of Action. Entry of the Confirmation Order will constitute the Bankruptcy Court's approval of this settlement pursuant to Bankruptcy Rule 9019 and its finding that this is a good faith settlement pursuant to any applicable state law, including, without limitation, the laws of the States of New York and Delaware, given and made after due notice and opportunity for hearing, and will bar any such Cause of Action by any Holder of a Claim or Interest against or involving another Holder of a Claim or Interest. CONDITIONS PRECEDENT TO CONFIRMATION ORDER AND EFFECTIVE DATE Conditions Precedent to Entry of the Confirmation Order Pursuant to the Prepackaged Plan, the following condition must occur and be satisfied or waived in accordance with the Prepackaged Plan on or before the Confirmation Date for the Prepackaged Plan to be confirmed on the Confirmation Date: the Confirmation Order is in form and substance reasonably acceptable to the Company, Magten and Apollo. Conditions Precedent to the Effective Date Pursuant to the Prepackaged Plan, the following conditions must occur and be satisfied or waived by the Company on or before the Effective Date for the Prepackaged Plan to become effective on the Effective Date. 1. Final Order. The Confirmation Order will have become a Final Order; 2. Working Capital Facility. Reorganized Salant will have executed an agreement for a working capital facility on terms reasonably satisfactory to Apollo and Magten; 3. Certificate of Incorporation. The Reorganized Salant Certificate of Incorporation, in the form of Exhibit I, attached to the Prepackaged Plan, will have been filed with the Secretary of State of the State of Delaware, in accordance with Sections 103 and 303 of the DGCL; and 4. Authorizations, Consents and Approvals. All authorizations, consents and regulatory approvals required (if any) in connection with the Prepackaged Plan's effectiveness will have been obtained. Waiver of Conditions Pursuant to the Prepackaged Plan, with the prior written consent (which consent will not be unreasonably withheld) of Magten and Apollo, but not otherwise, the Company may waive one or more of the conditions precedent to the confirmation or effectiveness of the Prepackaged Plan set forth in the Prepackaged Plan. Effect of Failure of Conditions Pursuant to the Prepackaged Plan, if each of the conditions to effectiveness and the occurrence of the Effective Date has not been satisfied or duly waived on or before the first Business Day that is more than 179 days after the date the Bankruptcy Court enters an order confirming the Prepackaged Plan, or by such later date as is proposed and approved, after notice and a hearing, by the Bankruptcy Court, then upon motion by the Company or any party in interest made before the time that each of the conditions has been satisfied or duly waived, the order confirming the Prepackaged Plan may be vacated by the Bankruptcy Court; provided, however, that notwithstanding the filing of such a motion, the order confirming the Prepackaged Plan shall not be vacated if each of the conditions to consummation is either satisfied or duly waived before the Bankruptcy Court enters an order granting the relief requested in such motion. If the order confirming the Prepackaged Plan is vacated pursuant to the foregoing provision of the Prepackaged Plan, the Prepackaged Plan will be null and void in all respects, and nothing contained in the Prepackaged Plan will (a) constitute a waiver or release of any claims against or equity interests in the Company or (b) prejudice in any manner the rights of the Holder of any claim or equity interest in the Company. MISCELLANEOUS PROVISIONS Bankruptcy Court to Retain Jurisdiction Pursuant to the Prepackaged Plan, the business and assets of the Company will remain subject to the jurisdiction of the Bankruptcy Court until the Effective Date. From and after the Effective Date, the Bankruptcy Court will retain and have exclusive jurisdiction of all matters arising out of, and related to the Chapter 11 Case or the Prepackaged Plan pursuant to, and for purposes of, Subsection 105(a) and Section 1142 of the Bankruptcy Code and for, among other things, the following purposes: (a) to determine any and all disputes relating to Claims and Interests and the allowance and amount thereof; (b) to determine any and all disputes among creditors with respect to their Claims; (c) to consider and allow any and all applications for compensation for professional services rendered and disbursements incurred in connection therewith; (d) to determine any and all applications, motions, adversary proceedings and contested or litigated matters pending on the Effective Date and arising in or related to the Chapter 11 Case or this Plan; (e) to remedy any defect or omission or reconcile any inconsistency in the Confirmation Order; (f) to enforce the provisions of the Prepackaged Plan relating to the distributions to be made hereunder; (g) to issue such orders, consistent with Section 1142 of the Bankruptcy Code, as may be necessary to effectuate the consummation and full and complete implementation of the Prepackaged Plan; (h) to enforce and interpret any provisions of the Prepackaged Plan; (i) to determine such other matters as may be set forth in the Confirmation Order or that may arise in connection with the implementation of the Prepackaged Plan; (j) to determine the amounts allowable as compensation or reimbursement of expenses pursuant to Section 503(b) of the Bankruptcy Code; (k) to hear and determine disputes arising in connection with the interpretation, implementation, or enforcement of the Prepackaged Plan and the Related Documents; (l) to hear and determine any issue for which the Prepackaged Plan or any Related Document requires a Final Order of the Bankruptcy Court; (m) to hear and determine matters concerning state, local, and federal taxes in accordance with Sections 346, 505, and 1146 of the Bankruptcy Code; (n) to hear and determine any issue related to the composition of the initial Board of Reorganized Salant; (o) to hear any other matter not inconsistent with the Bankruptcy Code; and (p) to enter a Final Decree closing the Chapter 11 Case. Binding Effect of this Plan Pursuant to the Prepackaged Plan, the provisions of the Prepackaged Plan will be binding upon and inure to the benefit of the Company, Reorganized Salant, Magten, Apollo, any Holder of a Claim or Interest, their respective predecessors, successors, assigns, agents, officers, managers and directors and any other Entity affected by the Prepackaged Plan. Nonvoting Stock Pursuant to the Prepackaged Plan, and in accordance with Section 1123(a)(6) of the Bankruptcy Code, the Reorganized Salant Certificate of Incorporation will contain a provision prohibiting the issuance of nonvoting equity securities by Reorganized Salant for a period of one year following the Effective Date. Authorization of Corporate Action Pursuant to the Prepackaged Plan, the entry of the Confirmation Order will constitute a direction and authorization to and of the Company to take or cause to be taken any action necessary or appropriate to consummate the provisions of the Prepackaged Plan and the Related Documents prior to and through the Effective Date (including, without limitation, the filing of the Reorganized Salant Certificate of Incorporation), and all such actions taken or caused to be taken will be deemed to have been authorized and approved by the Bankruptcy Code. Retiree Benefits Pursuant to the Prepackaged Plan, on and after the Effective Date, to the extent required by Section 1129(a)(13) of the Bankruptcy Code, Reorganized Salant will continue to pay all retiree benefits (if any), as the term "retiree benefits" is defined in Section 1114(a) of the Bankruptcy Code, maintained or established by the Company prior to the Confirmation Date. Withdrawal of the Prepackaged Plan Pursuant to the Prepackaged Plan, the Company reserves the right, at any time prior to the entry of the Confirmation Order, to revoke or withdraw the Prepackaged Plan. If the Company revokes or withdraws the Prepackaged Plan, if the Confirmation Date does not occur, or if the Effective Date does not occur then (i) the Prepackaged Plan will be deemed null and void and (ii) the Prepackaged Plan will be of no effect and will be deemed vacated, and the Chapter 11 Case will continue as if the Prepackaged Plan had never been filed and, in such event, the rights of any Holder of a Claim or Interest will not be affected nor will such Holder be bound by, for purposes of illustration only, and not limitation, (a) the Prepackaged Plan, (b) any statement, admission, commitment, valuation or representation contained in the Prepackaged Plan, this Exchange Restructuring Prospectus or the Related Documents or (c) the classification and proposed treatment (including any allowance) of any Claim in the Prepackaged Plan. Dissolution of Statutory Committees Pursuant to the Prepackaged Plan, on the Effective Date, any statutory committees appointed in the Chapter 11 Case pursuant to Section 1102 of the Bankruptcy Code will cease to exist and its members and employees or agents (including, without limitation, attorneys, investment bankers, financial advisors, accountants and other professionals) shall be released and discharged from further duties, responsibilities and obligations relating to and arising from and in connection with this Chapter 11 Case. Fees, Costs and Expenses of Trustee Pursuant to the Prepackaged Plan, and subject to applicable provisions of the Bankruptcy Code and Bankruptcy Court authorization and approval to the extent necessary, the Trustee will be entitled to payment for its reasonable fees, costs and expenses as provided for pursuant to the Indenture; provided, however, that if the Company or Reorganized Salant decides, in its sole discretion, that the fees, costs and expenses of the Trustee are reasonable, the Company or Reorganized Salant may pay the same without application to or further order of the Bankruptcy Court unless the Confirmation Order provides otherwise. Amendments and Modifications to the Prepackaged Plan Pursuant to the Prepackaged Plan, the Prepackaged Plan may be altered, amended or modified by the Company, after consultation with Magten, before or after the Confirmation Date, as provided in Section 1127 of the Bankruptcy Code. Section 1125(e) of the Bankruptcy Code The Prepackaged Plan provides that upon confirmation of the Prepackaged Plan, (i) the Company will be deemed to have solicited acceptances of the Prepackaged Plan in good faith and in compliance with the applicable provisions of the Bankruptcy Code and (ii) the Company, Magten, Apollo, and each of the members of the Creditors' Committee, if any (and each of their respective affiliates, agents, directors, officers, employees, advisors, and attorneys) will be deemed to have participated in good faith and in compliance with the applicable provisions of the Bankruptcy Code in the offer, issuance, sale, and purchase of the securities offered and sold under the Prepackaged Plan, and therefore will have no liability for the violation of any applicable law, rule, or regulation governing the solicitation of acceptances or rejections of the Prepackaged Plan or the offer, issuance, sale, or purchase of the securities offered and sold under the Prepackaged Plan. Pursuant to the Prepackaged Plan, on the Effective Date or as soon thereafter as is practicable, Reorganized Salant will file with the Secretary of State of the State of Delaware, in accordance with Sections 103 and 303 of the DGCL, the Reorganized Salant Certificate of Incorporation and such certificate will be the certificate of incorporation for Reorganized Salant. Pursuant to the Prepackaged Plan, on the Effective Date, the Reorganized Salant By-Laws will become the by-laws of Reorganized Salant. FEASIBILITY OF THE PREPACKAGED PLAN AND THE BEST INTERESTS OF CREDITORS TEST CONFIRMATION HEARING Section 1128(a) of the Bankruptcy Code requires the Bankruptcy Court, after notice, to hold a hearing on confirmation of a plan. As promptly as practicable after the commencement by the Company of the Chapter 11 Case, the Company will request the Bankruptcy Court to schedule a Confirmation Hearing. Notice of the Confirmation Hearing will be provided to all known creditors and equity holders or their representatives. The Confirmation Hearing may be adjourned from time to time by the Bankruptcy Court without further notice except for an announcement of the adjourned date made at the Confirmation Hearing or any subsequent adjourned confirmation hearing. Section 1128(b) of the Bankruptcy Code provides that any party-in-interest may object to confirmation of the Prepackaged Plan. Pursuant to the Bankruptcy Rules, any objection to confirmation of the Prepackaged Plan must be in writing, must conform to the Bankruptcy Rules, must set forth the name of the objector and, the nature and amount of claims or interests held or asserted by the objector and against the Company's estate or property, and the basis for the objection and the specific grounds therefor, and must be filed with the Bankruptcy Court, with a copy to Chambers, together with proof of service thereof, and served upon (i) Fried, Frank, Harris, Shriver & Jacobson, Attorneys for the Company, One New York Plaza, New York, New York 10004, Attention: Brad Eric Scheler, Esq. and Lawrence A. First, Esq., (ii) The United States Trustee for the Southern District of New York, 80 Broad Street, Third Floor, New York, New York 10004, Attention: Carolyn S. Schwartz, Esq., (iii) Hebb & Gitlin, Attorneys for Magten, One State Street, Hartford, Connecticut 06103-3178, Attention: Evan Flaschen, Esq., and (iv) the attorneys for any official committee of unsecured creditors that may be appointed in the Company's Chapter 11 Case, so as to be received no later than the date and time designated in the notice of the Confirmation Hearing. Objections to confirmation of the Prepackaged Plan are governed by Bankruptcy Rule 9014. UNLESS AN OBJECTION TO CONFIRMATION IS TIMELY SERVED AND FILED, IT MAY NOT BE CONSIDERED BY THE BANKRUPTCY COURT. At the Confirmation Hearing, the Bankruptcy Court will confirm the Prepackaged Plan only if all of the following requirements of Section 1129(a) of the Bankruptcy Code are met: 1. The Prepackaged Plan complies with the applicable provisions of the Bankruptcy Code. 2. The Company complies with the applicable provisions of the Bankruptcy Code. 3. The Prepackaged Plan has been proposed in good faith and not by any means forbidden by law. 4. Any payment made or to be made by the Company, or by an entity issuing securities, or acquiring property under the Prepackaged Plan, for services or for costs and expenses in, or in connection with, the Chapter 11 Case or in connection with the Prepackaged Plan and incident to the Chapter 11 Case has been approved by, or be subject to the approval of, the Bankruptcy Court as reasonable. 5. The Company has disclosed the identity and affiliations of any individual proposed to serve, after confirmation of the Prepackaged Plan, as a director or officer of Reorganized Salant, or a successor to the Company under the Prepackaged Plan, and the appointment to or continuance in such office by such individual must be consistent with the interests of creditors and interest holders and with public policy. The Company has disclosed the identity of any "insider" who will be employed or retained by Reorganized Salant and the nature of any compensation for such "insider." 6. With respect to each Impaired Class of Claims or Interests, each holder of a Claim or Interest in such Class has either accepted the Prepackaged Plan or will receive or retain under the Prepackaged Plan on account of such Claim or Interest property of a value, as of the Effective Date, that is not less than the amount that such holder would receive or retain if the Company were liquidated on the Effective Date under Chapter 7 of the Bankruptcy Code. 7. With respect to each Class of Claims or Interests, such Class has either accepted the Prepackaged Plan or is not Impaired by the Prepackaged Plan. If this requirement is not met, the Prepackaged Plan may still be confirmed pursuant to Section 1129(b) of the Bankruptcy Code. See "FEASIBILITY OF THE PREPACKAGED PLAN AND THE BEST INTERESTS OF CREDITORS TEST -- Nonconsensual Confirmation." 8. Except to the extent that the Holder of a particular Claim has agreed to a different treatment of its Claim, the Prepackaged Plan provides that (i) allowed Administrative Expenses will be paid in full in Cash on the Effective Date, (ii) Allowed Priority Claims will be paid in full in Cash on the Effective Date, or if the Class of such Claims accepts the Prepackaged Plan, the Prepackaged Plan may provide for deferred Cash payments, of a value as of the Effective Date, equal to the Allowed amount of such Claims, and (iii) the holder of an Allowed Priority Tax Claim will receive on account of such Claim deferred Cash payments over a period not exceeding six years after the date of assessment of such Claim, of a value, as of the Effective Date, equal to the Allowed amount of such Claim. 9. If a Class of Claims is Impaired under the Prepackaged Plan, at least one Class of Claims that is Impaired by the Prepackaged Plan has accepted the Prepackaged Plan, determined without including any acceptance of the Prepackaged Plan by any "insider." 10. Confirmation of the Prepackaged Plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the Company or any successor of the Company under the Prepackaged Plan. 11. All fees payable under Section 1930 of title 28 as determined by the Bankruptcy Court at the Confirmation Hearing have been paid or the Prepackaged Plan provides for the payment of all such fees on the Effective Date. 12. The Prepackaged Plan provides for the continuation after the Effective Date of payment of all Retiree Benefits (as defined in Section 1114 of the Bankruptcy Code), at the level established pursuant to subsection 1114(e)(1)(B) or 1114(g) of the Bankruptcy Code at any time prior to confirmation of the Prepackaged Plan, for the duration of the period the Company has obligated itself to provide such benefits. The Company believes that the Prepackaged Plan satisfies all of the statutory requirements of Chapter 11 of the Bankruptcy Code. Certain of these requirements are discussed in more detail below. FEASIBILITY OF THE PREPACKAGED PLAN In connection with confirmation of the Prepackaged Plan, Section 1129(a)(11) requires that the Bankruptcy Court find that confirmation of the Prepackaged Plan is not likely to be followed by the liquidation or the need for further financial reorganization of the Company. This is the so-called "feasibility" test. To support its belief in the feasibility of the Prepackaged Plan, the Company has prepared the Projections for the years 1998 through 2000, which Projections are a part of the Three-Year Business Plan. The professionals have not performed an independent investigation of the accuracy or completeness of the Projections. See "FINANCIAL PROJECTIONS AND ASSUMPTIONS USED." The Projections indicate that Reorganized Salant should have sufficient cash flow to make the payments required under the Prepackaged Plan on the Effective Date and to repay and service its debt obligations and to maintain its operations. Accordingly, the Company believes that the Prepackaged Plan complies with the standard of Section 1129(a)(11) of the Bankruptcy Code. As noted in the Projections, however, the Company cautions that no representations can be made as to the accuracy of the Projections or as to Reorganized Salant's ability to achieve the projected results. Many of the assumptions upon which the Projections are based are subject to uncertainties outside the control of the Company. Some assumptions may not materialize, and events and circumstances occurring after the date on which the Projections were prepared may be different from those assumed or may be unanticipated, and may adversely affect the Company's financial results. As discussed elsewhere in this Exchange Restructuring Prospectus, there are numerous circumstances that may cause actual results to vary from the projected results, and the variations may be material and adverse. See "RISK FACTORS" for a discussion of certain risk factors that may affect financial feasibility of the Prepackaged Plan. THE PROJECTIONS WERE NOT PREPARED WITH A VIEW TOWARD COMPLIANCE WITH THE GUIDELINES ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS OR THE RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION REGARDING PROJECTIONS. FURTHERMORE, THE PROJECTIONS HAVE NOT BEEN AUDITED BY THE COMPANY'S INDEPENDENT CERTIFIED ACCOUNTANTS. ALTHOUGH PRESENTED WITH NUMERICAL SPECIFICITY, THE PROJECTIONS ARE BASED UPON A VARIETY OF ASSUMPTIONS, SOME OF WHICH HAVE NOT BEEN ACHIEVED TO DATE AND MAY NOT BE REALIZED IN THE FUTURE, AND ARE SUBJECT TO SIGNIFICANT BUSINESS, LITIGATION, ECONOMIC, AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY. CONSEQUENTLY, THE PROJECTIONS SHOULD NOT BE REGARDED AS A REPRESENTATION OR WARRANTY BY THE COMPANY, OR ANY OTHER PERSON, THAT THE PROJECTIONS WILL BE REALIZED. ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE PRESENTED IN THE PROJECTIONS. BEST INTERESTS TEST As described above, the Bankruptcy Code requires that each holder of an impaired claim or equity interest either (a) accepts the plan or (b) receives or retains under the plan property of a value, as of the effective date of the plan, that is not less than the value such holder would receive or retain if the Company were liquidated under Chapter 7 of the Bankruptcy Code on the Effective Date. The first step in meeting this test is to determine the dollar amount that would be generated from the liquidation of the Company's assets and properties in the context of a Chapter 7 liquidation case. The total cash available would be the sum of the proceeds from the disposition of the Company's assets and the cash held by the Company at the time of the commencement of the Chapter 7 case. The next step is to reduce that total by the amount of any claims secured by such assets, the costs and expenses of the liquidation, and such additional administrative expenses and priority claims that may result from the termination of the Company's business and the use of Chapter 7 for the purposes of liquidation. Next, any remaining cash would be allocated to creditors and shareholders in strict priority in accordance with Section 726 of the Bankruptcy Code (see discussion below). Finally, the present value of such allocations (taking into account the time necessary to accomplish the liquidation) is compared to the value of the property that is proposed to be distributed under the Prepackaged Plan on the Effective Date. The Company's costs of liquidation under Chapter 7 would include the fees payable to a trustee in bankruptcy, as well as those which might be payable to attorneys and other professionals that such a trustee may engage, plus any unpaid expenses incurred by the Company during a Chapter 11 case and allowed in the Chapter 7 case, such as compensation for attorneys, financial advisors, appraisers, accountants and other professionals, and costs and expenses of members of any statutory committee of unsecured creditors appointed by the United States Trustee pursuant to Section 1102 of the Bankruptcy Code and any other committee so appointed. In addition, claims would arise by reason of the breach or rejection of obligations incurred and executory contracts entered into by the Company both prior to, and during the pendency of, the Chapter 11 Case. The foregoing types of claims, costs, expenses, and fees and such other claims which may arise in a liquidation case or result from a pending Chapter 11 case would be paid in full from the liquidation proceeds before the balance of those proceeds would be made available to pay pre-Chapter 11 priority and unsecured claims. In applying the "best interests test," it is possible that claims and equity interests in the Chapter 7 case may not be classified according to the seniority of such claims and equity interests as provided in the Prepackaged Plan. In the absence of a contrary determination by the Bankruptcy Court, all pre-Chapter 11 unsecured claims which have the same rights upon liquidation and would be treated as one class for purposes of determining the potential distribution of the liquidation proceeds resulting from the Company's Chapter 7 case. The distributions from the liquidation proceeds would be calculated ratably according to the amount of the claim held by each creditor. Therefore, creditors who claim to be third-party beneficiaries of any contractual subordination provisions might be required to seek to enforce such contractual subordination provisions in the Bankruptcy Court or otherwise. Section 510 of the Bankruptcy Code specifies that such contractual subordination provisions are enforceable in a Chapter 7 liquidation case. The Company believes that the most likely outcome of liquidation proceedings under Chapter 7 would be the application of the rule of absolute priority of distributions. Under that rule, no junior creditor receives any distribution until all senior creditors are paid in full, with interest, and no equity holder receives any distribution until all creditors are paid in full with interest. Consequently, the Company believes that in a Chapter 7 case, Holders of Senior Note Claims would likely receive less than they would receive under the Prepackaged Plan and Holders of General Unsecured Claims, Old Common Stock Interests and Other Interests would receive no distributions of property. After consideration of the effects that a Chapter 7 liquidation would have on the ultimate proceeds available for distribution to creditors in a Chapter 11 case, including (i) the increased costs and expenses of a liquidation under Chapter 7 arising from fees payable to a trustee in bankruptcy and professional advisors to such trustee, (ii) the erosion in value of assets in a Chapter 7 case in the context of the expeditious liquidation required under Chapter 7 and the "forced sale" atmosphere that would prevail, (iii) the adverse effects on the salability of the capital stock of the subsidiaries as a result of the departure of key employees and the loss of major customers and suppliers, and (iv) substantial increases in claims which would be satisfied on a priority basis or on a parity with creditors in a Chapter 11 case, the Company has determined that confirmation of the Prepackaged Plan will provide each creditor and equity holder with a recovery that is not less than it would receive pursuant to a liquidation of the Company under Chapter 7 of the Bankruptcy Code. Moreover, the Company believes that the value of any distributions from the liquidation proceeds to each class of allowed claims in a Chapter 7 case would be the same or less than the value of distributions under the Prepackaged Plan because such distributions in a Chapter 7 case may not occur for a substantial period of time. In this regard, it is possible that distribution of the proceeds of the liquidation could be delayed for a year or more after the completion of such liquidation in order to resolve the claims and prepare for distributions. In the event litigation were necessary to resolve claims asserted in the Chapter 7 case, the delay could be further prolonged. NONCONSENSUAL CONFIRMATION In the event that any Impaired Class of Claims or Interests does not accept the Prepackaged Plan, the Bankruptcy Court may nevertheless confirm the Prepackaged Plan if all other requirements under Section 1129(a) of the Bankruptcy Code are satisfied, and if, with respect to each Impaired Class which has not accepted the Prepackaged Plan, the Bankruptcy Court determines that the Prepackaged Plan does not "discriminate unfairly" and is "fair and equitable" with respect to such Class. Confirmation under Section 1129(b) of the Bankruptcy Code requires that at least one Impaired Class of Claims accepts the Prepackaged Plan, excluding any acceptance of the Prepackaged Plan by an "insider" (as that term is defined in section 101 of the Bankruptcy Code). In the event Class 3 accepts the Prepackaged Plan, the Company intends to seek confirmation of the Prepackaged Plan notwithstanding the nonacceptance of one or more other Impaired Classes. No Unfair Discrimination A plan of reorganization does not "discriminate unfairly" with respect to a nonaccepting Class if the value of the cash and/or securities to be distributed to the nonaccepting Class is equal or otherwise fair when compared to the value of distributions to other Classes whose legal rights are the same as those of the nonaccepting Class. The Company believes that the Prepackaged Plan would not discriminate unfairly against any nonaccepting Class of Claims or Interests. Fair and Equitable Test The "fair and equitable" test of Section 1129(b) of the Bankruptcy Code requires absolute priority in the payment of claims and interests with respect to any nonaccepting Class or Classes. The "fair and equitable" test established by the Bankruptcy Code is different for secured claims, unsecured claims and equity interests, and includes the following treatment: Secured Claims. A plan is fair and equitable with respect to a nonaccepting class of secured claims if (1) the holder of each claim in such class will retain its lien or liens and receive deferred cash payments totaling the allowed amount of its claim, of a value, as of the effective date of the plan, equal to the value of such holder's interest in the collateral, (2) the holder of each claim in such class will receive the proceeds from any sale of such collateral or (3) the holder of each claim in such class will realize the indubitable equivalent of its allowed secured claim. Unsecured Claims. A plan is fair and equitable with respect to a nonaccepting class of unsecured claims if (1) the holder of each claim in such class will receive or retain under the plan property of a value, as of the effective date of the plan, equal to the allowed amount of its claim, or (2) holders of claims or interests that are junior to the claims of such creditors will not receive or retain any property under the plan on account of such junior claim or interest. Equity Interests. A plan is fair and equitable with respect to a nonaccepting class of interests if the plan provides that (1) each member of such class receives or retains on account of its interest property of a value, as of the effective date of the plan, equal to the greatest of the allowed amount of any fixed liquidation preference to which such holder is entitled, any fixed redemption price to which such holder is entitled, or the value of such interest, or (2) holders of interests that are junior to the interests of such class will not receive or retain any property under the plan on account of such junior interests. In the event that Class 6 does not accept the Prepackaged Plan, and notwithstanding that Class 7 is deemed not to have accepted the Prepackaged Plan, the Company believes and will be prepared to demonstrate at the Confirmation Hearing that the Prepackaged Plan is "fair and equitable" with respect to all Impaired Classes of Claims and Interests, because, in each case, no class that is junior to such a dissenting class will receive or retain any property on account of the claims or equity interests in such class. SECURITIES ISSUED UNDER PREPACKAGED PLAN -- APPLICATION OF SECURITIES ACT THE SOLICITATION The Company has registered under the Securities Act the offer to exchange New Common Stock and Warrants for Senior Notes and Old Common Stock which may be deemed to be made by the Company pursuant to the Solicitation. ISSUANCE AND RESALE OF NEW SECURITIES UNDER THE PREPACKAGED PLAN Section 1145 of the Bankruptcy Code generally exempts from registration under the Securities Act (and any equivalent state securities or "blue sky" laws) the offer of a debtor's securities under a Chapter 11 plan if such securities are offered or sold in exchange for a claim against, or equity interest in, such debtor. In reliance upon this exemption, the New Common Stock and Warrants to be issued on the Effective Date as provided in the Prepackaged Plan generally will be exempt from the registration requirements of the Securities Act, and state and local securities laws. Accordingly, such securities may be resold without registration under the Securities Act or other federal securities laws pursuant to the exemption provided by Section 4(l) of the Securities Act, unless the holder is an "underwriter" with respect to such securities, as that term is defined in the Bankruptcy Code. In addition, such securities generally may be resold without registration under state securities laws pursuant to various exemptions provided by the respective laws of the several states. However, recipients of securities issued under the Prepackaged Plan are advised to consult with their own counsel as to the availability of any such exemption from registration under state law in any given instance and as to any applicable requirements or conditions to such availability. Section 1145(b) of the Bankruptcy Code defines "underwriter" under section 2(11) of the Securities Act of 1933 as an entity who (A) purchases a claim against, interest in, or claim for an administrative expense in the case concerning, the debtor, if such purchase is with a view to distribution of any security received or to be received in exchange for such a claim or interest; (B) offers to sell securities offered or sold under a plan for the holders of such securities; (C) offers to buy securities offered or sold under a plan from the holders of such securities, if such offer to buy is (i) with a view to distribution of such securities, and (ii) under an agreement made in connection with the plan, with the consummation of a plan, or with the offer or sale of securities under a plan; or (D) is an issuer, as used in section 2(11) of the Securities Act of 1933, with respect to such securities. Notwithstanding the foregoing, statutory underwriters may be able to sell securities without registration pursuant to the resale limitations of Rule 144 under the Securities Act which, in effect, permits the resale of securities received by statutory underwriters pursuant to a Chapter 11 plan, subject to applicable volume limitation, notice and manner of sale requirements, and certain other conditions. Parties which believe they may be statutory underwriters as defined in section 1145 of the Bankruptcy Code are advised to consult with their own counsel as to the availability of the exemption provided by Rule 144. For a description of the Registration Rights Agreement, see "DESCRIPTION OF REGISTRATION RIGHTS AGREEMENT." There can be no assurance that an active market for any of the securities to be distributed under the Prepackaged Plan will develop and no assurance can be given as to the prices at which they might be traded. BECAUSE OF THE COMPLEX, SUBJECTIVE NATURE OF THE QUESTION OF WHETHER A PARTICULAR HOLDER MAY BE AN UNDERWRITER, THE COMPANY MAKES NO REPRESENTATION CONCERNING THE ABILITY OF ANY PERSON TO DISPOSE OF THE SECURITIES TO BE DISTRIBUTED UNDER THE PREPACKAGED PLAN. MOREOVER, SUCH SECURITIES, OR THE DOCUMENTS THAT ESTABLISH THE TERMS AND PROVISIONS THEREOF, MAY CONTAIN TERMS AND LEGENDS THAT RESTRICT OR INDICATE THE EXISTENCE OF RESTRICTIONS ON THE TRANSFERABILITY OF SUCH SECURITIES. THE COMPANY RECOMMENDS THAT RECIPIENTS OF SECURITIES UNDER THE PREPACKAGED PLAN CONSULT WITH LEGAL COUNSEL CONCERNING THE LIMITATIONS ON THEIR ABILITY TO DISPOSE OF SUCH SECURITIES. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PREPACKAGED PLAN ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PREPACKAGED PLAN If the Chapter 11 case is commenced but the Prepackaged Plan is not confirmed, the alternatives include (a) continuation of the Chapter 11 Case and formulation of an alternative plan or plans of reorganization or (b) liquidation of the Company under Chapter 7 or Chapter 11 of the Bankruptcy Code. CONTINUATION OF THE CHAPTER 11 CASE If the Company were to commence the Chapter 11 Case and remain in Chapter 11, the Company could continue to operate its businesses and manage its properties as a debtor-in-possession, but it would remain subject to the restrictions imposed by the Bankruptcy Code. It is not clear whether the Company could survive as a going-concern in a protracted Chapter 11 case. The Company could have difficulty sustaining the high costs, operating financing, and the confidence of the Company's and its subsidiaries customers and trade vendors, of the Company remaining in Chapter 11. Ultimately, the Company (or other parties in interest) could propose another plan or attempt to liquidate the Company under Chapter 7 or Chapter 11. Such plans might involve either a reorganization and continuation of the Company's business, or an orderly liquidation of its assets, or a combination of both. LIQUIDATION UNDER CHAPTER 7 OR CHAPTER 11 If the Chapter 11 Case is commenced, but the Prepackaged Plan is not confirmed, the Company's Chapter 11 Case could be converted to a liquidation case under Chapter 7 of the Bankruptcy Code. In a Chapter 7 case, a trustee would be appointed to liquidate promptly the assets of the Company. The Company believes that in liquidation under Chapter 7, before creditors received any distributions, additional administrative expenses involved in the appointment of a trustee and attorneys, accountants, and other professionals to assist such trustee, along with an increase in expenses associated with an increase in the number of unsecured claims that would be expected, would cause a substantial diminution in the value of the estate. The assets available for distribution to creditors would be reduced by such additional expenses and by Claims, some of which would be entitled to priority, which would arise by reason of the liquidation and from the rejection of leases and other executory contracts in connection with the cessation of the Company's operations and the failure to realize the greater going-concern value of the Company's assets. The Company could also be liquidated pursuant to the provisions of a Chapter 11 plan of reorganization. In a liquidation under Chapter 11, the Company's assets could be sold in a more orderly fashion over a longer period of time than in a liquidation under Chapter 7. Thus, Chapter 11 liquidation might result in larger recoveries than in a Chapter 7 liquidation, but the delay in distributions could result in lower present values received and higher administrative costs. Because a trustee is not required in a Chapter 11 case, expenses for professional fees could be lower than in a Chapter 7 case, in which a trustee must be appointed. Any distribution to the holders of Claims under a Chapter 11 liquidation plan probably would be delayed substantially. The Company's liquidation analysis, prepared with its financial advisors and included above in this Exchange Restructuring Prospectus, is by law premised upon a liquidation in a Chapter 7 case. In that analysis, the Company has taken into account the nature, status, and underlying value of its assets, the ultimate realizable value of its assets, and the extent to which such assets are subject to liens and security interests. TENDERING AND VOTING PROCEDURES The following tendering and voting procedures relate to the Exchange Offer. The instructions for voting on the Prepackaged Plan are set forth in the section entitled "VOTING AND CONFIRMATION OF THE PREPACKAGED PLAN" below and in the instructions attached to the Ballots and Master Ballots. THE RESTRUCTURING Upon the terms and subject to the conditions set forth in this Exchange Restructuring Prospectus and in the accompanying Letter of Transmittal, the Company is offering in the Exchange Offer to issue to each Noteholder 175.977555 shares (adjusted to reflect the ten-to-one reverse stock split described herein) of New Common Stock, for each $1,000 principal amount of Senior Notes (together with all accrued and unpaid interest) which is validly tendered and not withdrawn (as described below) prior to the Expiration Date. Nominees or other record holders of Senior Notes that hold for more than one beneficial owner will be entitled to make elections that reflect the elections of each of the beneficial holders for whom they exchange Senior Notes. The Company is also soliciting from the holders of Senior Notes acceptances of the Prepackaged Plan, under which the Senior Notes would be exchanged for the same consideration offered in the Exchange Offer. This Exchange Restructuring Prospectus and the Letter of Transmittal are first being mailed to registered Noteholders on or about ______ __, 1998. GENERAL As of February 28, 1998, there were outstanding $104.879 million aggregate principal amount of Senior Notes (plus accrued but unpaid interest thereon of approximately $5.5 million). For purposes of the Exchange Offer, the Company shall be deemed to have accepted for exchange, and to have exchanged, validly tendered Senior Notes in the Exchange Offer when, as and if the Company has given oral or written notice thereof to the Depositary. The Depositary will act as agent for the tendering Noteholders for the purposes of receiving New Common Stock from the Company and transmitting such New Common Stock to tendering Noteholders. The New Common Stock will be delivered in exchange for Senior Notes accepted in the Exchange Offer promptly after acceptance on the Expiration Date or, in the event of confirmation of the Prepackaged Plan, promptly after the Effective Date as described in the Prepackaged Plan. The Company's obligation to accept Senior Notes for exchange in the Exchange Offer is subject to the satisfaction of the conditions set forth below under "Conditions." The Company reserves the right, in its sole discretion, to waive any or all of the conditions to the Exchange Offer or amend the terms of the Exchange Offer but does not currently intend to waive any condition or amend any of the terms of the Exchange Offer. Pursuant to the Letter Agreement, Magten's consent is required for the Company to waive the Minimum Tender Condition. The Exchange Offer is subject to extension of the time period during which it is open. See "Expiration Date; Extensions; Amendments" below. New Common Stock will be rounded up to the nearest whole number in the Exchange Restructuring and the Prepackaged Restructuring. Noteholders who receive New Common Stock pursuant to the Exchange Restructuring will not be required to pay brokerage commissions or fees to the Company or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the receipt of New Common Stock pursuant to the Exchange Restructuring. The Company will pay all charges and expenses, other than certain applicable taxes, in connection with the Exchange Restructuring. INTEREST ON SENIOR NOTES Exchange Offer consideration will be paid in respect of each $1,000 principal amount of Senior Notes, together with all accrued and unpaid interest, tendered and accepted for exchange. By tendering Senior Notes, a Noteholder waives all rights to receive any payments with respect to accrued but unpaid interest on such Senior Notes other than the New Common Stock to be issued pursuant to the Exchange Offer. EXPIRATION DATE; EXTENSIONS; AMENDMENTS With respect to the Exchange Offer and the solicitation of acceptances of the Prepackaged Plan, the term "Expiration Date" shall mean 5:00 p.m., New York City time, on ______ __, 1998, unless the Company, in its sole discretion, extends the Exchange Offer or solicitation period, in which case the term "Expiration Date" for such Exchange Offer or solicitation period shall mean the last time and date to which the Exchange Offer or solicitation period is extended. The Company expressly reserves the right, at any time or from time to time, to extend the period during which the Exchange Offer is open. In order to extend the Expiration Date, the Company will notify the Depositary of any extension by oral or written notice and will make a public announcement thereof, the announcement to be issued no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. Such announcement may state that the Company is extending the Exchange Offer for a specified period or on a daily basis. The Company also expressly reserves the right to (a) delay accepting any Senior Notes, to extend the Exchange Offer and the solicitation period for acceptances of the Prepackaged Plan or to terminate the Exchange Offer and the solicitation period for acceptances of the Prepackaged Plan and not accept Senior Notes not previously accepted, if any of the conditions set forth herein under "Conditions" shall not have been satisfied or validly waived by the Company, by giving oral or written notice of such delay, extension or termination to the Depositary or (b) amend, at any time or from time to time, the terms of the Exchange Offer and the Prepackaged Plan in any respect. The Company also expressly reserves the right to terminate the Exchange Offer at any time as described herein under "Conditions." Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by public announcement thereof. Pursuant to the Letter Agreement, the obligations of Magten and Apollo under the Letter Agreement will terminate if the Restructuring Date does not occur on or before November 30, 1998. If the terms of the Exchange Offer or the Prepackaged Plan are amended in a manner determined by the Company to constitute a material change, the Company will promptly disclose such amendment in a manner reasonably calculated to inform the affected Noteholders of such amendment and the Company will extend the Exchange Offer or the solicitation period for acceptances of the Prepackaged Plan for a period which the Company in its discretion deems appropriate, depending upon the significance of the amendment and the manner of disclosure to Noteholders, if the Exchange Offer or the solicitation period for acceptances of the Prepackaged Plan would otherwise expire during such period. Any such extension shall, in the case of the Exchange Offer and, prior to the filing of the Prepackaged Plan, in the case of the Prepackaged Plan with the Bankruptcy Court, be in compliance with any applicable rules and regulations of the Commission. Without limiting the manner in which the Company may choose to make a public announcement of any extension, amendment or termination of the Exchange Offer or the solicitation period for acceptances of the Prepackaged Plan, the Company shall have no obligation, unless otherwise required by law, to publish, advertise, or otherwise communicate any such public announcement, other than by making a timely release to the Dow Jones News Service. HOW TO TENDER IN THE EXCHANGE OFFER To tender Senior Notes pursuant to the Exchange Offer, a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof) or an Agent's Message in the case of a book-entry transfer of Senior Notes, together with any signature guarantees and any other documents required by the instructions to the Letter of Transmittal, must be received by the Depositary at one of its addresses set forth on the back cover page of this Exchange Restructuring Prospectus prior to the Expiration Date and either (i) certificates representing such Senior Notes must be received by the Depositary at one of its address or (ii) such Senior Notes must be transferred pursuant to the procedures for book-entry transfer set forth below and the book-entry transfer of such Senior Notes into the Depositary's account at a book-entry transfer facility must be confirmed, in each case, prior to the Expiration Date. LETTERS OF TRANSMITTAL AND ANY SENIOR NOTES TENDERED PURSUANT TO THE EXCHANGE OFFER SHOULD BE SENT ONLY TO THE DEPOSITARY, NOT THE COMPANY, THE TRUSTEE, THE INFORMATION AGENT OR THE FINANCIAL ADVISOR. ONLY REGISTERED NOTEHOLDERS, OR PERSONS WHO HAVE OBTAINED A PROPERLY COMPLETED NOTE POWER FROM THE REGISTERED NOTEHOLDERS THEREOF, MAY TENDER IN THE EXCHANGE OFFER. Any beneficial holder whose Senior Notes are registered in the name of his broker, dealer, commercial bank, trust company or other nominee and who wishes to tender Senior Notes should contact such registered Noteholder and instruct such registered Noteholder to tender Senior Notes on his behalf. If such beneficial holder wishes to tender Senior Notes on his own behalf, such beneficial holder must, prior to completing and executing the Letter of Transmittal and delivering his Senior Notes, either make appropriate arrangements to register ownership of the Senior Notes in such beneficial holder's name or obtain a properly completed note power from the Noteholder. The transfer of record ownership of Senior Notes may take considerable time and, depending on when such transfer is requested, may not be accomplished prior to the Expiration Date. The Depositary and The Depository Trust Company ("DTC") have confirmed that the Exchange Offer is eligible to ATOP. Accordingly, DTC participants may electronically transmit their acceptance of the Exchange Offer by causing DTC to transfer Senior Notes to the Depositary in accordance with DTC's ATOP procedures for transfer. DTC will then send an Agent's Message to the Depositary. The term "Agent's Message" means a message transmitted by DTC, received by the Depositary and forming part of the confirmation of book-entry transfer, which states that DTC has received an express acknowledgment from the participant in DTC tendering Senior Notes which are the subject of such confirmation of book-entry transfer that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and that the Company may enforce such agreement against such participant. TENDERS--ADDITIONAL INFORMATION The tender by a Noteholder pursuant to one of the procedures set forth herein will constitute an agreement between such Noteholder and the Company in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. The method of delivery of Senior Notes, the Letter of Transmittal and all other required documents to be delivered to the Depositary, including delivery through a book-entry transfer facility and any acceptance or Agent's Message transmitted through ATOP, is at the election and risk of each Noteholder. Except as otherwise provided herein, such delivery will be deemed made only when actually received by the Depositary. If such delivery is by mail, registered mail with return receipt requested and properly insured, is recommended, and sufficient time should be allowed to assure timely delivery. No documents should be sent to the Company, the Company's financial advisor, the Information Agent, the Trustee or the transfer agent for the New Common Stock. The Depositary will establish accounts with respect to the Senior Notes within two business days after the date of this Exchange Restructuring Prospectus at DTC and the Philadelphia Depository Trust Company ("Philadep," together with DTC, collectively referred to as the "Book-Entry Transfer Facilities") for the purpose of the Exchange Offer. Any financial institution that is a participant in any of the Book-Entry Transfer Facilities' systems may make book entry delivery of the Senior Notes by causing DTC or Philadep to transfer such Senior Notes into the Depositary's account in accordance with such Book-Entry Transfer Facility's procedure for such transfer. Although delivery of Senior Notes may be effected through book entry transfer in the Depositary's account at DTC or Philadep, the Letter of Transmittal or facsimile thereof, with any required signature guarantees and any other required documents, or an Agent's Message, must in any case, be transmitted to and received or confirmed by the Depositary at one of its addresses set forth on the back cover of this Exchange Restructuring Prospectus prior to the Expiration Date. DELIVERY OF DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. Signatures on each Letter of Transmittal must be guaranteed by an Eligible Institution unless the Senior Notes delivered pursuant thereto are delivered (a) by a Noteholder (or a participant in one of the Book-Entry Transfer Facilities whose name appears on a security position listing as the owner of Senior Notes) who has not completed the boxes on the Letter of Transmittal entitled "Special Issuance Instructions" or "Special Delivery Instructions" or (b) for the account of an Eligible Institution. An "Eligible Institution" means a participant in the Security Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Program or the Stock Exchange Medallion Program. If the Senior Notes are registered, in the name of a person other than the signer of the Letter of Transmittal, then the signatures on the Letters of Transmittal accompanying the tendered Senior Notes must be guaranteed by an Eligible Institution as described above. See Instructions to the Letter of Transmittal. If the Letter of Transmittal with respect to any Senior Notes is signed by a person other than the Noteholder of any certificate(s) listed hereon, such certificate(s) must be endorsed or accompanied by appropriate note powers signed exactly as the name or names of the Noteholder or Noteholders appear on the certificate(s) with the signature(s) on the Senior Notes or instruments of transfer guaranteed as provided herein. If the exchanging holder is not the registered holder of the Senior Notes, then the registered holder must also sign a valid proxy in favor of the exchanging holder. If the Letter of Transmittal, or any certificates, note powers, stock powers or proxies are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company of their authority to so act must be submitted. Tenders of Senior Notes for exchange may be made only in principal amounts of $1,000 and integral multiples thereof. If a Noteholder desires to tender Senior Notes, but the certificates evidencing such Senior Notes have been mutilated, lost, stolen or destroyed, such Noteholder should contact the Trustee to receive information about the procedures for obtaining replacement certificates for Senior Notes at the following address or telephone number: [_______________] [_______________] Notwithstanding any other provision hereof, distributions in respect of Senior Notes tendered and accepted for exchange pursuant to the Exchange Offer will, in all cases, be made only after timely receipt by the Depositary of such Senior Notes (or confirmation of a book-entry transfer of such Senior Notes into the Depositary's account at a Book-Entry Transfer Facility as described above) and a Letter of Transmittal (or facsimile thereof) with respect to such Senior Notes, properly completed and duly executed, with any required signature guarantees and any other documents required by the Letter of Transmittal, or an Agent's Message in the case of a book-entry transfer of the Senior Notes. All questions as to the validity, form, eligibility (including time of receipt), acceptance, withdrawal and revocation of tendered Senior Notes will be resolved by the Company, whose determination will be final and binding. The Company reserves the absolute right to reject any or all tenders and withdrawals of Senior Notes that are not in proper form or the acceptance of which would, in the opinion of the Company or counsel for the Company, be unlawful. The Company also reserves the absolute right, in its sole discretion, to waive any defect or irregularity in any tender as to particular Senior Notes, whether or not similar defects or irregularities are waived in the case of other Senior Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letter of Transmittal) will be final and binding. Unless waived, any irregularities in connection with tenders and withdrawals of Senior Notes must be cured within such time as the Company shall determine in its sole discretion. None of the Company, the Depositary, the Trustee or any other person shall be under any duty to give notification of defects in such tenders, withdrawals, deliveries or revocations or shall incur any liability for failure to give such notification. Tenders and withdrawals of Senior Notes will not be deemed to have been made until such irregularities have been cured or waived. Any Senior Notes received by the Depositary that are not properly tendered or delivered and as to which the irregularities have not been cured or waived will be returned by the Depositary to the tendering Noteholders unless otherwise provided in the Letter of Transmittal as soon as practicable following the Expiration Date. THERE IS NO PROCEDURE FOR TENDERING BY GUARANTEED DELIVERY. TENDERS BY GUARANTEED DELIVERY WILL NOT BE ACCEPTED. WITHDRAWAL OF TENDERS AND REVOCATION OF VOTES. Tenders of Senior Notes may be withdrawn, subject to the procedures described herein, at any time before they are accepted for exchange by the Company. The Company shall be deemed to have accepted for exchange, and to have exchanged, validly tendered Senior Notes in the Exchange Offer when, as and if the Company has given oral or written notice thereof to the Depositary. Any Noteholder who has tendered Senior Notes, or who succeeds to the record ownership of Senior Notes in respect of which such tenders have previously been given, may withdraw such Senior Notes by delivery of a written notice of withdrawal or revocation. To be effective, a written, telegraphic or facsimile transmission notice of withdrawal or revocation of a tender must (a) be timely received by the Depositary at one of its addresses specified on the back cover of this Exchange Restructuring Prospectus, before such Senior Notes are accepted for exchange by the Company, (b) specify the name of the person who tendered the Senior Notes to be withdrawn, (c) contain the description of the Senior Notes to be withdrawn, the certificate numbers shown on the particular certificates evidencing such Senior Notes (unless the Senior Notes were tendered by Book-Entry Transfer) and the aggregate principal amount represented by such Senior Notes and (d) be signed by such Noteholder in the same manner as the original signature on the Letter of Transmittal (including any required signature guarantees), or be accompanied by documents of transfer sufficient to have the Trustee register the transfer of such Senior Notes into the name of the person withdrawing Senior Notes. The signature(s) on the notice of withdrawal must be guaranteed by an Eligible Institution unless such Senior Notes have been tendered (a) by a registered Noteholder who has not completed the boxes on the Letter of Transmittal entitled "Special Issuance Instructions" or "Special Delivery Instructions" or (b) for the account of an Eligible Institution. If the Senior Notes to be withdrawn have been delivered or otherwise identified to the Depositary, a properly completed and signed notice of withdrawal shall be effective immediately upon receipt thereof even if physical release is not yet effected. A withdrawal of Senior Notes can only be accomplished in accordance with the foregoing procedures. Any Senior Notes which have been tendered for exchange but which are not exchanged will be returned to the Noteholder without cost to such Noteholder as soon as practicable following the Expiration Date. Properly withdrawn Senior Notes may be retendered at any time prior to the Expiration Date by following one of the procedures described under "How to Tender in the Exchange Offer." Votes on the Prepackaged Plan may be revoked, subject to the procedures described at any time prior to the earlier of (i) the Filing Date and (ii) the Expiration Date. If a bankruptcy case has been commenced, withdrawal or change of such votes thereafter may be effected only with the approval of the Bankruptcy Court. See "VOTING PROCEDURES FOR PREPACKAGED PLAN AND REQUIREMENTS." If a Noteholder properly withdraws the tender of its Senior Note(s) such withdrawal will not affect such Noteholder's vote on the Prepackaged Plan. Similarly, if a Noteholder properly withdraws or changes its vote on the Prepackaged Plan, such withdrawal or change will not affect such Noteholder's tender of its Senior Note(s). CONDITIONS The obligation of the Company to accept for exchange any Senior Notes validly tendered pursuant to the Exchange Offer is subject to the satisfaction of the following conditions: (1) the Minimum Tender Condition (requiring 100% of the aggregate principal amount of the Senior Notes being validly tendered and not withdrawn prior to the Expiration Date), which pursuant to the Letter Agreement cannot be waived without the consent of Magten; (2) the approval by the Company's Stockholders of each of the Restructuring Proposals; and (3) obtaining the waiver of certain provisions under the Company's licensing agreements by certain licensors to the Company and any other consents or waivers that the Company determines are necessary to effectuate the terms and conditions of the Exchange Restructuring. In addition, notwithstanding any other provisions of the Exchange Offer and without prejudice to the Company's other rights under the Exchange Offer, the Company, in its sole discretion, may amend, extend or terminate the Exchange Offer, or may delay or refrain from accepting for exchange or exchanging any Senior Notes subject to the Exchange Offer, in each event subject to Rule 14e-1(c) under the Exchange Act, if, at any time prior to the Expiration Date, any of the following shall occur: (a) there shall be threatened, instituted, or pending any action, proceeding, application, claim or counterclaim before any court or governmental regulatory or administrative agency, authority or tribunal, domestic or foreign, which in the sole judgment of the Company (i) challenges or makes or seeks to make illegal the acceptance for exchange, or exchange of, any of the Senior Notes pursuant to the Exchange Offer, (ii) could result in a delay in the ability of the Company to accept for exchange or exchange some or all of the Senior Notes, (iii) imposes or seeks to impose limitations on the ability of the Company to acquire, hold or exercise full rights of ownership of the Senior Notes, or (iv) may prohibit, restrict or delay consummation of, or otherwise have a material adverse effect on the contemplated benefits to the Company of, the Exchange Offer or the Exchange Restructuring; (b) any change (or any condition, event or development involving a prospective change) shall have occurred or be threatened in the general economic, financial, currency exchange or market conditions in the United States or abroad that, in the sole judgment of the Company, has or may have a material adverse effect upon (i) the market prices of the Senior Notes and/or New Common Stock, (ii) the trading in the Senior Notes and/or New Common Stock, or (iii) the value of the Senior Notes to the Company; (c) a general deterioration in the prices of equity or debt (including high-yield debt) securities in the United States from levels prevailing at the date hereof shall have occurred which, in the sole judgment of the Company, may have a material adverse effect on the contemplated benefits of, or otherwise may make it inadvisable for the Company to proceed with, the Exchange Offer; (d) (i) any general suspension of or limitation on times for trading in, or limitation on prices for, securities on the NYSE, the Nasdaq Stock Market, the American Stock Exchange or in the over-the-counter market, (ii) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States or any limitation (whether or not mandatory) by any federal, state or foreign governmental authority on, or any other event which might affect, the extension of credit by banks or other financial institutions, (iii) a commencement of a war, armed hostilities or other international or national calamity directly or indirectly involving the United States, (iv) a material adverse change (or development or threatened development including a prospective material adverse change) in United States or any other currency exchange rates or a suspension of or limitation on the markets therefor or (v) in the case of any of the foregoing existing at the date hereof, a material acceleration or worsening thereof; (e) any statute, order, rule or regulation shall have been proposed or enacted or deemed applicable, or any action shall have been taken by any governmental authority, that would or might prohibit, restrict or delay consummation of the Exchange Restructuring or, in the reasonable judgment of the Company, materially affect the contemplated benefits to the Company of the Exchange Restructuring; (f) there exists, in the reasonable judgment of the Company, any other actual or threatened legal impediment (including a default under an agreement, indenture (including the Indenture) or other instrument or obligation to which the Company is a party, or by which it is bound) to the acceptance for exchange, or exchange of, any of the Senior Notes pursuant to the Exchange Offer; (g) a preliminary or permanent injunction or other order by any court or governmental agency shall have been issued and remain in effect which restrains or prohibits the consummation of any component of the Exchange Restructuring; or (h) any change shall occur or be threatened in the business, assets, properties, liabilities, condition (financial or other), income, results of operations or prospects of the Company or any of its subsidiaries, which, in the sole judgment of the Company, is or may be material to the Company. The conditions (a) through (h) set forth above are for the sole benefit of the Company. Each such condition may be asserted by the Company regardless of the circumstances, including any action or inaction by the Company giving rise thereto, and each may be waived by the Company with respect to the Senior Notes subject to the Exchange Offer in whole or in part at any time, and from time to time, in its sole discretion. If any of the conditions set forth herein are not satisfied, the Company may (a) refuse to accept any Senior Notes and return all tendered Senior Notes to tendering Noteholders, (b) extend the Exchange Offer and retain all Senior Notes previously tendered, or (c) waive or modify any of such unsatisfied conditions with respect to the Exchange Offer and accept all properly tendered Senior Notes. If such waiver constitutes a material change to the Exchange Offer, the Company will promptly disclose such waiver in a manner reasonably calculated to inform Noteholders of such waiver, and the Company will extend the Exchange Offer for a period which the Company in its discretion deems appropriate, subject to any applicable laws, depending on the significance of the waiver or amendment and the manner of disclosure to Noteholders. In the event the Company waives or modifies any of such conditions, the Company and/or Noteholders may be exposed to additional risks which cannot currently be predicted or evaluated. See "Expiration Date; Extensions; Amendments." In addition, the Company may, in its sole discretion, (a) terminate the Exchange Offer at any time prior to the Expiration Date for any reason (whether or not the Registration Statement of which this Exchange Restructuring Prospectus is a part has become effective under the Securities Act) or (b) amend, at any time or from time to time, the terms of the Exchange Offer. The Company has no present intention of terminating or amending the terms of the Exchange Offer. VOTING AND CONFIRMATION OF THE PREPACKAGED PLAN In the event that the Company pursues the Prepackaged Restructuring and files the Chapter 11 Case, the Bankruptcy Code requires that, in order to confirm the Prepackaged Plan, the Bankruptcy Court must make a series of findings concerning the Prepackaged Plan and the Company, including, without limitation, that (i) the Prepackaged Plan has classified Claims and Interests in a permissible manner, (ii) the Prepackaged Plan complies with applicable provisions of the Bankruptcy Code, (iii) the Company has complied with applicable provisions of the Bankruptcy Code, (iv) the Company has proposed the Prepackaged Plan in good faith and not by any means forbidden by law, (v) the disclosure required by Section 1125 of the Bankruptcy Code has been made, (vi) the Prepackaged Plan has been accepted by the requisite votes of creditors (except to the extent that "cramdown" is available under Section 1129(b) of the Bankruptcy Code) (see "FEASIBILITY OF THE PREPACKAGED PLAN AND THE BEST INTERESTS OF CREDITORS TEST -- NONCONSENSUAL CONFIRMATION"), (vii) the Prepackaged Plan is feasible and confirmation is not likely to be followed by the liquidation or the need for further financial reorganization of the Company, (viii) the Prepackaged Plan is in the "best interests" of all Holders of Claims or Interests in an Impaired Class by providing to such Holders on account of their Claims or Interests property of a value, as of the Effective Date, that is not less than the amount that such Holder would receive or retain in a Chapter 7 liquidation, unless each Holder of a Claim or Interest in such Class has accepted the Prepackaged Plan, (ix) all fees and expenses payable under 28 U.S.C. ss. 1930, as determined by the Bankruptcy Court at the hearing on Confirmation, have been paid or the Prepackaged Plan provides for the payment of such fees on the Effective Date, and (x) the Prepackaged Plan provides for the continuation after the Effective Date of all retiree benefits, as defined in Section 1114 of the Bankruptcy Code, at the level established at any time prior to confirmation pursuant to Sections 1114(e)(1)(B) or 1114(g) of the Bankruptcy Code, for the duration of the period that the Company has obligated itself to provide such benefits. THE FOLLOWING VOTING PROCEDURES ARE APPLICABLE SOLELY TO VOTING TO ACCEPT THE PREPACKAGED PLAN AND DO NOT APPLY TO VOTING AND TENDER PROCEDURES IN CONNECTION WITH THE EXCHANGE OFFER. VOTING PROCEDURES FOR PREPACKAGED PLAN AND REQUIREMENTS Pursuant to the Bankruptcy Code, only Classes of Claims and Interests that are "impaired," as defined in Section 1124 of the Bankruptcy Code, under the Prepackaged Plan are entitled to vote to accept or reject the Prepackaged Plan. A Class is Impaired unless the Prepackaged Plan (i) leaves unaltered the legal, equitable or contractual rights to which the Claims or Interests of that Class entitle the Holders of such Claims or Interests or (ii) cures any defaults that occurred before or after the filing of the Chapter 11 Case (other than a default of a kind specified in Section 365(b)(2) of the Bankruptcy Code), reinstates the maturity of the debt as it existed before such default, compensates the Holders for any damages incurred as a result of any reasonable reliance upon any contractual provision or applicable law entitling the Holder to accelerate the debt, and does not otherwise alter the legal, equitable and contractual rights of such Holders. Classes of Claims and Interests that are not impaired are conclusively presumed to have accepted the Prepackaged Plan and are not entitled to vote on the Prepackaged Plan. Classes of Claims and Interests whose Holders receive or retain no property under the Prepackaged Plan are deemed not to have accepted the Prepackaged Plan and are not entitled to vote on the Prepackaged Plan. The classification of Claims and Interests is summarized, together with notations as to whether each Class of Claims or Interests is impaired or unimpaired, in "DESCRIPTION OF THE PREPACKAGED PLAN -- CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS." Additional information regarding voting is contained in the instructions accompanying the Ballots. Under Section 1126(b) of the Bankruptcy Code, a holder of a claim or interest that has accepted a plan of reorganization before the commencement of a Chapter 11 case will be deemed to have accepted the plan for purposes of confirmation under Chapter 11 of the Bankruptcy Code if the bankruptcy court determines that the solicitation of such acceptances was in compliance with any applicable non-bankruptcy law governing the adequacy of disclosure in connection with such a solicitation, or, if there is no such applicable non-bankruptcy law, such acceptance or rejection was solicited after disclosure to such holder of adequate information as defined in Section 1125(a) of the Bankruptcy Code. Under Bankruptcy Rule 3018(b), solicitations of acceptances of a plan of reorganization before the commencement of a Chapter 11 case shall be rejected by a bankruptcy court if the bankruptcy court finds that (i) the plan was not transmitted to substantially all creditors and equity interest holders of the same class, (ii) an unreasonably short time was prescribed for such creditors or equity interest holders to vote on the plan or (iii) the solicitation was not in compliance with Section 1126(b) of the Bankruptcy Code. The Company believes that its Solicitation of acceptances of the Prepackaged Plan complies with the requirements of Section 1126(b), Bankruptcy Rule 3018(b) and all applicable federal and state securities laws for purposes of Solicitation of acceptances or rejections of the Prepackaged Plan. If the Bankruptcy Court finds such compliance, then Holders casting Ballots to accept or reject the Prepackaged Plan will be deemed by the Bankruptcy Court to have accepted or rejected the Prepackaged Plan. Unless the Bankruptcy Court later determines that any acceptances of the Prepackaged Plan may be revoked, all such acceptances will remain in full force and effect until the Bankruptcy Court determines whether such acceptances constitute acceptances or rejections for purposes of confirmation under the Bankruptcy Code. The Company also reserves the right to use acceptances of the Prepackaged Plan received in this Solicitation to seek confirmation of the Prepackaged Plan under any other circumstances, including the filing of an involuntary bankruptcy petition against the Company. For a discussion of other significant conditions to confirmation under the Bankruptcy Code, see "FEASIBILITY OF THE PREPACKAGED PLAN AND THE BEST INTERESTS OF CREDITORS TEST -NONCONSENSUAL CONFIRMATION." The appropriate Ballots, together with either this Exchange Restructuring Prospectus or the Proxy Statement/Prospectus, as applicable, are being distributed to all Holders of Class 3 Senior Note Claims and Class 6 Old Common Stock Interests, the only Holders who are entitled to vote on the Prepackaged Plan. There is a separate Ballot designated for each Class of Claims and Interests in order to facilitate vote tabulation; however, all Ballots are substantially similar in form and substance and the term "Ballot" is used without intended reference to the Ballot of any specific Class of Claims or Interests. WHO MAY VOTE Under the Prepackaged Plan, the Claims against and the Interests in the Company are divided into seven Classes. Pursuant to the Bankruptcy Code, only Classes of Claims or Interests that are Impaired and are to receive a distribution under the Prepackaged Plan, and which are not deemed to reject the Prepackaged Plan under Section 1126(g) of the Bankruptcy Code, are entitled to vote on the Prepackaged Plan. Claims or Interests in the following Classes are Impaired under the Prepackaged Plan and are entitled under the terms and provisions of the Bankruptcy Code to vote on the Prepackaged Plan: Class 3: Senior Note Claims. Class 6: Old Common Stock Interests. Only beneficial owners of Senior Notes and Old Common Stock (the "Old Securities") on the Voting Record Date, or their authorized signatories, are eligible to vote on the Prepackaged Plan. The Voting Record Date is [______]. PROCEDURES FOR HOLDERS OF OLD SECURITIES TO VOTE ON PREPACKAGED PLAN If you are a registered Holder of Old Securities (i.e., Senior Notes or Old Common Stock), you will receive the Ballot relating to the securities you hold of record. Registered Holders may include brokerage firms, commercial banks, trust companies or other nominees. If such Entities do not hold Old Securities for their own account, they should provide copies of this Exchange Restructuring Prospectus and an appropriate Ballot to their customers and to beneficial owners. Any beneficial owner who has not received an Exchange Restructuring Prospectus or Ballot should contact their brokerage firm, nominee or the Information Agent. All votes to accept or reject the Prepackaged Plan must be cast by using the Ballot or, in the case of a brokerage firm or other nominee holding Old Securities in its own name on behalf of a beneficial owner, the Master Ballot, enclosed with this Exchange Restructuring Prospectus (or original, manually executed facsimiles thereof). Brokerage firms or other nominees holding Old Securities for the account of only one beneficial owner may use a Ballot. Purported votes which are cast in any other manner will not be counted. Ballots and Master Ballots must be received by the voting agent (the "Voting Agent") at its address set forth on the applicable Ballot no later than 5:00 p.m., New York City time, on [________] (the "Voting Deadline"), which may be extended at the Company's discretion. You may receive a Ballot relating to Old Securities that you did not beneficially own on the applicable Voting Record Date. You should complete only the Ballot corresponding to each class of Old Securities which you beneficially owned on the Voting Record Date. Holders who purchase or whose purchase is registered after the Record Date, and who wish to vote on the Prepackaged Plan must arrange with their seller to receive a proxy from the Holder of record on such Voting Record Date, a form of which is provided with each Ballot and Master Ballot. Holders of Old Securities who elect to vote on the Prepackaged Plan should complete and sign the Ballot in accordance with the instructions thereon being sure to check the appropriate box entitled "Accept the Prepackaged Plan" or "Reject the Prepackaged Plan." Holders may not split their vote on the Prepackaged Plan with respect to a particular class of Old Securities. A Holder must vote all securities beneficially owned in a particular class in the same way (i.e., all "accept" or all "reject") even if such Old Securities are owned through more than one broker or bank. Delivery of all documents must be made to the Voting Agent at its address set forth on the applicable Ballot. The method of such delivery is at the election and risk of the Holder. If such delivery is by mail, it is recommended that Holders use an air courier with a guaranteed next day delivery or registered mail, properly insured, with return receipt requested. In all cases, sufficient time should be allowed to assure timely delivery. YOU MAY RECEIVE MULTIPLE MAILINGS OF THIS EXCHANGE RESTRUCTURING PROSPECTUS, ESPECIALLY IF YOU OWN YOUR OLD SECURITIES THROUGH MORE THAN ONE BROKER OR BANK. IF YOU SUBMIT MORE THAN ONE BALLOT FOR A CLASS OR ISSUE OF OLD SECURITIES BECAUSE YOU BENEFICIALLY OWN SUCH OLD SECURITIES THROUGH MORE THAN ONE BROKER OR BANK, BE SURE TO INDICATE IN ITEM __ OF THE BALLOT(S), THE NAME OF ALL BROKER DEALERS OR OTHER INTERMEDIATES WHO HOLD OLD SECURITIES FOR YOU. BENEFICIAL OWNERS OF OLD SECURITIES Section 1126(b) of the Bankruptcy Code has been interpreted to require that a solicitation for acceptances prior to filing a plan of reorganization must include the beneficial owners of securities, regardless of whether such beneficial owners are the holders of record. Accordingly, a beneficial owner of Old Securities on the Voting Record Date is eligible to vote on the Prepackaged Plan, whether the Old Securities were held on the Voting Record Date in such beneficial owner's name or in the name of a brokerage firm, commercial bank, trust company or other nominee. Any beneficial owner holding Old Securities in its own name can vote by completing and signing the enclosed Ballot and returning it directly to the Voting Agent using the enclosed pre-addressed stamped envelope. A beneficial owner holding Old Securities in "street name" (i.e., through a brokerage firm, bank, trust company or other nominee) or a beneficial owner's authorized signatory (a broker or other intermediary having power of attorney to vote on behalf of a beneficial owner) can vote by following the instructions set forth below: 1. Review the enclosed Ballot Instructions and the certification set forth in the Ballot Instructions. 2. Sign the enclosed Ballot (unless it has already been signed by the bank, trust company or other nominee). 3. Return the Ballot to the addressee in the preaddressed, stamped envelope enclosed with the form. If no envelope was enclosed, contact the Information Agent (identified below) or the Voting Agent identified on the applicable Ballot Instructions. Authorized signatories voting on behalf of more than one beneficial owner must complete a separate Ballot for each such beneficial owner. Any Ballot submitted to a brokerage firm or proxy intermediary will not be counted until such brokerage firm or proxy intermediary (i) properly executes and delivers such Ballot to the Voting Agent or (ii) properly completes and delivers a corresponding Master Ballot to the Voting Agent. By submitting a vote for or against the Prepackaged Plan, you are certifying that you are the beneficial owner of the Old Securities being voted or an authorized signatory for such a beneficial owner. Your submission of a Ballot will also constitute a request that you (or in the case of an authorized signatory, the beneficial owner) be treated as the record holder of such securities for purposes of voting on the Prepackaged Plan. BROKERAGE FIRMS, BANKS AND OTHER NOMINEES A brokerage firm, commercial bank, trust company or other nominee which is the registered holder of an Old Security for a beneficial owner, or is a participant in a securities clearing agency and is authorized to vote in the name of such securities clearing agency pursuant to an omnibus proxy (as described below) and is acting for a beneficial owner, can vote on behalf of such beneficial owner by (i) distributing a copy of this Exchange Restructuring Prospectus and all appropriate Ballots (either in blank or prevalidated in accordance with the Master Ballot Instructions) to such owner, (ii) collecting all such Ballots, (iii) completing a Master Ballot in accordance with the Master Ballot Instructions compiling the votes and other information from the Ballots collected, and (iv) transmitting such completed Master Ballot to the Voting Agent. A proxy intermediary acting on behalf of a brokerage firm or bank may follow the procedures outlined in the preceding sentence to vote on behalf of such beneficial owner. A brokerage firm, commercial bank, trust company or other nominee which is the registered holder of an Old Security for only one beneficial owner also may arrange for such beneficial owner to vote by executing the appropriate Ballot and by distributing a copy of this Exchange Restructuring Prospectus and such executed Ballot to such beneficial owner for voting and returning such Ballot to the Voting Agent at the address set forth on the applicable Ballot. SECURITIES CLEARING AGENT Any nominee holder of Old Securities will execute an omnibus proxy in favor of its respective participants. As a result of the omnibus proxy, each such participant will be authorized to vote the securities owned by it and held in the name of such securities clearing agency. IMPORTANCE OF PROPER AND TIMELY SUBMISSION OF COMPLETED BALLOTS It is important that all Holders of Class 3 Senior Note Claims and Class 6 Old Common Stock Interest's vote to accept or to reject the Prepackaged Plan, because under the Bankruptcy Code, for purposes of determining whether the requisite acceptances have been received from an Impaired Class of Claims or Interests, the vote will be tabulated based on the ratio of (i) Allowed Claims or Interests with respect to which a vote to accept was received to (ii) all Allowed Claims or Interests of such Impaired Class with respect to which any valid vote was received. Therefore, it is possible that the Prepackaged Plan could be approved with the affirmative vote of significantly less than two-thirds in amount and one-half in number of the entire Class of Senior Note Claims, or by Class 6 Old Common Stock Interests with the affirmative vote of significantly less than two-thirds in amount of the entire Class of Old Common Stock Interests. Failure by a Holder of an Impaired Class 3 Senior Note Claim or an Impaired Class 6 Old Common Stock Interest to submit a properly executed Ballot or Master Ballot (as appropriate) or to indicate acceptance or rejection of the Prepackaged Plan in accordance with the instructions set forth in the Ballot Instructions and the procedures set forth herein shall be deemed to not constitute a vote either to accept or reject the Prepackaged Plan. The failure to submit a properly executed Ballot or Master Ballot (when appropriate) or failing to indicate a vote either for acceptance or rejection of the Prepackaged Plan will not be counted as votes for or against the Prepackaged Plan. The Company, in its sole discretion, may waive any defect in any Ballot or Master Ballot at any time, either before or after the close of voting, and without notice. EXCEPT AS OTHERWISE ORDERED BY THE BANKRUPTCY COURT, A BALLOT OR, WHERE APPROPRIATE, MASTER BALLOT, WHICH IS EITHER (i) NOT TIMELY SUBMITTED TO THE VOTING AGENT AT THE ADDRESS SET FORTH ON THE APPLICABLE BALLOT INSTRUCTIONS, (ii) SUBMITTED TO SUCH VOTING AGENT WITHOUT PROPER EXECUTION OR (iii) EXECUTED AND SUBMITTED TO SUCH VOTING AGENT WITHOUT PROPERLY INDICATING ACCEPTANCE OR REJECTION OF THE PREPACKAGED PLAN WILL NOT CONSTITUTE EITHER AN ACCEPTANCE OR REJECTION OF THE PREPACKAGED PLAN UNDER SECTION 1126 OF THE BANKRUPTCY CODE. SUBMISSION OF PROXIES IN CONNECTION WITH THE EXCHANGE RESTRUCTURING DOES NOT AND WILL NOT CONSTITUTE A VOTE IN RESPECT OF THE PREPACKAGED PLAN. A HOLDER OF AN IMPAIRED CLAIM OR INTEREST ENTITLED TO VOTE ON THE PREPACKAGED PLAN MUST PROPERLY AND TIMELY COMPLETE AND RETURN A BALLOT IN ORDER FOR SUCH HOLDER'S VOTE IN RESPECT OF THE PREPACKAGED PLAN TO BE COUNTED. VOTING DEADLINE AND EXTENSIONS In order to be counted for purposes of voting on the Prepackaged Plan, all of the information requested on the applicable Ballot must be provided by the Voting Deadline. THE VOTING DEADLINE IS [_______________], 5:00 P.M., NEW YORK CITY TIME. Ballots must be received by the Voting Agent at its address set forth on the applicable Ballot. The Company reserves the right, in its sole discretion, to extend the Voting Deadline, in which case the term "Voting Deadline" shall mean the latest date on which a Ballot will be accepted. To extend the Voting Deadline, the Company will make an announcement thereof, prior to 9:00 p.m., New York City time, not later than the next business day immediately following the previously scheduled Voting Deadline. Such announcement may state that the Company is extending the Voting Deadline for a specified period of time or on a daily basis until 5:00 p.m., New York City time, on the date on which sufficient acceptances required to seek confirmation of the Prepackaged Plan have been received. WITHDRAWAL OF VOTES ON THE PREPACKAGED PLAN The Solicitation of acceptances of the Prepackaged Plan will expire on the Voting Deadline. Any voter who has delivered a valid Ballot or Master Ballot may withdraw its vote by delivering a written notice of withdrawal to the Voting Agent before the Voting Deadline. To be valid, the notice of withdrawal must (a) describe the claim or equity interest to which it relates, (b) be signed by the party who signed the Ballot or Master Ballot to be revoked, and (c) be received by the Voting Agent before the Voting Deadline. The Company may contest the validity of any withdrawals. Any holder who has delivered a valid Ballot or Master Ballot may change its vote by delivering to the Voting Agent a properly completed subsequent Ballot or Master Ballot so as to be received before the Voting Deadline. In the case where more than one timely, properly completed Ballot or Master Ballot is received, only the Ballot or Master Ballot that bears the latest date will be counted. After the Chapter 11 Case is commenced, a properly submitted Ballot may be withdrawn only with the approval of the Bankruptcy Court. INFORMATION AGENT [_____________] has been appointed as Information Agent for the Prepackaged Plan. Questions and requests for assistance may be directed to the Information Agent. Requests for additional copies of this Exchange Restructuring Prospectus, the Ballots or the Master Ballots should be directed to the Information Agent. Such requests should be addressed to the Information Agent as follows: [TO COME]. MARKET FOR OLD COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Old Common Stock is traded on the New York Stock Exchange (the "NYSE") under the trading symbol SLT. The high and low sale prices per share of Old Common Stock (based upon the NYSE composite tape as reported in published financial sources) for each quarter of 1996 and 1997 are set forth below. The Company did not declare or pay any dividends during such years. The indenture governing the Senior Notes and the Credit Agreement requires the satisfaction of certain net worth tests prior to the payment of any cash dividends by the Company. As of January 3, 1998, the Company was prohibited from paying cash dividends under the most restrictive of these provisions. HIGH AND LOW SALE PRICES PER SHARE OF THE OLD COMMON STOCK QUARTER HIGH LOW 1998 Second First $1 13/16 3/8 1997 Fourth $3 3/8 $1 9/16 Third 3 1 15/16 Second 4 1/4 2 7/8 First 5 3/8 3 1996 Fourth $3 7/8 $3 1/8 Third 4 2 3/4 Second 4 7/8 3 1/2 First 5 3/4 3 1/8 On March 2, 1998, the day immediately prior to the date the Company announced its intention to pursue the Restructuring, the closing market price of the Old Common Stock was $1.6875 per share. On ____________, 1998, there were _____ holders of record of shares of Old Common Stock, and the closing market price was $______ per share. The following chart indicates the effect of the Restructuring on the amount and percentage of the holdings of the Company's common equity owned beneficially by (i) each person (including any group as that term is used in section 13(d)(3) of the Exchange Act) who is known to the Company to be the beneficial owner of more than 5% of the Old Common Stock, (ii) each current director and each Board nominee and (iii) all directors and officers as a group.
New Common Stock Issuable with Old Common Stock Beneficially Respect Owned to Such Holdings of Old Common as of March 16, Stock 1998 Upon Consummation of Restructuring** --------------- No. Of Holder Shares(a) % of Class(b) No. Of Shares % of Class ------ --------- ------------- ------------- ---------- Apollo Apparel 5,924,352 39.6% 592,435 2.9% Partners, L.P. DDJ Capital 1,615,730(c) 10.8% 161,573 * Management, LLC Robert Falk 5,925,652(d) 39.6% 592,565 2.9% Ann Dibble 2,200 * 220 * Jordan (e) Robert Katz 5,925,952(f) 39.6% 592,595 2.9% Harold Leppo 2,200(g) * 220 * Jerald S. Politzer 145,000(h) 1.0% 14,500 * Bruce F. Roberts 6,200(i) * 620 * John S. Rodgers 433,787(j) 2.9% 43,379 * Marvin Schiller 16,134(k) * 1,613 * Edward M. Yorke 5,926,552(l) 39.6% 592,655 2.9% All directors and executive 6,535,277(m) 43.6% 653,528 3.2% officers as a group (14 persons)
- -------------------------- * Represents less than one percent. ** Exclusive of any shares of New Common Stock issuable upon exercise of any Warrants distributed to such holders in connection with the Restructuring. (a) For purposes of this table, a person or group of persons is deemed to have "beneficial ownership" of any shares of Old Common Stock which such person has the right to acquire within 60 days following March 16, 1998. (b) As of March 16, 1998, there were 14,964,608 shares outstanding, excluding those shares held by or for the account of the Company. For purposes of computing the percentage of outstanding shares of Old Common Stock held by each person or group of persons named above, any security which such person or persons has the right to acquire within 60 days following March 16, 1998 is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. (c) This amount reflects Old Common Stock beneficially owned by DDJ Capital Management, LLC as of April 20, 1998. (d) This amount includes 5,924,352 shares beneficially owned by Apollo and 1,300 shares issuable upon the exercise of stock options. The general partner of Apollo is AIF II, L.P., the managing general partner of which is Apollo Advisors, L.P. Mr. Falk is a principal of Apollo Advisors, L.P. He disclaims beneficial ownership of any shares of Old Common Stock held by Apollo. (e) This amount represents 2,200 shares issuable upon the exercise of stock options. (f) This amount includes 5,924,352 shares beneficially owned by Apollo and 1,600 shares issuable upon the exercise of stock options. The general partner of Apollo is AIF II, L.P., the managing general partner of which is Apollo Advisors, L.P. Mr. Katz is an officer of Apollo Advisors, L.P. He disclaims beneficial ownership of any shares of Old Common Stock held by Apollo. (g) This amount represents 2,200 shares issuable upon the exercise of stock options. (h) This amount includes 45,000 shares held directly and 100,000 shares issuable upon the exercise of stock options. (i) This amount includes 4,000 shares held directly and 2,200 shares issuable upon the exercise of stock options. (j) This amount includes 424,280 shares held directly by Mr. Rodgers, 1,300 shares issuable upon the exercise of stock options, 2,284 shares held through the Company's Long Term Savings and Investment Plan (the "Savings Plan") and 5,923 shares held by the Margaret S. Vickery Trust, of which Mr. Rodgers is a co-trustee. As to the shares held by the Margaret S. Vickery Trust, Mr. Rodgers shares voting and investment power with a co-trustee. He disclaims beneficial ownership with respect to the shares held by the Trust. (k) This amount includes 11,234 shares held directly and 5,200 shares issuable upon the exercise of stock options. (l) This amount includes 5,924,352 shares beneficially owned by Apollo and 2,200 shares issuable upon the exercise of stock options. The general partner of Apollo is AIF II, L.P., the managing partner of which is Apollo Advisors, L.P. Mr. Yorke is an officer of Apollo Advisors, L.P. He disclaims beneficial ownership of any shares of Old Common Stock held by Apollo. (m) The 6,607,773 shares held by all directors and executive officers of the Company as a group counts the 5,924,352 shares held by Apollo (discussed in notes (d), (f) and (l) above) once. Such 6,607,773 shares include (i) 6,419,789 shares held directly by, or attributable to, directors and executive officers, (ii) 2,284 shares held through the Savings Plan by executive officers, and (iii) 185,700 shares issuable upon the exercise of stock options held by all directors and executive officers that are exercisable on, or may become exercisable within sixty days of, March 16, 1997. All of the outstanding voting securities of the Company's subsidiaries are owned beneficially and (except for shares of certain foreign subsidiaries of the Company owned of record by others to satisfy local laws) of record by the Company. The Company has never declared or paid and does not expect to declare or pay dividends on the outstanding Old Common Stock. Restrictions contained in the instruments governing the outstanding indebtedness of the Company restrict its ability to provide funds that might otherwise be used by the Company for the payment of dividends on the Old Common Stock. The Company has fallen below the continued listing criteria of the NYSE for net tangible assets available to common stock together with average net income after taxes for the past three years. However, the NYSE has reviewed the terms and conditions of the Restructuring set forth herein and has informed the Company that it will continue to list the Company's common stock during the period prior to consummation of the Restructuring and intends to list the Company's common stock from and after the Restructuring Date. However, the NYSE has advised the Company that after consummation of the Restructuring, the NYSE intends to monitor the performance of the Company based upon the Projections set forth herein to ensure compliance with the NYSE's original listing standards in respect of the New Common Stock. The Company believes that as a result of the consummation of the Restructuring, following the Restructuring Date, the Company will be able to return to compliance with the original listing standards in respect of the New Common Stock and the Warrants and the New Common Stock and the Warrants will continue to be listed for trading on the NYSE. However, the NYSE has advised the Company that the Company's failure to meet the Projections following the Restructuring could result in the suspension from trading and subsequent delisting of the New Common Stock. MARKET PRICES OF THE SENIOR NOTES The Senior Notes are traded in the over-the-counter market by certain dealers who from time to time are willing to make a market in such securities. Trading of the Senior Notes is, however, extremely limited. Prices and trading volume of the Senior Notes in the over-the-counter market are not reported and are difficult to monitor. To the extent that Senior Notes are traded, prices may fluctuate widely depending on, among other things, the trading volume and the balance between buy and sell orders. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS: NOTEHOLDERS The following summary of certain Federal income tax consequences of the Restructuring to the Noteholders and the Company, insofar as it makes statements of law, reflects the opinion of Fried, Frank, Harris, Shriver & Jacobson. This summary is based on the Federal income tax law now in effect, which is subject to change, possibly retroactively. This summary does not discuss all aspects of Federal income taxation which may be important to particular Noteholders in light of their individual investment circumstances or to Noteholders subject to special tax rules (e.g., financial institutions, broker-dealers, insurance companies, tax-exempt organizations and foreign taxpayers). In addition, this summary does not address state, local or foreign tax consequences. This summary assumes that Noteholders hold their Senior Notes, and will hold their New Common Stock, as "capital assets" (generally, property held for investment) under the Tax Code. No rulings have been or will be requested from the Internal Revenue Service with respect to any of the matters discussed herein. Noteholders are urged to consult their tax advisors regarding the specific Federal, state, local and foreign income and other tax consequences of the Restructuring. FEDERAL INCOME TAX CONSEQUENCES TO NOTEHOLDERS GENERAL The Restructuring, [assuming the Senior Notes constitute securities for federal income tax purposes] and assuming it is consummated as described herein, should constitute a tax-free recapitalization for purposes of the Tax Code. Accordingly, for Federal income tax purposes: (i) no gain or loss will be recognized by a Noteholder upon the receipt of New Common Stock pursuant to the Restructuring (except with respect to cash, if any, received in lieu of any fractional share settled in cash as described above) except that the Noteholder will recognize income to the extent of the value of the shares of New Common Stock received in the Restructuring which are allocable to any interest on the Senior Notes that accrued on or after the beginning of the Noteholder's holding period and which interest was not previously included in the Noteholder's taxable income (the "Accrued Interest"); (ii) the aggregate tax basis of the New Common Stock received by a Noteholder in the Restructuring will be the same as the aggregate tax basis of the Senior Notes exchanged therefor (reduced by any basis apportionable to any fractional share settled in cash as described above), except that the basis of the shares of New Common Stock (or fractions thereof) received which are treated as attributable to Accrued Interest will be equal to the fair market value of the shares (or fractions thereof) on the Restructuring Date; and (iii) the holding period of the shares of New Common Stock in the hands of the Noteholders will include the holding period of their Senior Notes exchanged therefor, except that the holding period of the shares of New Common Stock (or fractions thereof) treated as attributable to Accrued Interest will begin the day after the Restructuring Date. The Prepackaged Restructuring provides that the New Common Stock received by Noteholders will be allocated first to principal and only thereafter to accrued interest. However, there is some uncertainty as to whether allocations between principal and interest will be respected for federal income tax purposes. The Exchange Restructuring does not provide an express allocation between principal and interest. Noteholders should consult their own tax advisors as to how to allocate the New Common Stock received between principal and interest. MARKET DISCOUNT Noteholders who acquired their Senior Notes at a "market discount" subsequent to the initial offering of the Senior Notes may be required to carry over any accrued (but unrecognized) market discount to the New Common Stock received in the Restructuring, which discount will be recognized as ordinary income upon disposition of such New Common Stock. However, it is possible (although unlikely) that any such accrued market discount would be required to be recognized in the Restructuring to the extent of any gain realized. FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY CANCELLATION OF INDEBTEDNESS INCOME The Company will realize cancellation of indebtedness ("COI") income, for Federal income tax purposes, in an amount equal to the excess, if any, of the adjusted issue price of the Senior Notes (including any accrued but unpaid interest) over the fair market value of the New Common Stock received by Noteholders pursuant to the Restructuring. The Company has approximately $55 million of operating losses and net operating loss carryovers ("NOLs") which are available to offset any COI income that may be recognized. If (i) COI income is realized in a case under the Bankruptcy Code (i.e., pursuant to the Prepackaged Restructuring) or (ii) if the Company is insolvent on the Restructuring Date, to the extent of the insolvency, under section 108 of the Tax Code such COI income would not be included in the Company's gross income. In such event, the Company would be required, however, to reduce certain of its tax attributes, such as its NOLs, certain tax credits, and the basis of its assets, by the amount of the COI income that is not included. LIMITATION ON NET OPERATING LOSS CARRYOVERS As a result of the receipt by Noteholders of New Common Stock in exchange for the Senior Notes pursuant to the Restructuring, the Company will undergo an "ownership change" (generally, a 50% change in ownership) for purposes of section 382 of the Tax Code and, accordingly, the Company will be limited in its ability to use its NOLs and certain tax credit carryforwards (the "Section 382 Limitation") to offset future taxable income. The Section 382 Limitation will generally be determined by multiplying the value of the Company's equity before the ownership change by the long-term tax-exempt rate (currently 5.02%). This is likely to limit significantly the Company's use of its NOLs in any one year (including for this purpose any deductions attributable to any "recognized built-in-loss" within the meaning of Section 382(h) of the Code, which could include deductions for depreciation and amortization of the Company's assets, which existed at the time of the Restructuring). If an ownership change occurs in a case under the Bankruptcy Code, the value of a corporation's equity for purposes of determining the Section 382 Limitation would be adjusted to reflect any increase in such value arising from the cancellation of debt as a result of the ownership change. Because the Company anticipates that the value of its equity would be increased as a result of the cancellation of the Senior Notes, the Company's ability to use its NOLs would be significantly greater under the Prepackaged Restructuring than under the Exchange Restructuring. INFORMATION REGARDING NOMINEES If the Exchange Restructuring is consummated and the Restructuring Proposal with respect to the Election of the New Board is approved and implemented, the existing members of the Board will resign, effective as of the Exchange Restructuring Date and [ ] new Board members will be elected at the Annual Meeting, subject to the occurrence of the Exchange Restructuring Date. Each of the existing members of the Board have delivered to the Company a resignation letter resigning from the Board effective as of the Exchange Restructuring Date. In accordance with the Company's Certificate of Incorporation, by resolution of the Board, the number of directors has been fixed at [ ] effective as of the Exchange Restructuring Date. As provided for in the Letter Agreement, the new Board will consist of: (i) Mr. Jerald Politzer, as the Chairman of the Board, (ii) [_____] members nominated by Magten, subject to consultation with the Company and with other Noteholders who may come forward prior to the commencement of the Solicitation, and (iii) one member designated by the current Board. As described above, as contemplated by the Letter Agreement, it is expected that Magten will provide the Company with its Board nominees prior to the commencement of the Solicitation. In addition, the current Board has designated Marvin Schiller to be the current Board's nominee to the new Board. If any nominee should be unavailable for election at the Stockholders' Meeting, the proxies will be voted for the election of such other person as may be recommended by the Board. The names, principal occupations and other information concerning nominees proposed for election to the Board are presented below. Proxies will be voted for all such nominees, unless marked to the contrary. The Company believes that each nominee will serve as a director, but should any such nominee be unable to serve as a director or withdraw from nomination, proxies will be voted for the election of such substitute nominee as the Board may propose. Jerald S. Politzer, age 52, joined the Company as a director on March 24, 1997 and Chief Executive Officer commencing April 1, 1997. From July 1989 to November 1996 he had been Executive Vice President of Melville Corporation, a diversified retailer. Mr. Politzer is a director of Norton McNaughton, Inc., a manufacturer of women's apparel. Marvin Schiller, age 64, was Managing Director of A.T. Kearney, Inc., a management consulting firm, from May 1983 until his retirement as of January 1995. Dr. Schiller is a director of LePercq-Istel Fund, Inc., a mutual fund; Strategic Agricultural Management Corp., a software developer and marketer; and Tutor Time Learning Systems Inc., a childcare and educational company. Dr. Schiller has served as a director of the Company since May 1983. Information regarding the remaining Board nominees will be provided once Magten has advised the Company of its Board nominees. POST RESTRUCTURING STOCK OPTION GRANTS EXCHANGE RESTRUCTURING In the event that the Plan Proposal is approved by the Stockholders, the Minimum Tender Condition is satisfied and the Exchange Restructuring is consummated, all options to purchase shares of Old Common Stock outstanding granted under the Company's 1987 Stock Plan, 1988 Stock Plan, 1993 Stock Plan and 1996 Stock Plan (the "Old Plans") and held by directors, officers and employees of the Company (the "Old Options") will not be terminated but will continue to remain outstanding, subject to adjustment (the "Adjustment") as provided for in each of the Old Plans. Such Adjustment is intended to reflect the effect of the Reverse Split on the Old Options. As of April 9, 1998, there were outstanding Old Option which, in the aggregate, related to 1,823,443 shares of Old Common Stock (or 12% of the issued and outstanding shares of Old Common Stock as of such date). Pursuant to the Exchange Restructuring, after giving effect to the Adjustment, all of the outstanding Old Options, in the aggregate, will relate to 182,344 shares of New Common Stock (or approximately 1% of the issued and outstanding shares of New Common Stock as of the Restructuring Date, exclusive of the Warrant Shares). In connection with the Adjustment, the exercise price applicable to such Old Options will be appropriately adjusted. In addition, under the Stock Award and Incentive Plans, directors, officers and employees of the Company will become eligible to receive additional options to purchase shares of New Common Stock as determined by the new Board after the Restructuring Date subject to the approval by the stockholders of the Company. See "DISCUSSION OF THE RESTRUCTURING PROPOSALS - - Salant Corporation 1998 Stock Award and Incentive Plan" in the Proxy Statement/Prospectus. PREPACKAGED RESTRUCTURING In the event that each of the Restructuring Proposals is not approved by the Stockholders, or the Minimum Tender Condition is not satisfied or waived, but the Company receives sufficient acceptances of the Prepackaged Plan to obtain confirmation thereof by the Bankruptcy Court and the Company files the Prepackaged Plan with the Bankruptcy Court, pursuant to the Prepackaged Plan all options to purchase shares of Old Common Stock outstanding as of the commencement of the Chapter 11 case granted under the Old Plans will be terminated and of no further force or effect as of the consummation of the Prepackaged Plan. In addition, each of the Old Plans shall be terminated and of no further force or effect as of the consummation of the Prepackaged Plan. The Stock Award and Incentive Plan will remain in effect after the consummation of the Prepackaged Plan; provided, that, if the Stock Award and Incentive Plan has not been approved by the Stockholders prior to the commencement of the Chapter 11 case, any awards granted thereunder shall be subject to subsequent approval of the stockholders of the Company. It is the Company's intention that certain directors, officers and employees of the Company will be granted new options to purchase shares of New Common Stock under the Stock Award and Incentive Plan. The persons to receive such grants, the number of shares of New Common Stock subject to such grants, and such other terms and conditions applicable to such grants, shall be determined by the Board of Reorganized Salant in its sole discretion, except for automatic stock option grants to certain non-employee directors of the Company. SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth certain information as of March 16, 1998 with respect to the beneficial ownership of Old Common Stock by each of the directors of the Company, the Chief Executive Officer and each of the four most highly compensated other executives of the Company (the "Named Executive Officers") and all directors and executive officers of the Company as a group. BENEFICIAL OWNERSHIP OF THE COMPANY'S OLD COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AMOUNT AND NATURE OF BENEFICIAL PERCENT OF NAME OF BENEFICIAL OWNER OWNERSHIP (a) CLASS (b) - ------------------------------------ ------------------------ -------------- Nicholas P. DiPaolo................... 0 * Robert H. Falk..................... 5,925,652 (c) 39.6% Philip A. Franzel.................. 1,000 (d) * Ann Dibble Jordan.................. 2,200 (e) * Todd Kahn.......................... 71,500 (f) * Robert Katz........................ 5,925,952 (g) 39.6% Harold Leppo....................... 2,200 (h) * Michael A. Lubin................... 0 * Jerald S. Politzer................. 145,000 (i) 1.0% Richard P. Randall................. 0 * Bruce F. Roberts................... 6,200 (j) * John S. Rodgers.................... 433,787 (k) 2.9% Marvin Schiller.................... 16,134 (l) * Edward M. Yorke.................... 5,926,552 (m) 39.6% All directors and executive officers as a group (14 6,607,773 (n) 43.6% persons)......................... - ------------------ * Represents less than one percent. (a) For purposes of this table, a person or group of persons is deemed to have "beneficial ownership" of any shares of Old Common Stock which such person has the right to acquire within 60 days following March 16, 1998. (b) As of March 16, 1998, there were 14,964,608 shares outstanding, excluding those shares held by or for the account of the Company. For purposes of computing the percentage of outstanding shares of Old Common Stock held by each person or group of persons named above, any security which such person or persons has the right to acquire within 60 days following March 16, 1998 is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. (c) This amount includes 5,924,352 shares beneficially owned by Apollo and 1,300 shares issuable upon the exercise of stock options. The general partner of Apollo is AIF II, L.P., the managing general partner of which is Apollo Advisors, L.P. Mr. Falk is a principal of Apollo Advisors, L.P. He disclaims beneficial ownership of any shares of Old Common Stock held by Apollo. (d) This amount represents 1,000 shares held directly by Mr. Franzel. (e) This amount represents 2,200 shares issuable upon the exercise of stock options. (f) This amount represents 4,000 shares held directly and 67,500 shares issuable upon the exercise of stock options. (g) This amount includes 5,924,352 shares beneficially owned by Apollo and 1,600 shares issuable upon the exercise of stock options. Stock options. The general partner of Apollo is AIF II, L.P., the managing general partner of which is Apollo Advisors, L.P. Mr. Katz is an officer of Apollo Advisors, L.P. He disclaims beneficial ownership of any shares of Common Stock held by Apollo. (h) This amount represents 2,200 issuable upon the exercise of stock options. (i) This amount includes 45,000 shares held directly and 100,000 shares issuable upon the exercise of stock options. (j) This amount includes 4,000 shares held directly and 2,200 shares issuable upon the exercise of stock options. (k) This amount includes 424,280 shares held directly by Mr. Rodgers, 1,300 shares issuable upon the exercise of stock options, 2,284 shares held through the Company's Long Term Savings and Investment Plan (the "Savings Plan") and 5,923 shares held by the Margaret S. Vickery Trust, of which Mr. Rodgers is a co-trustee. As to the shares held by the Margaret S. Vickery Trust, Mr. Rodgers shares voting and investment power with a co-trustee. He disclaims beneficial ownership with respect to the shares held by the Trust. (l) This amount includes 11,234 shares held directly and 5,200 shares issuable upon the exercise of stock options. (m) This amount includes 5,924,352 shares beneficially owned by Apollo and 2,200 shares issuable upon the exercise of stock options. The general partner of Apollo is AIF II, L.P., the managing partner of which is Apollo Advisors, L.P. Mr. Yorke is an officer of Apollo Advisors, L.P. He disclaims beneficial ownership of any shares of Old Common Stock held by Apollo. (i) This amount includes 4,000 shares held directly and 1,900 shares issuable upon the exercise of stock options. (j) The 6,607,773 shares held by all directors and executive officers of the Company as a group counts the 5,924,352 shares held by Apollo (discussed in notes (c), (g) and (m) above) once. Such 6,607,773 shares include (i) 6,419,789 shares held directly by, or attributable to, directors and executive officers, (ii) 2,284 shares held through the Savings Plan by executive officers, and (iii) 185,700 shares issuable upon the exercise of stock options held by all directors and executive officers that are exercisable on, or may become exercisable within sixty days of, March 16, 1998. CERTAIN AFFILIATE TRANSACTIONS Except as described below, no transactions have occurred since December 31, 1996 to which the Company was or is to be a party and in which directors, executive officers or control persons of the Company, or their associates, had or are to have a direct or indirect material interest. Pursuant to an agreement, dated December 1, 1995 (the "Lubin Delano Agreement"), the Company has retained Lubin Delano to render certain financial advisory and investment banking services to the Company for a monthly retainer of $8,333.33. Under the Lubin Delano Agreement, Lubin Delano may receive a bonus equal to 100% of its annual retainer if the Company's pre-tax income for the year equals 100% of the pre-tax income provided in the Company's annual business plan. Actual pre-tax income in excess of the annual business plan increases Lubin Delano's bonus by 20% of its retainer for each full five percentage point increment of increased pre-tax income for the year. The term of Lubin Delano's engagement is coterminous with the employment of Michael A. Lubin by the Company. Effective with Mr. Lubin's resignation on July 31, 1997 the Lubin Delano Agreement was terminated, and pursuant to the Lubin Agreement, a one-time lump sum payment of $368,149 was made to Lubin Delano. PAYMENTS TO MANAGEMENT In accordance with the terms of the Letter Agreement, no payments will be made to the members of management under existing severance, employment and/or change-in-control agreements or arrangements solely by reason of the consummation of the Restructuring. ADVISORS AND REPRESENTATIVES Pursuant to an agreement effective as of December 18, 1997, between E&Y and the Company (the "E&Y Agreement"), the Company has engaged E&Y to act as its financial advisor in connection with the Restructuring. Pursuant to the E&Y Agreement, the Company has agreed to pay E&Y a monthly advisory fee in the amount of $125,000, consisting of two components: (i) $95,000 per month, and (ii) $90,000 at the end of every three month period (representing $30,000 per month for the prior three months). The Company has also agreed to pay E&Y its reasonable out-of-pocket costs. To date, the Company has paid approximately $600,000 to E&Y in respect of its services under the E&Y Agreement. The E&Y Agreement may be terminated by either party at any time. Pursuant to the E&Y Agreement, E&Y performed certain valuation services in connection with the Restructuring at the request of the Company. In connection with those services, E&Y has been paid $100,000 by the Company. Since E&Y's retention by the Company, Michael Gries has served as the individual at E&Y principally involved in this matter. On April 1, 1998, Mr. Gries withdrew as a partner at E&Y and is currently a member of the financial advisory firm of Conway, Delgenio, Gries & Co., LLC ("CDG"). Since that time, Mr. Gries has continued to advise the Company and is being compensated for such services pursuant to an agreement between E&Y and CDG. In connection with the rendering the E&Y Fairness Opinion, the Company separately engaged E&Y pursuant to a letter agreement, dated March 25, 1998 (the "E&Y Opinion Agreement"). Pursuant to the E&Y Opinion Agreement, the Company agreed to pay E&Y: (i) a fee of $75,000 payable in cash upon execution of the E&Y Opinion Agreement; and (ii) $75,000 payable in cash on the date that E&Y informs the Company that they were prepared to deliver the E&Y Fairness Opinion. The Company also agreed to reimburse E&Y for its reasonable out-of-pocket expenses. Payment of such fees and expenses are in no way contingent or dependent upon the results of E&Y analyses or any conclusions it may reach or the consummation of the Restructuring. Additionally, the Company agreed to indemnify E&Y and certain related persons for certain liabilities related to or arising out of its engagement, including liabilities under Federal securities laws. To date, the Company has paid $150,000 to E&Y in respect of its services pursuant to the E&Y Opinion Agreement. Pursuant to a fee agreement (the "H & G Agreement") effective as of January 6, 1998, between the Company and Hebb & Gitlin, a Professional Corporation ("H & G"), the Company agreed to retain H & G as special legal counsel to Magten in connection with the Restructuring. Pursuant to the H & G Agreement, the Company agreed to pay H & G's fees (based on certain hourly rates) and disbursements incurred in rendering services in connection with the Restructuring. Pursuant to the H & G Agreement, the Company also paid H & G a $100,000 fee reserve. For services rendered through March 31, 1998, the Company has paid $37,013.66 to H & G in respect of its services under the H & G Agreement. Pursuant to a fee agreement (the "Allen Agreement") effective as of January 1, 1998, between the Company, Allen and Company ("Allen & Co."), Magten and H & G, Allen & Co. was retained as financial advisor to H&G in connection with the Restructuring until consummation of the Restructuring unless otherwise earlier terminated by any party. Pursuant to the Allen Agreement, the Company agreed to pay Allen & Co. financial advisory fees of $100,000 per month until the Allen Agreement is terminated. Pursuant to the Allen Agreement, the Company also paid Allen & Co. a $100,000 retainer fee, and has agreed to pay its reasonable out-of-pocket costs. To date, the Company has paid $[_____] to Allen & Co. in respect of its services under the Allen Agreement. Under the Allen Agreement, the Company agreed to indemnify Allen & Co. and its affiliates from and against all claims, liabilities, losses, damages, and expenses relating to its services to H&G as set forth in the Allen Agreement, except, among other things, for any claims, liabilities, losses, damages or expenses that result from Allen & Co.'s willful misconduct or gross negligence or lack of good faith. If the Company proceeds with the Prepackaged Restructuring, the Company intends to assume the H & G Agreement and the Allen Agreement pursuant to the Prepackaged Plan. [ ] has been appointed as Information Agent in connection with the Exchange Offer and as voting agent for the solicitation of acceptances of the Prepackaged Plan. Any questions regarding how to tender in the Exchange Offer or how to vote on the Prepackaged Plan and any requests for additional copies of this Exchange Restructuring Prospectus, Letters of Transmittal, Ballots or Master Ballots should be directed to the Information Agent at its address and telephone number set forth on the back cover of this Exchange Restructuring Prospectus. [ ] has been appointed as Depositary with respect to the Noteholders for the Exchange Offer. Questions and requests for assistance may be directed to the Depositary at one of its addresses and telephone numbers set forth on the back cover of this Exchange Restructuring Prospectus. ESTIMATED FEES AND EXPENSES The Company estimates that fees and expenses incurred in connection with the Restructuring will be approximately $[ ], including financial advisory fees, commitment fees, legal fees, printing fees, accounting fees, Depositary fees, Information Agent fees, out-of-pocket expenses, retention payments and other fees and expenses. The Company will also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of this Exchange Restructuring Prospectus or the Proxy Statement Prospectus, as the case may be, and related documents to the beneficial owners of the Senior Notes and Old Common Stock and in handling or forwarding tenders of their customers. Below is a breakdown of the estimated fees and expenses related to the Restructuring (in thousands): Bank Fees and Expenses.................................... Financial Advisory Services............................... Legal Services............................................ Accounting Services....................................... Other Fees and Expenses................................... Total.................................................. ========= ----------------------------------------------------------- -------- As of ____ __, 1998, approximately $[ ] million of such fees and expenses had been accrued by the Company. The Company intends to pay the fees and expenses with cash from operations, cash on hand and additional borrowings as necessary. LEGAL MATTERS Certain legal matters in connection with the New Common Stock (including the Warrant Shares) and the Warrants offered hereby will be passed upon by Fried, Frank, Harris, Shriver & Jacobson, special counsel to the Company. EXPERTS The Company's consolidated financial statements as of January 3, 1998 and December 28, 1996 and for the years ended January 3, 1998, December 28, 1996 and December 30, 1995 and the related financial statement schedule included in this Exchange Restructuring Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and incorporated by reference in the Registration Statement, and have been so included herein in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. GLOSSARY OF CERTAIN DEFINED TERMS As used in this Exchange Restructuring Prospectus, the following are the meanings for the terms set forth below: "Administrative Expense"...........means (a) any cost or expense of administration of the Chapter 11 Case (including, without limitation, professional fees and expenses) allowed under Section 503(b) of the Bankruptcy Code and (b) any fees or charges assessed against the Company's estate under title 28, United States Code, Section 1930. "Affiliate"........................means "affiliate" as defined in Section 101 of the Bankruptcy Code. "Agent's Message".................means a message transmitted by DTC, received by the Depositary and forming part of the confirmation of book-entry transfer, as set forth in "TENDERING AND VOTING PROCEDURES -- How to Tender on the Exchange Offer." "Allowed"..........................means with respect to Claims and Interests, (a) any Claim against, or Interest in, the Company, proof of which is timely filed or by order of the Bankruptcy Court is not or will not be required to be filed, (b) any Claim or Interest that has been or is hereafter listed in the Schedules as liquidated in amount and not disputed or contingent or (c) any Claim allowed pursuant to the Prepackaged Plan and, in each such case in (a) and (b) above, as to which either (i) no objection to the allowance thereof has been interposed within the applicable period of time fixed by the Prepackaged Plan, the Bankruptcy Code, the Bankruptcy Rules or the Bankruptcy Court or (ii) such an objection is so interposed and the Claim or Interest shall have been allowed by a Final Order (but only to the extent so allowed). "Apollo"...........................means Apollo Apparel Partners, L.P., a Delaware limited partnership, in its capacity as the beneficial owner of 5,924,352 shares of Old Common Stock. "Apollo Shares"....................means the shares of Old Common Stock beneficially held by Apollo. "Awards Committee".................means the committee of the Board of the Company from and after the Restructuring Date which will grant Awards (as defined in the Stock Award and Incentive Plan) pursuant to the Stock Award and Incentive Plan. "Ballots"..........................means the forms to be distributed to vote on the Prepackaged Plan, included herewith. "Bankruptcy Code"..................means title 11 of the United States Code, as amended from time to time. "Bankruptcy Court".................means the United States Bankruptcy Court for the Southern District of New York, or any other court having jurisdiction over the Chapter 11 Case. "Bankruptcy Rules".................means the Federal Rules of Bankruptcy Procedure, as amended, promulgated under Section 2075 of title 28 of the United States Code and the Local Rules of the Bankruptcy Court, as applicable from time to time during the Chapter 11 Case. "Board"............................means the Board of Directors of the Company or Reorganized Salant, as applicable. "Book-Entry Transfer Facility......means, collectively, DTC and Philadelphia Depository Trust Company. "By-Laws"..........................means the By-Laws, as amended, of the Company. "Canceled Security"................means a security, note or other instrument evidencing a Claim or Interest outstanding immediately prior to the Effective Date, which security, note or other instrument represents a Claim or Interest that is Impaired under the Prepackaged Plan. "Cash".............................means currency, a certified check, a cashier's check or a wire transfer of good funds from any source, or a check drawn on a domestic bank from the Company, Reorganized Salant or other Entity making any distribution under the Prepackaged Plan. "Cause of Action"..................means any and all actions, causes of action, suits, accounts, controversies, agreements, promises, rights to legal remedies, rights to equitable remedies, rights to payment, and claims, whether known or unknown, reduced to judgment, not reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, secured, unsecured and whether asserted or assertable directly or derivatively, in law, equity or otherwise. "Certificate of Incorporation".....means the Amended and Restated Certificate of Incorporation of the Company in effect on the date hereof. "Chapter 11 Case"..................means the case under Chapter 11 of the Bankruptcy Code concerning the Company to be commenced on the Filing Date. "Charter Amendment"................means the proposed Certificate of Amendment to the Certificate of Incorporation. "CIT"..............................means The CIT Group/Commercial Services, Inc., a New York corporation, the lender under the Credit Agreement. "CIT Claim"........................means any and all Claims in respect of all or any portion of the aggregate outstanding and unpaid amount of principal and interest due and owing under, and subject to the terms and provisions of, the Credit Agreement and all other Financing Agreements (as defined in the Credit Agreement), including, without limitation, any and all interest, costs, attorney's fees and other expenses owed by the Company or for which the Company may be liable in connection therewith. "CIT Commitment Letter"............means that certain commitment letter, dated June 1, 1998, between the Company and CIT, pursuant to which CIT agreed to enter into a new working capital facility with the Company on the Restructuring Date, and filed as Exhibit 10.54 to the Company's Registration Statement of which this Exchange Restructuring Prospectus is a part. "Claim"............................means any right to (a) payment from the Company, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured or (b) an equitable remedy for breach of performance if such breach gives rise to a right to payment from the Company, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured. "Class"............................means a class of Claims or Interests designated pursuant to the Prepackaged Plan. "Commission".......................means the Securities and Exchange Commission. "Company"..........................means, unless the context otherwise requires, Salant Corporation, a Delaware corporation, and its wholly owned subsidiaries. "Confirmation Date"................means the date on which the Confirmation Order shall be entered on the docket maintained by the Clerk of the Bankruptcy Court with respect to the Chapter 11 Case. "Confirmation Hearing".............means the hearing before the Bankruptcy Court regarding the confirmation of the Prepackaged Plan pursuant to Section 1129 of the Bankruptcy Code. "Confirmation Order"...............means the order of the Bankruptcy Court confirming the Prepackaged Plan. "Credit Agreement".................means the Revolving Credit, Factoring and Security Agreement, dated as of September 20, 1993, as amended, modified or supplemented from time to time, between the Company and CIT. "Creditors' Committee".............Any official committee of unsecured creditors appointed in the Chapter 11 Case pursuant to Section 1102(a) of the Bankruptcy Code, as the same may be constituted from time to time. "Deloitte & Touche"................means Deloitte & Touche LLP, independent auditors to the Company. "Disputed".........................means with respect to Claims, any Claim that is not Allowed. "Distribution Record Date".........means the date or dates fixed by the Bankruptcy Court for determining the Noteholders and Stockholders, respectively, who are entitled to receive distributions under the Prepackaged Plan, or if the Bankruptcy Court does not fix such date or dates, the Plan Record Date. "DTC"..............................means the Depository Trust Company. "Effective Date"...................means the date which is 11 days after the Confirmation Date, or, if such date is not a Business Day, the next succeeding Business Day, or such earlier date after the Confirmation Date as agreed to in writing between the Company and Magten so long as no stay of the Confirmation Order is in effect on such date; provided, however, that if, on or prior to such date, all conditions to the Effective Date set forth in Article Thirteen of the Prepackaged Plan have not been satisfied, or waived, then the Effective Date shall be the first Business Day following the day on which all such conditions to the Effective Date have been satisfied or waived. "Election of the New Board"........means the election of new directors to the Board as of the Restructuring Date. "Entity"...........................means any individual, corporation, limited or general partnership, limited liability company, joint venture, association, joint stock company, estate, entity, trust, trustee, United States trustee, unincorporated organization, government, governmental unit (as defined in the Bankruptcy Code), agency or political subdivision thereof. "Exchange Act".....................means the Securities Exchange Act of 1934, as amended. "Exchange Offer"...................means the Company's offer to exchange shares of New Common Stock for the Senior Notes pursuant to the terms of the Exchange Restructuring. "Exchange Restructuring"...........means the proposed out-of-court financial restructuring of the Company in connection with the Exchange Offer. "Exchange Restructuring Date"......means the date of consummation of the Exchange Restructuring. "Exchange..........................Restructuring Prospectus" means the Exchange Offer Prospectus and Disclosure Statement to be delivered to the Noteholders in connection with the Exchange Offer and the Prepackaged Plan. "Exercise Price"...................means $6.2648 per share, subject to adjustment. "Existing Equity-Based Plans"......means all of the Company's existing equity or equity-based plans. "Expiration Date"..................means, with respect to the Exchange Offer and the solicitation of acceptances of the Prepackaged Plan, 5:00 p.m., New York City time, on ______ __, 1998, unless the Company, in its sole discretion, extends the Exchange Offer or solicitation period, in which case the term "Expiration Date" for the Exchange Offer or solicitation period shall mean the last time and date to which the Exchange Offer or solicitation period is extended. "E&Y"..............................means Ernst & Young LLP, financial advisor to the Company in connection with the Restructuring. "Filing Date"......................means the date on which the Company files its voluntary petition for relief commencing a Chapter 11 case to effectuate the Restructuring and files the Prepackaged Plan with the Bankruptcy Court. "Final Decree".....................means a final decree closing the Chapter 11 Case as described in Bankruptcy Rule 3022. "Final Order"......................means an order, ruling or judgment that: (i) is in full force and effect; (ii) is not stayed; and (iii) is no longer subject to review, reversal, modification or amendment, by appeal or writ of certiorari. "Fiscal 1997"......................means the fiscal year of the Company for accounting purposes which ended on January 3, 1998. "GAAP".............................means generally accepted accounting principles. "General Unsecured Claim".........means any Claim against the Company (other than the CIT Claim, a Miscellaneous Secured Claim, a Senior Note Claim, a Priority Claim, a Priority Tax Claim, or an Administrative Expense). "Holder"...........................means any Entity that holds a Claim or Interest. Where the identity of the Holder of a Claim or Interest is set forth on a register or other record maintained by or at the direction of the Company, the Holder of such Claim or Interest shall be deemed to be the Holder as identified on such register or record unless the Company is otherwise notified in a writing authorized by such Holder. "Impaired".........................means any Class of Claims or Interests that is impaired within the meaning of Section 1124 of the Bankruptcy Code. "Indenture"........................means the Indenture, dated September 20, 1993, as amended, between the Company and Bankers Trust Company, as Trustee, pursuant to which the Senior Notes were issued. "Instrument".......................means any share of stock security, promissory note or other "Instrument" within the meaning of that term, as defined in Section 9-105(1)(i) of the UCC. "Interests"........................means the equity interests in the Company, including, but not limited to, shares of common stock and shares of preferred stock of the Company and any rights, options, warrants, calls, subscriptions or other similar rights or agreements, commitments or outstanding securities obligating the Company to issue, transfer or sell any shares of capital stock of the Company. "Issuance".........................means the issuance of (i) the shares of New Common Stock to the Noteholders in exchange for their Senior Notes and to the Stockholders in exchange for their Old Common Stock; (ii) the Warrants; and (iii) the shares of New Common Stock to holders of Warrants upon exercise of their Warrants, pursuant to the Exchange Restructuring. "Letter Agreement".................means that certain letter agreement, dated March 2, 1998, among Magten, Apollo and the Company, as amended from time to time regarding the basic terms and conditions of the Restructuring, and filed as Exhibit 10.42 to the Company's Registration Statement. "Letter Agreement Amendments"......means collectively those certain letter agreements, dated June 1, 1998 and July 8, 1998, among Magten, Apollo and the Company, amending certain provisions of the Letter Agreement, and filed as Exhibits 10.55 and 10.56, respectively, to the Company's Registration Statement. "Letter of Transmittal" ................means the letter of transmittal mailed to the Stockholders with the Proxy Statement/Prospectus or to the Noteholders with the Exchange Restructuring Prospectus, as applicable. "Magten"...........................means Magten Asset Management Corp., a New York corporation, in its capacity as the beneficial owner, or the investment manager on behalf of the beneficial owners of, approximately $74 million in aggregate principal face amount of the Senior Notes. "Magten Notes".....................means the Senior Notes beneficially held by Magten. "Market Rate"......................means the rate of interest per annum (rounded upward, if necessary, to the nearest whole 1/100 of 1%) equal to the yield equivalent (as determined by the Secretary of the Treasury) of the average accepted auction price for the last auction of one-year United States Treasury bills settled at least fifteen days prior to the Effective Date. "Master Ballots"...................means ballots to be voted on behalf of beneficial owners of Old Common Stock with respect to the Prepackaged Plan by such beneficial owners' broker or other record holder of such shares. "Minimum Tender Condition".........means the condition to the Exchange Offer requiring 100% of the aggregate principal amount of the Senior Notes to be validly tendered and not withdrawn prior to the Expiration Date. "Miscellaneous Secured Claim".....means any Claim, other than the CIT Claim, a Senior Note Claim, or an Administrative Expense, that is a secured claim within the meaning of, and to the extent provided in, Section 506 of the Bankruptcy Code. "NASD".............................means the National Association of Securities Dealers, Inc. "New Common Stock"................means the new shares of common stock of the Company, par value $1.00 per share, to be issued in accordance with and pursuant to the Restructuring. "New CIT Credit Agreement"........means the agreement in respect of a new working capital facility to be entered into by the Company and CIT on the Exchange Date, on the terms and conditions set forth in the CIT Commitment Letter, and which will replace the Company's current working capital facility under the Credit Agreement. "New Credit Agreement"............means the agreement in respect of a new working capital facility to be entered into by the Company and either CIT or another working capital lender on the Restructuring Date, and which will replace the Company's current working capital facility under the Credit Agreement. "Noteholders"......................means the holders of the Senior Notes. "NYSE".............................means the New York Stock Exchange, Inc. "Old Common Stock".................means the issued and outstanding common stock, par value $1.00 per share of the Company authorized prior to the Restructuring. "Old Common Stock Interest"........means any Interest evidenced by Old Common Stock. "Old Plans"........................means the Company's 1987 Stock Plan, 1988 Stock Plan, 1993 Stock Plan and 1996 Stock Plan. "Other Interest"...................means any Interest other than an Old Common Stock Interest. "Plan Proposal"....................means the proposal to approve the adoption of the Stock Award and Incentive Plan. "Plan Record Date".................means ________ ___, 1998. "Prepackaged Plan".................means the prepackaged plan of reorganization of the Company under Chapter 11 of the Bankruptcy Code contemplated by the Prepackaged Restructuring and attached hereto as Annex II. "Prepackaged Restructuring"........means the proposed financial restructuring of the Company pursuant to the Prepackaged Plan. "Priority Claim"...................means any Claim, other than a Priority Tax Claim or an Administrative Expense, which is entitled to priority of payment under Section 507(a) of the Bankruptcy Code. "Priority Tax Claim"...............means any Claim which is entitled to priority of payment under Section 507(a)(8) of the Bankruptcy Code. "Proposals"........................means collectively, in connection with the Exchange Restructuring, the (A) proposal to ratify Deloitte & Touche as independent auditors, (B) the Plan Proposal, and (C) the Restructuring Proposals. "Proxy"............................means, in connection with the Exchange Restructuring, the proxy card mailed to Stockholders, together with the Proxy Statement/Prospectus which also serves as a Letter of Transmittal for the Stockholder. "Proxy Statement/Prospectus" ......means the Proxy Statement/Prospectus of the Company mailed to Stockholders in connection with the Stockholders' Meeting. "Record Date"......................means _____ __, 1998. "Registration Rights Agreement"....means a registration rights agreement to be entered into on the Restructuring Date by and among Reorganized Salant and certain holders of the New Common Stock as of the Restructuring Date and included as Exhibit 10.51 to the Company's Registration Statement. "Registration Statement"...........means the Registration Statement on Form S-4, as amended, that the Company filed with the Commission under the Securities Act, with respect to the securities offered hereby. "Related Documents"................means the Prepackaged Plan, this Exchange Restructuring Prospectus and all documents necessary to consummate the transactions contemplated by the Prepackaged Plan. "Reorganized Salant"...............means Salant Corporation, from and after the effectiveness of the Prepackaged Plan on the Effective Date. "Reorganized Salant By-Laws".......means the by-laws of Reorganized Salant, as amended and restated pursuant to the Prepackaged Plan, to be filed with the Bankruptcy Court at least 10 days prior to the Confirmation Date. "Reorganized Salant Certificate of Incorporation"...............means the certificate of incorporation of Reorganized Salant, as amended and restated pursuant to the Prepackaged Plan, to be filed with the Bankruptcy Court at least 10 days prior to the Confirmation Date. "Restructuring"....................means the financial restructuring of the Company pursuant to either the Exchange Restructuring or the Prepackaged Restructuring, as the case may be. "Restructuring Date"...............means the date of consummation of the Restructuring, by means of the Prepackaged Plan or the Exchange Offer. "Restructuring Proposals"..........means, in connection with the Exchange Restructuring, the proposals of the Board that are described herein (A) to approve the Charter Amendment, (B) to approve the Issuance, and (C) to elect new directors pursuant to the Election of the New Board. "Reverse Split"....................means, with respect to the Exchange Restructuring, the ten-to-one reverse stock split of the Company's common stock to be effected pursuant to the Charter Amendment. "Rights Plan"......................means the shareholder rights plan between the Company and Chase Manhattan Bank, N.A., as rights agent, dated December 8, 1987, as amended. "Salant"...........................means Salant Corporation, a Delaware corporation. "Schedules"........................means the schedules of assets and liabilities to be filed by the Company with the Bankruptcy Court in accordance with Section 521(1) of the Bankruptcy Code, and any supplements and amendments thereto. "Securities Act"...................means the Securities Act of 1933, as amended. "Senior Notes".....................means the 10-1/2% Senior Secured Notes due December 31, 1998 of the Company that were issued pursuant to the Indenture. "Senior Note Claims"...............means any and all Claims in respect of all or any portion of the aggregate outstanding and unpaid amount of principal and interest due and owing under, and subject to the terms and provisions of, the Senior Notes, and any other indebtedness of the Company due and owing under the Indenture or the Senior Notes (including, without limitation, any and all interest, costs, attorneys' fees and other expenses owed by the Company or for which the Company may be liable in connection therewith). "Series A Preferred Stock".........means the 50,000 shares of preferred stock designated as "Series A Junior Participating Preferred Stock" authorized pursuant to a resolution adopted by the Board on December 8, 1987, in connection with the Rights Plan. "Solicitation".....................means the solicitation of Stockholders' acceptances of the Restructuring Proposals and the Prepackaged Plan as contemplated under the Proxy Statement/Prospectus, or the solicitation of tenders in the Exchange Offer and acceptances of the Prepackaged Plan as contemplated under the Exchange Restructuring Prospectus, as applicable. "Stock Award and Incentive Plan"...means the Company's proposed 1998 Stock Award and Incentive Plan, and included as Exhibit 10.50 to the Company's Registration Statement. "Stockholders".....................means the holders of Old Common Stock. "Stockholders' Meeting"............means the Annual Meeting of Stockholders of the Company to be held on _____ __, 1998 at __:__ _.m., New York City time, at Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York 10004. "Three-Year Business Plan "........means the Company's Three-Year Operating Plan for 1998-2000. "Trustee"..........................means Bankers Trust Company, as trustee under the Indenture, or its duly appointed successor, if any. "Thirteenth Amendment".............means the Thirteenth Amendment and Forbearance Agreement, dated as of June 1, 1998, by and between the Company and CIT. "Twelfth Amendment"................means the Twelfth Amendment and Forbearance Agreement, dated as of March 2, 1998, by and between the Company and CIT, and included as Exhibit 10.43 to the Company's Registration Statement. "UCC"..............................means the Uniform Commercial Code, from time to time in effect in the State of New York. "Unimpaired".......................means any Class of Claims or Interests that is not Impaired. "Warrants".........................means warrants exercisable for shares of New Common Stock and issued in connection with the Restructuring and in accordance with the Warrant Agreement. "Warrant Agreement"................means the Warrant Agreement pursuant to which the Warrants will be issued, and included as Exhibit 10.52 to the Company's Registration Statement. "Warrant Shares"...................means shares of New Common Stock issued to holders of Warrants upon exercise of their Warrants. ANNEX II UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK - -------------------------------------------------------------x : : In re: : : Chapter 11 SALANT CORPORATION, : Case No. _____ : Debtor. : : - -------------------------------------------------------------x ----------------------------------------------------- CHAPTER 11 PLAN OF REORGANIZATION FOR SALANT CORPORATION ----------------------------------------------------- Dated: New York, New York ________ ___, 1998 FRIED, FRANK, HARRIS, SHRIVER & JACOBSON (A Partnership Including Professional Corporations) Attorneys for Salant Corporation Debtor and Debtor-In-Possession One New York Plaza New York, New York 10004 (212) 859-8000 TABLE OF CONTENTS ARTICLE ONE DEFINITIONS ...................................................5 ARTICLE TWO PROVISIONS FOR TREATMENT OF ADMINISTRATIVE EXPENSES.............9 2.1. Administrative Expenses........................................9 ARTICLE THREE PROVISIONS FOR TREATMENT OF PRIORITY TAX CLAIMS..............10 3.1. Priority Tax Claims...........................................10 ARTICLE FOUR CLASSIFICATION OF CLAIMS AND INTERESTS........................10 4.1. Claims. ..................................................10 4.2. Interests. ..................................................10 ARTICLE FIVE IDENTIFICATION OF CLASSES OF CLAIMS AND INTERESTS IMPAIRED AND NOT IMPAIRED BY THIS PLAN...........................11 5.1. Classes of Claims and Interests Impaired by this Plan and Entitled to Vote.....................................11 5.2. Classes of Claims and Interests Not Impaired by this Plan and Conclusively Presumed to Accept this Plan............11 5.3. Class of Interests Impaired by this Plan and Deemed Not to Have Accepted this Plan.............................11 ARTICLE SIX PROVISIONS FOR TREATMENT OF CLAIMS AND INTERESTS...............11 6.1. Priority Claims (Class 1).....................................11 6.2. CIT Claim (Class 2)...........................................11 6.3. Senior Note Claims (Class 3)..................................12 6.4. Miscellaneous Secured Claims (Class 4)........................12 6.5. General Unsecured Claims (Class 5)............................12 6.6. Old Common Stock Interests (Class 6)..........................13 6.7. Other Interests (Class 7).....................................13 ARTICLE SEVEN ACCEPTANCE OR REJECTION OF THIS PLAN; EFFECT OF REJECTION BY ONE OR MORE IMPAIRED CLASSES OF CLAIMS OR INTERESTS......13 7.1. Impaired Class of Claims and Interests Entitled to Vote.......13 7.2. Acceptance by an Impaired Class of Creditors..................13 7.3. Acceptance by an Impaired Class of Interest Holders...........13 7.4. Classes of Claims Not Impaired by this Plan and Conclusively Presumed to Accept this Plan........................14 7.5. Class of Interests Deemed Not to Have Accepted this Plan..... 14 7.6. Confirmation Pursuant to Section 1129(b) of the Bankruptcy Code.....................................14 ARTICLE EIGHT UNEXPIRED LEASES AND EXECUTORY CONTRACTS.....................14 8.1. Assumption and Rejection of Executory Contracts and Unexpired Leases....................................14 8.2. Bar Date for Rejection Damages................................14 ARTICLE NINE IMPLEMENTATION OF THIS PLAN...................................15 9.1. Vesting of Property...........................................15 9.2. Transactions on Business Days.................................15 9.3. Restated Certificate of Incorporation; Restated By-Laws.......15 9.4. Implementation................................................15 9.5. Issuance of New Securities....................................15 9.6. Cancellation of Existing Securities and Agreements............15 9.7. Board of Directors of Reorganized Salant......................15 9.8. Employee Benefit Plans........................................16 9.9. The Stock Award and Incentive Plan............................16 9.10. Survival of Indemnification Obligations......................16 9.11. Listing of New Common Stock; Registration of Securities......16 9.12. Retention and Enforcement of Causes of Action................17 ARTICLE TEN PROVISIONS COVERING DISTRIBUTIONS..............................17 10.1. Timing of Distributions Under this Plan......................17 10.2. Allocation of Consideration..................................17 10.3. Cash Payments................................................17 10.4. Payment of Statutory Fees....................................17 10.5. No Interest..................................................17 10.6. Fractional Securities........................................17 10.7. Withholding of Taxes.........................................18 10.8. Pro Rata Distribution........................................18 10.9. Distribution Record Date.....................................18 10.10. Persons Deemed Holders of Registered Securities.............18 10.11. Surrender of Existing Securities............................18 10.12. Special Procedures for Lost, Stolen, Mutilated or Destroyed Instruments........................................19 10.13. Undeliverable or Unclaimed Distributions....................19 ARTICLE ELEVEN PROCEDURES FOR RESOLVING DISPUTED CLAIMS....................19 11.1. Objections to Claims.........................................19 11.2. Procedure ..................................................20 11.3. Payments and Distributions With Respect to Disputed Claims...20 11.4. Timing of Payments and Distributions With Respect to Disputed Claims....................................20 11.5. Individual Holder Proofs of Interest................. .......20 ARTICLE TWELVE DISCHARGE, INJUNCTION, RELEASES AND SETTLEMENTS OF CLAIMS...20 12.1. Discharge of All Claims and Interests and Releases...........20 12.2. Injunction ..................................................21 12.3. Exculpation..................................................21 12.4. Guaranties and Claims of Subordination.......................21 ARTICLE THIRTEEN CONDITIONS PRECEDENT TO CONFIRMATION ORDER AND EFFECTIVE DATE............................................22 13.1. Conditions Precedent to Entry of the Confirmation Order......22 13.2. Conditions Precedent to the Effective Date...................22 13.3. Waiver of Conditions.........................................23 13.4. Effect of Failure of Conditions..............................23 ARTICLE FOURTEEN MISCELLANEOUS PROVISIONS..................................23 14.1. Bankruptcy Court to Retain Jurisdiction......................23 14.2. Binding Effect of this Plan..................................24 14.3. Nonvoting Stock..............................................24 14.4. Authorization of Corporate Action............................24 14.5. Retiree Benefits.............................................24 14.6. Withdrawal of this Plan......................................24 14.7. Captions ..................................................24 14.8. Method of Notice.............................................24 14.9. Dissolution of Statutory Committees..........................25 14.10. Fees, Costs and Expenses of Indenture Trustee...............25 14.11. Amendments and Modifications to Plan........................25 14.12. Section 1125(e) of the Bankruptcy Code......................26 SALANT CORPORATION, the above-captioned Debtor and Debtor-in-Possession, hereby proposes the following chapter 11 plan of reorganization pursuant to section 1121(a) of the Bankruptcy Code. ARTICLE ONE DEFINITIONS Whenever from the context it appears appropriate, each term stated in either the singular or the plural shall include the singular and the plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, the feminine and the neuter. Unless the context requires otherwise, the following words and phrases shall have the meanings set forth below when used in initially-capitalized form in this Plan: Administrative Expense: (a) Any cost or expense of administration of the Chapter 11 Case (including, without limitation, professional fees and expenses) allowed under Section 503(b) of the Bankruptcy Code and (b) any fees or charges assessed against the Debtor's estate under title 28, United States Code, Section 1930. Affiliate: As defined in Section 101 of the Bankruptcy Code. Allowed: With respect to Claims and Interests, (a) any Claim against, or Interest in, the Debtor, proof of which is timely filed or by order of the Bankruptcy Court is not or will not be required to be filed, (b) any Claim or Interest that has been or is hereafter listed in the Schedules as liquidated in amount and not disputed or contingent or (c) any Claim allowed pursuant to this Plan and, in each such case in (a) and (b) above, as to which either (i) no objection to the allowance thereof has been interposed within the applicable period of time fixed by this Plan, the Bankruptcy Code, the Bankruptcy Rules or the Bankruptcy Court or (ii) such an objection is so interposed and the Claim or Interest shall have been allowed by a Final Order (but only to the extent so allowed). Apollo: Apollo Apparel Partners, L.P., a Delaware limited partnership, in its capacity as the beneficial owner of 5,924,352 shares of the Old Common Stock. Bankruptcy Code: Title 11 of the United States Code, as amended from time to time. Bankruptcy Court: The United States Bankruptcy Court for the Southern District of New York, or any other court having jurisdiction over this Chapter 11 Case. Bankruptcy Rules: The Federal Rules of Bankruptcy Procedure, as amended, promulgated under Section 2075 of title 28 of the United States Code and the Local Rules of the Bankruptcy Court, as applicable from time to time during the Chapter 11 Case. Board: The Board of Directors of the Debtor or Reorganized Salant, as applicable. Business Day: Any day other than a Saturday, Sunday or "legal holiday" as defined in Bankruptcy Rule 9006(a). By-Laws: The By-Laws, as amended, of the Debtor. Canceled Security: A security, note or other instrument evidencing a Claim or Interest outstanding immediately prior to the Effective Date, which security, note or other instrument represents a Claim or Interest that is Impaired under this Plan. Cash: Currency, a certified check, a cashier's check or a wire transfer of good funds from any source, or a check drawn on a domestic bank from the Debtor, Reorganized Salant or other Entity making any distribution under this Plan. Cause of Action: Any and all actions, causes of action, suits, accounts, controversies, agreements, promises, rights to legal remedies, rights to equitable remedies, rights to payment, and claims, whether known or unknown, reduced to judgment, not reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, secured, unsecured and whether asserted or assertable directly or derivatively, in law, equity or otherwise. Certificate of Incorporation: The Amended and Restated Certificate of Incorporation of the Debtor. Chapter 11 Case: The case under chapter 11 of the Bankruptcy Code concerning the Debtor to be commenced on the Filing Date. CIT: The CIT Group/Commercial Services, Inc., a New York corporation. CIT Claim: Any and all Claims in respect of all or any portion of the aggregate outstanding and unpaid amount of principal and interest due and owing under, and subject to the terms and provisions of, the Credit Agreement and all other Financing Agreements (as defined in the Credit Agreement), including, without limitation, any and all interest, costs, attorney's fees and other expenses owed by Debtor or for which the Debtor may be liable in connection therewith. Claim: Any right to (a) payment from the Debtor, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured or (b) an equitable remedy for breach of performance if such breach gives rise to a right to payment from the Debtor, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured. Class: A class of Claims or Interests designated pursuant to this Plan. Commission: The Securities and Exchange Commission. Confirmation Date: The date on which the Confirmation Order shall be entered on the docket maintained by the Clerk of the Bankruptcy Court with respect to the Chapter 11 Case. Confirmation Hearing: The hearing before the Bankruptcy Court regarding the confirmation of this Plan pursuant to section 1129 of the Bankruptcy Code. Confirmation Order: The order of the Bankruptcy Court confirming this Plan. Credit Agreement: The Revolving Credit, Factoring and Security Agreement, dated as of September 20, 1993, as amended, modified or supplemented from time to time, between Salant and CIT. Creditors' Committee: Any official committee of unsecured creditors appointed in the Chapter 11 Case pursuant to Section 1102(a) of the Bankruptcy Code, as the same may be constituted from time to time. Debtor: Salant Corporation, as debtor and debtor-in-possession in the Chapter 11 Case. Disputed: With respect to Claims, any Claim that is not Allowed. Distribution Record Date: The date or dates fixed by the Bankruptcy Court for determining the Holders of Senior Notes and Old Common Stock, respectively, who are entitled to receive distributions under this Plan, or if the Bankruptcy Court does not fix such date or dates, the Record Date. Effective Date: The date which is 11 days after the Confirmation Date, or, if such date is not a Business Day, the next succeeding Business Day, or such earlier date after the Confirmation Date as agreed to in writing between the Debtor and Magten so long as no stay of the Confirmation Order is in effect on such date; provided, however, that if, on or prior to such date, all conditions to the Effective Date set forth in Article Thirteen of this Plan have not been satisfied, or waived, then the Effective Date shall be the first Business Day following the day on which all such conditions to the Effective Date have been satisfied or waived. Entity: Any individual, corporation, limited or general partnership, limited liability company, joint venture, association, joint stock company, estate, entity, trust, trustee, United States trustee, unincorporated organization, government, governmental unit (as defined in the Bankruptcy Code), agency or political subdivision thereof. Exchange Act: The Securities Exchange Act of 1934, as amended. Exchange Restructuring Prospectus: The Exchange Offer Prospectus and Disclosure Statement distributed to the Noteholders for the purpose of voting to accept or reject this Plan in accordance with section 1126(b) of the Bankruptcy Code and Bankruptcy Rule 3018. Filing Date: The date on which the Debtor files its voluntary petition for relief commencing the Chapter 11 Case and files this Plan with the Bankruptcy Court. Final Decree: A final decree closing the Chapter 11 Case as described in Bankruptcy Rule 3022. Final Order: An order, ruling or judgment that: (i) is in full force and effect; (ii) is not stayed; and (iii) is no longer subject to review, reversal, modification or amendment, by appeal or writ of certiorari. General Unsecured Claim: Any Claim against the Debtor (other than the CIT Claim, a Miscellaneous Secured Claim, a Senior Note Claim, a Priority Claim, a Priority Tax Claim, or an Administrative Expense). Holder: Any Entity that holds a Claim or Interest. Where the identity of the Holder of a Claim or Interest is set forth on a register or other record maintained by or at the direction of the Debtor, the Holder of such Claim or Interest shall be deemed to be the Holder as identified on such register or record unless the Debtor is otherwise notified in a writing authorized by such Holder. Impaired: Any Class of Claims or Interests that is impaired within the meaning of Section 1124 of the Bankruptcy Code. Indenture: The Indenture, dated September 20, 1993, as amended, between Salant and Bankers Trust Company, as Indenture Trustee, pursuant to which the Senior Notes were issued. Indenture Trustee: Bankers Trust Company, as trustee under the Indenture, or its duly appointed successor (if any). Instrument: Any share of stock security, promissory note or other "Instrument" within the meaning of that term, as defined in Section 9-105(1)(i) of the UCC. Interests: The equity interests in the Debtor, including, but not limited to, shares of common stock and shares of preferred stock of the Debtor and any rights, options, warrants, calls, subscriptions or other similar rights or agreements, commitments or outstanding securities obligating the Debtor to issue, transfer or sell any shares of capital stock of the Debtor. Letter Agreement: That certain letter agreement, dated March 2, 1998, by and among Magten, Apollo and Salant, as amended. Magten: Magten Asset Management Corp., a New York corporation, in its capacity as the beneficial owner, or the investment manager on behalf of the beneficial owners, of a substantial portion of the outstanding Senior Notes. Market Rate: The rate of interest per annum (rounded upward, if necessary, to the nearest whole 1/100 of 1%) equal to the yield equivalent (as determined by the Secretary of the Treasury) of the average accepted auction price for the last auction of one-year United States Treasury bills settled at least fifteen days prior to the Effective Date. Miscellaneous Secured Claim: Any Claim, other than the CIT Claim, a Senior Note Claim, or an Administrative Expense, that is a secured claim within the meaning of, and to the extent provided in, Section 506 of the Bankruptcy Code. New Common Stock: The shares of common stock of Reorganized Salant, par value $1.00 per share, to be issued by Reorganized Salant on and after the Effective Date pursuant to this Plan. Noteholders: The holders of the Senior Notes. NYSE: The New York Stock Exchange, Inc. Old Common Stock: The common stock of the Debtor, par value $1.00 per share, issued and outstanding as of the Filing Date. Old Common Stock Interest: Any Interest evidenced by Old Common Stock. Other Interest: Any Interest other than an Old Common Stock Interest. Plan: This Chapter 11 plan of reorganization of the Debtor, as amended and modified from time to time in accordance with the terms hereof. Priority Claim: Any Claim, other than a Priority Tax Claim or an Administrative Expense, which is entitled to priority of payment under Section 507(a) of the Bankruptcy Code. Priority Tax Claim: Any Claim which is entitled to priority of payment under Section 507(a)(8) of the Bankruptcy Code. Proxy Statement/Prospectus: The Proxy Statement/Prospectus and Disclosure Statement distributed to the Holders of the Old Common Stock for the purpose of voting to accept or reject this Plan in accordance with section 1126(b) of the Bankruptcy Code and Bankruptcy Rule 3018. Record Date: _____ __, 1998. Registration Rights Agreement: A registration rights agreement, in substantially the form annexed hereto as Exhibit B, to be entered into on the Effective Date by and among Reorganized Salant and certain holders of the New Common Stock as of the Effective Date. Related Documents: This Plan and all documents necessary to consummate the transactions contemplated by this Plan. Reorganized Salant: The Debtor from and after the effectiveness of this Plan on the Effective Date. Reorganized Salant By-Laws: The by-laws of Reorganized Salant, as amended and restated pursuant to this Plan, to be filed with the Bankruptcy Court prior to the Confirmation Date. Reorganized Salant Certificate of Incorporation: The certificate of incorporation of Reorganized Salant, as amended and restated pursuant to this Plan, in substantially the form annexed hereto as Exhibit F. Salant: Salant Corporation, a Delaware corporation. Schedules: The schedule of assets and liabilities filed by the Debtor with the Bankruptcy Court in accordance with section 521(1) of the Bankruptcy Code, and any supplements and amendments thereto. Securities Act: The Securities Act of 1933, as amended. Senior Notes: The 10-1/2% Senior Secured Notes due December 31, 1998 issued pursuant to the Indenture. Senior Note Claims: Any and all Claims in respect of all or any portion of the aggregate outstanding and unpaid amount of principal and interest due and owing under, and subject to the terms and provisions of, the Senior Notes, and any other indebtedness of the Debtor due and owing under the Indenture or the Senior Notes (including, without limitation, any and all interest, costs, attorneys' fees and other expenses owed by the Debtor or for which the Debtor may be liable in connection therewith). Stock Award and Incentive Plan: Reorganized Salant's 1998 Stock Award and Incentive Plan, in substantially the form annexed hereto as Exhibit C. UCC: The Uniform Commercial Code, from time to time in effect in the State of New York. Unimpaired: Any Class of Claims or Interests that is not Impaired. Warrants: Warrants representing the right to purchase, in the aggregate, up to 2,216,979 shares of New Common Stock, to be issued by Reorganized Salant on the Effective Date pursuant to the Warrant Agreement. Each Warrant represents the right to purchase one share of New Common Stock. Warrant Agreement: The Warrant Agreement pursuant to which the Warrants will be issued, in substantially the form annexed hereto as Exhibit A. ARTICLE TWO PROVISIONS FOR TREATMENT OF ADMINISTRATIVE EXPENSES 2.1. Administrative Expenses. Each allowed Administrative Expense shall be paid in full in Cash on the later of (i) the Effective Date and (ii) the date on which the Bankruptcy Court enters an order allowing such Administrative Expense; provided, however, that allowed Administrative Expenses representing obligations incurred in the ordinary course of business, consistent with past practice, or assumed by the Debtor shall be paid in full or performed by the Debtor or Reorganized Salant in the ordinary course of business, consistent with past practice; provided further, however, that allowed Administrative Expenses incurred by the Debtor or Reorganized Salant after the Confirmation Date, including (without limitation) claims for professionals' fees and expenses, shall not be subject to application and may be paid by the Debtor or Reorganized Salant, as the case may be, in the ordinary course of business and without further Bankruptcy Court approval. ARTICLE THREE PROVISIONS FOR TREATMENT OF PRIORITY TAX CLAIMS 3.1. Priority Tax Claims. With respect to each Allowed Priority Tax Claim, at the sole option of the Debtor, the Holder of an Allowed Priority Tax Claim shall be entitled to receive from Reorganized Salant on account of such Claim: (a) Cash payments made in equal annual installments beginning on or before the first anniversary following the Effective Date with the final installment being payable no later than the sixth anniversary of the date of the assessment of such Allowed Priority Tax Claim, together with interest on the unpaid balance of such Allowed Priority Tax Claim from the Effective Date calculated at the Market Rate; or (b) Such other treatment agreed to by the Holder of such Allowed Priority Tax Claim and the Debtor or Reorganized Salant, as the case may be. ARTICLE FOUR CLASSIFICATION OF CLAIMS AND INTERESTS Pursuant to Section 1122 and 1123(a)(1) of the Bankruptcy Code, set forth below is a designation of classes of Claims and Interests. Administrative Expenses and Priority Tax Claims of the kinds specified in Sections 507(a)(1) and 507(a)(8) of the Bankruptcy Code (set forth in Articles Two and Three above) have not been classified and are excluded from the following classes in accordance with Section 1123(a)(l) of the Bankruptcy Code. 4.1. Claims. Class 1. Class 1 consists of all Priority Claims. Class 2. Class 2 consists of the CIT Claim. Class 3. Class 3 consists of all Senior Note Claims. Class 4. Class 4 consists of all Miscellaneous Secured Claims. Class 5. Class 5 consists of all General Unsecured Claims. 4.2. Interests. Class 6. Class 6 consists of all Old Common Stock Interests. Class 7. Class 7 consists of all Other Interests. ARTICLE FIVE IDENTIFICATION OF CLASSES OF CLAIMS AND INTERESTS IMPAIRED AND NOT IMPAIRED BY THIS PLAN 5.1. Classes of Claims and Interests Impaired by this Plan and Entitled to Vote. Senior Note Claims (Class 3) and Old Common Stock Interests (Class 6) are Impaired by this Plan and the Holders of Allowed Claims and Interests in such Classes are entitled to vote to accept or reject this Plan. 5.2. Classes of Claims and Interests Not Impaired by this Plan and Conclusively Presumed to Accept this Plan. Priority Claims (Class 1), the CIT Claim (Class 2), Miscellaneous Secured Claims (Class 4) and General Unsecured Claims (Class 5) are not Impaired by this Plan. Under Section 1126(f) of the Bankruptcy Code, the Holders of such Claims and Interests are conclusively presumed to accept this Plan, and the acceptances of such Holders will not be solicited. 5.3. Class of Interests Impaired by this Plan and Deemed Not to Have Accepted this Plan. Other Interests (Class 7) are Impaired by this Plan and do not receive or retain any property under this Plan. Under Section 1126(g) of the Bankruptcy Code, the Holders of Other Interests are deemed not to have accepted this Plan, and the acceptance of such Holders will not be solicited. ARTICLE SIX PROVISIONS FOR TREATMENT OF CLAIMS AND INTERESTS 6.1. Priority Claims (Class 1). On the latest of (a) the Effective Date, (b) the date on which such Priority Claim becomes an Allowed Claim, and (c) the date on which the Debtor and the Holder of such Allowed Priority Claim otherwise agree, each Holder of an Allowed Priority Claim shall be entitled to receive Cash in an amount sufficient to render such Allowed Priority Claim Unimpaired under Section 1124 of the Bankruptcy Code, in full settlement, release and discharge of such Allowed Priority Claim. Class 1 is not Impaired. 6.2. CIT Claim (Class 2). (a) Treatment. At the election of the Debtor prior to the Effective Date, on the Effective Date or as soon as practicable thereafter, CIT shall be entitled to receive on account of the Allowed CIT Claim one of the following treatments: (i) CIT shall receive a distribution in Cash equal to 100% of its Allowed CIT Claim, (ii) the Allowed CIT Claim shall be otherwise rendered Unimpaired in accordance with Section 1124 of the Bankruptcy Code, or (iii) such other treatment as mutually agreed to by the Debtor and CIT. (b) Full Settlement. The distribution provided for in this Section 6.2 is in full settlement, release and discharge of the CIT Claim. Class 2 is not Impaired. 6.3. Senior Note Claims (Class 3). (a) Treatment. On the Effective Date or as soon as practicable thereafter, each Holder of an Allowed Senior Note Claim shall be entitled to receive on account of such Holder's Allowed Senior Note Claim such Holder's pro rata share of 18,456,350 shares of New Common Stock (or 175.977555 shares of New Common Stock for each $1,000 principal amount of Senior Notes held by such Holder). (b) Full Settlement. The distribution provided for in this Section 6.3 is in full settlement, release and discharge of each Holder's Senior Note Claim. (c) Allowance of Senior Note Claims. The aggregate Senior Note Claims in Class 3 shall be deemed Allowed in the aggregate amount of $110,379,000, plus interest in the amount of $30,590 for each day after February 28, 1998, until and including the Filing Date. The Senior Note Claims are not disputed, contingent or unliquidated, and no Holder of a Senior Note Claim or the Indenture Trustee shall be required to file a proof of claim in order for such Claims to be Allowed pursuant to this Plan. Any Claims filed with respect to the Senior Note Claims shall be disallowed as duplicative of the Claim deemed filed and Allowed as provided in this Section 6.3(c). The reasonable fees, costs and expenses of the Indenture Trustee as provided for pursuant to the Indenture shall be paid in Cash in accordance with Section 14.10 of this Plan. Class 3 is Impaired. 6.4. Miscellaneous Secured Claims (Class 4). (a) Treatment. At the election of the Debtor prior to the Effective Date, on the Effective Date or as soon as practicable thereafter, each Holder of an Allowed Miscellaneous Secured Claim shall be entitled to receive on account of such Holder's Allowed Miscellaneous Secured Claim one of the following treatments: (i) the legal, equitable and contractual rights to which such Allowed Miscellaneous Secured Claim entitles such Holder shall remain unaltered, (ii) such Holder's Allowed Miscellaneous Secured Claim shall be reinstated and rendered Unimpaired in accordance with section 1124(2) of the Bankruptcy Code, or (iii) such other treatment as mutually agreed to by the Debtor and such Holder. (b) Full Settlement. The distribution provided for in this Section 6.4 is in full settlement, release and discharge of each Holder's Miscellaneous Secured Claim. Class 4 is not Impaired. 6.5. General Unsecured Claims (Class 5). (a) Treatment. At the election of the Debtor prior to the Effective Date, on the Effective Date or as soon as practicable thereafter, each Holder of an Allowed General Unsecured Claim that has not been fully paid or satisfied prior to the Effective Date shall be entitled to receive on account of such Holder's Allowed General Unsecured Claim one of the following treatments: (i) the legal, equitable and contractual rights to which such Allowed General Unsecured Claim entitles such Holder shall remain unaltered; (ii) such Holder's Allowed General Unsecured Claim shall be reinstated and rendered Unimpaired in accordance with section 1124(2) of the Bankruptcy Code; or (iii) such other treatment as mutually agreed to by the Debtor and such Holder. (b) Full Settlement. The distribution provided for in this Section 6.5 is in full settlement, release and discharge of each Holder's General Unsecured Claim. Class 5 is not Impaired. 6.6. Old Common Stock Interests (Class 6) (a) Treatment. On the Effective Date or as soon as practicable thereafter, each Holder of an Allowed Old Common Stock Interest shall be entitled to receive on account of such Holder's Allowed Old Common Stock Interest such Holder's pro rata share of: (i) 1,496,461 shares of New Common Stock; and (ii) the Warrants. (b) Full Settlement. The distribution provided for in this Section 6.6 is in full settlement, release and discharge of each Holder's Old Common Stock Interest. Class 6 is Impaired. 6.7. Other Interests (Class 7). On the Effective Date, all Other Interests will be extinguished and no distributions will be made in respect of such Other Interests. Class 7 is Impaired. ARTICLE SEVEN ACCEPTANCE OR REJECTION OF THIS PLAN; EFFECT OF REJECTION BY ONE OR MORE IMPAIRED CLASSES OF CLAIMS OR INTERESTS 7.1. Impaired Class of Claims and Interests Entitled to Vote. The Holders of Claims in each Impaired Class of Claims (Class 3 - Senior Note Claims) and Interests (Class 6 - Old Common Stock Interests) are entitled to vote as a Class to accept or reject this Plan. 7.2. Acceptance by an Impaired Class of Creditors. Consistent with Section 1126(c) of the Bankruptcy Code and except as provided in Section 1126(e) of the Bankruptcy Code, Class 3 (Senior Note Claims) shall have accepted this Plan if this Plan is accepted by Holders of at least two-thirds in dollar amount and more than one-half in number of the Allowed Claims in Class 3 that have timely and properly voted to accept or reject this Plan. 7.3. Acceptance by an Impaired Class of Interest Holders. Consistent with Section 1126(d) of the Bankruptcy Code and except as provided in Section 1126(e) of the Bankruptcy Code, Class 6 (Old Common Stock Interests) shall have accepted this Plan if this Plan is accepted by Holders of at least two-thirds in amount of the Allowed Interests in Class 6 that have timely and properly voted to accept or reject this Plan. 7.4. Classes of Claims Not Impaired by this Plan and Conclusively Presumed to Accept this Plan. Priority Claims (Class 1), the CIT Claim (Class 2), Miscellaneous Secured Claims (Class 4) and General Unsecured Claims (Class 5) are not Impaired by this Plan. Under Section 1126(f) of the Bankruptcy Code, the Holders of such Claims are conclusively presumed to accept this Plan, and the acceptances of such Holders will not be solicited. 7.5. Class of Interests Deemed Not to Have Accepted this Plan. Other Interests (Class 7) are Impaired by this Plan and do not receive or retain any property under this Plan. Under Section 1126(g) of the Bankruptcy Code, the Holders of such Other Interests are deemed not to have accepted this Plan, and the acceptance of such Holders will not be solicited. 7.6. Confirmation Pursuant to Section 1129(b) of the Bankruptcy Code. With respect to Class 7 and any Impaired Class that does not accept this Plan, the Debtor intends to request that the Bankruptcy Court confirm this Plan in accordance with Section 1129(b) of the Bankruptcy Code. ARTICLE EIGHT UNEXPIRED LEASES AND EXECUTORY CONTRACTS 8.1. Assumption and Rejection of Executory Contracts and Unexpired Leases. Each executory contract or unexpired lease that is not listed on Exhibit E hereto or has not been expressly assumed or rejected by order of the Bankruptcy Court on or prior to the Confirmation Date shall, as of the Confirmation Date (subject to the occurrence of the Effective Date), be deemed to have been assumed by the Debtor unless there is then pending before the Bankruptcy Court a motion to reject such unexpired lease or executory contract. Each unexpired lease and executory contract listed on Exhibit E hereto is specifically rejected pursuant to this Plan as of the Effective Date. Entry of the Confirmation Order by the clerk of the Bankruptcy Court shall constitute an order approving such assumptions and rejections, as the case may be, pursuant to Section 365(a) of the Bankruptcy Code. 8.2. Bar Date for Rejection Damages. Unless otherwise provided by an order of the Bankruptcy Court entered prior to the Confirmation Date, proof of any Claim against the Debtor arising from the rejection of any executory contract or unexpired lease pursuant to an order of the Bankruptcy Court must be filed with the Bankruptcy Court within the later of (a) the time period established by the Bankruptcy Court in an order of the Bankruptcy Court approving such rejection, or (b) if no such time period is or was established, thirty (30) days from the date of entry of such order of the Bankruptcy Court approving such rejection. Any Entity that fails to file proof of its Claim arising from such a rejection within the period set forth above shall be forever barred from asserting a Claim against the Debtor, Reorganized Salant, or the property or interests in property of the Debtor or Reorganized Salant. All Allowed Claims arising from the rejection of executory contracts or unexpired leases shall be classified as a General Unsecured Claim (Class 5) under this Plan. ARTICLE NINE IMPLEMENTATION OF THIS PLAN 9.1. Vesting of Property. Except as otherwise provided in this Plan, on the Effective Date, title to all property of the Debtor's estate shall pass to Reorganized Salant free and clear of all Claims, Interests, and liens (including, without limitation, all liens securing the Senior Note Claims). Confirmation of this Plan (subject to the occurrence of the Effective Date) shall be binding and the Debtor's debts shall, without in any way limiting Section 12.1 of this Plan, be discharged as provided in Section 1141 of the Bankruptcy Code. 9.2. Transactions on Business Days. If the Effective Date or any other date on which a transaction may occur under this Plan shall occur on a day that is not a Business Day, the transactions contemplated by this Plan to occur on such day shall instead occur on the next succeeding Business Day. 9.3. Restated Certificate of Incorporation; Restated By-Laws. On the Effective Date or as soon thereafter as is practicable, Reorganized Salant shall file with the Secretary of State of the State of Delaware, in accordance with sections 103 and 303 of the Delaware General Corporation Law, the Reorganized Salant Certificate of Incorporation and such certificate shall be the certificate of incorporation for Reorganized Salant. On the Effective Date, the Reorganized Salant By-Laws shall become the by-laws of Reorganized Salant. 9.4. Implementation. The Debtor shall be authorized to take all necessary steps, and perform all necessary acts, to consummate the terms and conditions of this Plan. On or before the Effective Date, the Debtor may file with the Bankruptcy Court such agreements and other documents as may be necessary or appropriate to effectuate or further evidence the terms and conditions of this Plan and the other agreements referred to herein. The Debtor or Reorganized Salant, as the case may be, may, and shall, execute such documents and take such other actions as are necessary to effectuate the transactions provided for in this Plan. 9.5. Issuance of New Securities. The issuance and distribution of the New Common Stock and the Warrants by Reorganized Salant is hereby authorized and directed without the need for any further corporate action, under applicable law, regulation, order, rule or otherwise. 9.6. Cancellation of Existing Securities and Agreements. On the Effective Date, the Senior Notes, the Old Common Stock, and any rights, options, warrants, calls, subscriptions, or other similar rights or other agreements or commitments, contractual or otherwise, obligating the Debtor to issue, transfer, or sell any shares of Old Common Stock or any other capital stock of the Debtor shall be canceled. Except for purposes of effectuating the distributions under this Plan, on the Effective Date, the Indenture shall be canceled. 9.7. Board of Directors of Reorganized Salant. On the Effective Date, the operation of Reorganized Salant shall become the general responsibility of its Board, subject to, and in accordance with, the Reorganized Salant Certificate of Incorporation and the Reorganized Salant By-Laws. The initial Board of Reorganized Salant shall consist of the individuals identified on Exhibit D hereto. Such directors shall be deemed elected or appointed, as the case may be, pursuant to the Confirmation Order, but shall not take office and shall not be deemed to be elected or appointed until the occurrence of the Effective Date. Those directors and officers not continuing in office shall be deemed removed therefrom as of the Effective Date pursuant to the Confirmation Order. 9.8. Employee Benefit Plans. Subject to the occurrence of the Effective Date, all employee benefit plans, policies, and programs of the Debtor, and the Debtor's obligations thereunder, shall survive confirmation of this Plan, remain unaffected thereby, and not be discharged. Employee benefit plans, policies, and programs shall include, without limitation, all savings plans, retirement pension plans, health care plans, disability plans, severance benefit plans, life, accidental death, and dismemberment insurance plans (to the extent not executory contracts assumed under this Plan), but shall exclude all employee equity or equity-based incentive plans. 9.9. The Stock Award and Incentive Plan. The Stock Award and Incentive Plan shall remain in effect after the Effective Date; provided, that, if the Stock Award and Incentive Plan has not previously been approved by the stockholders of Salant, the Stock Award and Incentive Plan and any grants made thereunder shall be subject to the subsequent approval of the stockholders of Reorganized Salant. 9.10. Survival of Indemnification Obligations. Notwithstanding anything to the contrary contained in this Plan, the obligations of the Debtor to indemnify (i) its present or former directors, officers, agents, employees and representatives, pursuant to the Certificate of Incorporation, By-Laws, applicable statutes or contractual obligations, in respect of all past, present and future actions, suits and proceedings against any of such directors, officers, agents, employees and representatives, based upon any act or omission related to service with, for or on behalf of the Debtor, and (ii) Magten in accordance with and pursuant to paragraph 8 of the Letter Agreement, shall not be discharged or impaired by confirmation or consummation of this Plan but shall survive unaffected by the reorganization contemplated by this Plan and shall be treated as, and deemed to be, Allowed General Unsecured Claims pursuant to Section 6.5 of this Plan, pursuant to the Reorganized Salant By-Laws and Certificate of Incorporation, applicable statutes or contractual obligations, by Reorganized Salant regardless of such confirmation, consummation and reorganization. 9.11. Listing of New Common Stock; Registration of Securities. Reorganized Salant shall use its best efforts to (i) maintain its status as a reporting company under the Exchange Act and cause, on the Effective Date, the shares of New Common Stock issued hereunder to be listed on the NYSE, or, if Reorganized Salant is unable to have the shares of New Common Stock listed on the NYSE, on another national securities exchange, or, as to the New Common Stock, quoted in the national market system of the National Association of Securities Dealers' Automated Quotation System, (ii) in accordance with the terms of the Registration Rights Agreement, file and have declared effective as soon as possible thereafter a registration statement or registration statements under the Securities Act, for the offering on a continuous or delayed basis in the future of the shares of New Common Stock (the "Shelf Registration"), (iii) cause to be filed with the Commission on the Effective Date a registration statement on Form 10 under the Exchange Act with respect to the New Common Stock, (iv) keep the Shelf Registration effective for a three-year period, and (v) supplement or make amendments to the Shelf Registration, if required under the Securities Act or by the rules or regulations promulgated thereunder or in accordance with the terms of the Registration Rights Agreement, and have such supplements and amendments declared effective as soon as practicable after filing. In addition, on the Effective Date, Reorganized Salant shall enter into the Registration Rights Agreement in the form of Exhibit B hereto. 9.12. Retention and Enforcement of Causes of Action. Pursuant to section 1123(b)(3) of the Bankruptcy Code, Reorganized Salant shall retain and shall have the exclusive right, in its discretion, to enforce against any Entity any and all Causes of Action of the Debtor, including all Causes of Action of a trustee and debtor-in-possession under the Bankruptcy Code, other than those released or compromised as part of, or under, this Plan. ARTICLE TEN PROVISIONS COVERING DISTRIBUTIONS 10.1. Timing of Distributions Under this Plan. Except as otherwise provided in this Plan and without in any way limiting Sections 9.6, 10.6, 10.11, 11.3 and 12.1 of this Plan, payments and distributions in respect of Allowed Claims and Allowed Interests which are required by this Plan to be made on the Effective Date shall be made by the Debtor, Reorganized Salant or its designee or, in the case of the distributions to the Noteholders, by Reorganized Salant or its designee (with the assistance of the Indenture Trustee, if necessary) on, or as soon as practicable following, the Effective Date. Distributions of New Common Stock to the Noteholders shall be made at the addresses of the registered Holders of the Senior Notes last provided in writing to the Indenture Trustee. 10.2. Allocation of Consideration. The aggregate consideration to be distributed to the Holders of Allowed Claims in each Class under this Plan shall be treated as first satisfying an amount equal to the stated principal amount of the Allowed Claim for such Holders and any remaining consideration as satisfying accrued, but unpaid, interest, if any. 10.3. Cash Payments. Cash payments made pursuant to this Plan will be in U.S. dollars. Cash payments of $1,000,000 or more to be made pursuant to this Plan will, to the extent requested in writing no later than five days after the Confirmation Date, be made by wire transfer from a domestic bank. Cash payments to foreign creditors may be made, at the option of the Debtor or Reorganized Salant, in such funds and by such means as are necessary or customary in a particular foreign jurisdiction. Cash payments made pursuant to this Plan in the form of checks issued by Reorganized Salant shall be null and void if not cashed within 120 days of the date of the issuance thereof. Requests for reissuance of any check shall be made directly to Reorganized Salant or its designee as set forth in Section 10.13 below. 10.4. Payment of Statutory Fees. All fees payable to the United States Trustee pursuant to 28 U.S.C. ss. 1930 as determined by the Bankruptcy Court at the Confirmation Hearing shall be paid by the Debtor on or before the Effective Date. 10.5. No Interest. Except with respect to holders of Unimpaired Claims entitled to interest under applicable non-bankruptcy law or as expressly provided herein, no Holder of an Allowed Claim or Interest shall receive interest on the distribution to which such Holder is entitled hereunder, regardless of whether such distribution is made on the Effective Date or thereafter. 10.6. Fractional Securities. Notwithstanding any other provision of this Plan, only whole numbers of shares of New Common Stock and Warrants will be issued or transferred, as the case may be, pursuant to this Plan. Reorganized Salant will not distribute any fractional shares of New Common Stock or fractional interests in Warrants. For purposes of distribution, fractional shares of New Common Stock and fractional Warrants shall be rounded up to the nearest share of New Common Stock or Warrant, as the case may be. 10.7. Withholding of Taxes. Reorganized Salant shall withhold from any property distributed under this Plan any property which must be withheld for taxes payable by the Entity entitled to such property to the extent required by applicable law. As a condition to making any distribution under this Plan, Reorganized Salant or its designee, as the case may be, may request that the Holder of any Allowed Claim provide such Holder's taxpayer identification number and such other certification as may be deemed necessary to comply with applicable tax reporting and withholding laws. 10.8. Pro Rata Distribution. Where this Plan provides for pro rata distribution, the property to be distributed under this Plan shall be divided pro rata among the Holders of Allowed Claims or Allowed Interests of the relevant Class. 10.9. Distribution Record Date. As of the close of business on the Distribution Record Date, the transfer registers for the Senior Notes and Old Common Stock maintained by the Debtor, or its respective agents, will be closed. Reorganized Salant, its designees and the Indenture Trustee will have no obligation to recognize the transfer of any Senior Notes or Old Common Stock occurring after the Distribution Record Date and will be entitled for all purposes relating to this Plan to recognize and deal only with those Holders of record as of the close of business on the Distribution Record Date. 10.10. Persons Deemed Holders of Registered Securities. Except as otherwise provided herein and subject to Sections 9.6 and 10.11, the Debtor, Reorganized Salant or its designee or, in the case of the Noteholders, the Indenture Trustee, shall be entitled to treat the record holder of a registered security as the Holder of the Claim or Interest in respect thereof for purposes of all notices, payments or other distributions under this Plan unless the Debtor, Reorganized Salant, its designee or the Indenture Trustee, as the case may be, shall have received written notice specifying the name and address of any new Holder thereof (and the nature and amount of the interest of such new Holder) at least ten (10) Business Days prior to the date of such notice, payment or other distribution. In the event of any dispute regarding the identity of any party entitled to any payment or distribution in respect of any Claim or Interest under this Plan, no payments or distributions will be made in respect of such Claim or Interest until the Bankruptcy Court resolves that dispute pursuant to a Final Order. 10.11. Surrender of Existing Securities. As a condition to receiving any distribution under this Plan, each Holder of a Senior Note, Old Common Stock Interest, or other instrument evidencing a Claim or equity Interest must surrender such Senior Note, Old Common Stock Interest, or other instrument to Reorganized Salant or its designee. Reorganized Salant appoints the Indenture Trustee under the Indenture as its designee to receive the Senior Notes. Any Holder of a Claim or Interest that fails to (a) surrender such instrument or (b) execute and deliver an affidavit of loss and/or indemnity reasonably satisfactory to Reorganized Salant and furnish a bond in form, substance, and amount reasonably satisfactory to Reorganized Salant before the later to occur of (i) the second anniversary of the Effective Date and (ii) six months following the date such Holder's Claim becomes an Allowed Claim, shall be deemed to have forfeited all rights, Claims, and/or Interests and may not participate in any distribution under this Plan. 10.12. Special Procedures for Lost, Stolen, Mutilated or Destroyed Instruments. In addition to any requirements under the Debtor's Certificate of Incorporation or By-laws, any Holder of a Claim or an Interest evidenced by an Instrument that has been lost, stolen, mutilated or destroyed shall be required to, in lieu of surrendering such Instrument, deliver to Reorganized Salant or its designee: (a) evidence satisfactory to Reorganized Salant or its designee, as the case may be, of the loss, theft, mutilation or destruction; and (b) such security or indemnity as may be required by Reorganized Salant or its designee, as the case may be, to hold Reorganized Salant and/or its designee, as applicable, harmless from any damages, liabilities or costs incurred in treating such individual as a Holder of an Instrument. Upon compliance with this Section 10.12, the Holder of a Claim or Interest evidenced by any such lost, stolen, mutilated or destroyed Instrument will, for all purposes under this Plan, be deemed to have surrendered such Instrument. 10.13. Undeliverable or Unclaimed Distributions. Any Entity that is entitled to receive a Cash distribution under this Plan but that fails to cash a check within 120 days of its issuance shall be entitled to receive a reissued check from Reorganized Salant for the amount of the original check, without any interest, if such Entity requests Reorganized Salant or its designee to reissue such check and provides Reorganized Salant or its designee, as the case may be, with such documentation as Reorganized Salant or its designee requests to verify that such Entity is entitled to such check, prior to the second anniversary of the Effective Date. If an Entity fails to cash a check within 120 days of its issuance and fails to request reissuance of such check prior to the later to occur of (i) the second anniversary of the Effective Date and (ii) six months following the date such Holder's Claim becomes an Allowed Claim, such Entity shall not be entitled to receive any distribution under this Plan. If the distribution to any Holder of an Allowed Claim or Allowed Interest is returned to Reorganized Salant or its designee as undeliverable, no further distributions will be made to such Holder unless and until Reorganized Salant or its designee is notified in writing of such Holder's then-current address. Undeliverable distributions will remain in the possession of Reorganized Salant or its designee pursuant to Section 10.1 of this Plan until such time as a distribution becomes deliverable. All claims for undeliverable distributions must be made on or before the later to occur of (i) the second anniversary of the Effective Date and (ii) six months following the date such Holder's Claim or Interest becomes an Allowed Claim or Allowed Interest. After such date, all unclaimed property shall revert to Reorganized Salant and the claim of any Holder or successor to such Holder with respect to such property shall be discharged and forever barred notwithstanding any federal or state escheat laws to the contrary. ARTICLE ELEVEN PROCEDURES FOR RESOLVING DISPUTED CLAIMS 11.1. Objections to Claims. Only the Debtor and Reorganized Salant shall have the authority to file objections to Claims after the Effective Date. Subject to an order of the Bankruptcy Court providing otherwise, Reorganized Salant may object to a Claim by filing an objection with the Bankruptcy Court and serving such objection upon the Holder of such Claim not later than one hundred and twenty (120) days after the Effective Date or one hundred and twenty (120) days after the filing of the proof of such Claim, whichever is later, or such other date determined by the Bankruptcy Court upon motion to the Bankruptcy Court without further notice or hearing. Notwithstanding the foregoing, neither the Debtor nor Reorganized Salant shall object to the allowance of the Senior Note Claims as described in Section 6.3(c) of this Plan. 11.2. Procedure. Unless otherwise ordered by the Bankruptcy Court or agreed to by written stipulation of the Debtor or Reorganized Salant, or until an objection thereto by the Debtor or by Reorganized Salant is withdrawn, the Debtor or Reorganized Salant shall litigate the merits of each Disputed Claim until determined by a Final Order; provided, however, that, (a) prior to the Effective Date, the Debtor, subject to the approval of the Bankruptcy Court, and (b) after the Effective Date, Reorganized Salant, subject to the approval of the Bankruptcy Court, may compromise and settle any objection to any Claim. 11.3. Payments and Distributions With Respect to Disputed Claims. No payments or distributions shall be made in respect of a Disputed Claim until such Disputed Claim becomes an Allowed Claim. 11.4. Timing of Payments and Distributions With Respect to Disputed Claims. Subject to the provisions of this Plan, payments and distributions with respect to each Disputed Claim that becomes an Allowed Claim that would have otherwise been made had the Disputed Claim been an Allowed Claim on the Effective Date shall be made within thirty (30) days after the date that such Disputed Claim becomes an Allowed Claim. Holders of Disputed Claims that become Allowed Claims shall be bound, obligated and governed in all respects by the provisions of this Plan. 11.5. Individual Holder Proofs of Interest. Individual Holders of Allowed Old Common Stock Interests are not required to file proofs of such Interests unless they disagree with the number of shares set forth on the Debtor's stock register. ARTICLE TWELVE DISCHARGE, INJUNCTION, RELEASES AND SETTLEMENTS OF CLAIMS 12.1. Discharge of All Claims and Interests and Releases (a) Except as otherwise specifically provided by this Plan, the confirmation of this Plan (subject to the occurrence of the Effective Date) shall discharge and release the Debtor, Reorganized Salant, its successors and assigns and their respective assets and properties from any debt, charge, Cause of Action, liability, encumbrances, security interest, Claim, Interest, or other cause of action of any kind, nature or description (including, but not limited to, any claim of successor liability) that arose before the Confirmation Date, and any debt of the kind specified in Sections 502(g), 502(h) or 502(i) of the Bankruptcy Code, whether or not a proof of Claim is filed or is deemed filed, whether or not such Claim is Allowed, and whether or not the Holder of such Claim has accepted this Plan. (b) Furthermore, but in no way limiting the generality of the foregoing, except as otherwise specifically provided by this Plan, the distributions and rights that are provided in this Plan to Class 3 and Class 6 shall be in complete satisfaction, discharge and release, effective as of the Effective Date of all Claims and Causes of Action against, liabilities of, liens on, charges, encumbrances, security interests, obligations of and Interests in the Debtor, Reorganized Salant, or the direct or indirect assets and properties of the Debtor or Reorganized Salant, whether known or unknown, based on the same subject matter as any Claim or Interest, or based on any act or omission, transaction or other activity or security, instrument or other agreement of any kind or nature occurring, arising or existing prior to the Effective Date that was or could have been the subject of any Claim or Interest, in each case regardless of whether a proof of Claim or Interest was filed, whether or not Allowed and whether or not the Holder of the Claim or Interest has voted to accept or reject this Plan. (c) In addition, but in no way limiting the generality of the foregoing, except as otherwise specifically provided by this Plan, any Holder of a Claim in Class 3 or Class 6 accepting any distribution pursuant to this Plan shall be presumed conclusively to have released the Debtor and Reorganized Salant from any Cause of Action based on the same subject matter as the Claim on which the distribution is received. The release described in the preceding sentence shall be enforceable as a matter of contract against any Entity that accepts any distribution pursuant to this Plan. (d) Without in any way limiting Section 12.2 of this Plan, all injunctions or stays entered in the Chapter 11 Case and existing immediately prior to the Confirmation Date shall remain in full force and effect until the Effective Date. 12.2. Injunction. The satisfaction, release and discharge pursuant to Sections 12.1, 12.3 and 12.4 of this Plan, shall act as an injunction against any Entity commencing or continuing any action, employment of process, or act to collect, offset or recover any Claim or Cause of Action satisfied, released or discharged under this Plan. The injunction, discharge and releases described in Sections 12.1, 12.2, 12.3 and 12.4 of this Plan shall apply regardless of whether or not a proof of Claim or Interest based on any Claim, debt, liability or Interests is filed or whether or not a Claim or Interest based on such Claim, debt, liability or Interest is Allowed, or whether or not such Entity voted to accept or reject this Plan. 12.3. Exculpation. In consideration of the distributions under this Plan, upon the Effective Date, each Holder of a Claim or Interest will be deemed to have released the Debtor and its directors, officers, agents, attorneys, independent accountants, advisors, financial advisors, investment bankers and employees (as applicable) employed by the Debtors from and after the Filing Date and Magten and its attorneys, advisors, and financial advisors employed by Magten from and after the Filing Date, from any and all Causes of Action (other than the right to enforce the Debtor's obligations under this Plan and the right to pursue a Claim based on any willful misconduct) arising out of actions or omissions during the administration of the Debtor's estate. 12.4. Guaranties and Claims of Subordination (a) Guaranties. The classification and the manner of satisfying all Claims under this Plan takes into consideration the possible existence of any alleged guaranties by the Debtor of obligations of any Entity or Entities, and that the Debtor may be joint obligors with another Entity or Entities with respect to the same obligation. All Claims against the Debtor based upon any such guaranties shall be satisfied, discharged and released in the manner provided in this Plan and the Holders of Claims shall be entitled to only one distribution with respect to any given obligation of the Debtor. (b) Claims of Subordination. (i) Except as expressly provided for in this Plan, to the fullest extent permitted by applicable law, all Claims against and Interests in the Debtor, and all rights and Claims between or among Holders of Claims and Interests relating in any manner whatsoever to Claims against or Interests in the Debtor, based on any contractual, legal or equitable subordination rights, shall be terminated on the Effective Date and discharged in the manner provided in this Plan, and all such Claims, Interests and rights so based and all such contractual, legal and equitable subordination rights to which any Entity may be entitled shall be irrevocably waived by the acceptance by such Entity (or, unless the Confirmation Order provides otherwise, the Class of which such Entity is a member) of this Plan or of any distribution pursuant to this Plan. Except as otherwise provided in this Plan and to the fullest extent permitted by applicable law, the rights afforded and the distributions that are made in respect of any Claims or Interests hereunder shall not be subject to levy, garnishment, attachment or like legal process by any Holder of a Claim or Interest by reason of any contractual, legal or equitable subordination rights, so that, notwithstanding any such contractual, legal or equitable subordination, each Holder of a Claim or Interest shall have and receive the benefit of the rights and distributions set forth in this Plan. (ii) Pursuant to Bankruptcy Rule 9019 and any applicable state law and as consideration for the distributions and other benefits provided under this Plan, the provisions of this Section 12.4(b) shall constitute a good faith compromise and settlement of any Causes of Action relating to the matters described in this Section 12.4(b) which could be brought by any Holder of a Claim or Interest against or involving another Holder of a Claim or Interest, which compromise and settlement is in the best interests of Holders of Claims and Interests and is fair, equitable and reasonable. This settlement shall be approved by the Bankruptcy Court as a settlement of all such Causes of Action. Entry of the Confirmation Order shall constitute the Bankruptcy Court's approval of this settlement pursuant to Bankruptcy Rule 9019 and its finding that this is a good faith settlement pursuant to any applicable state law, including, without limitation, the laws of the States of New York and Delaware, given and made after due notice and opportunity for hearing, and shall bar any such Cause of Action by any Holder of a Claim or Interest against or involving another Holder of a Claim or Interest. ARTICLE THIRTEEN CONDITIONS PRECEDENT TO CONFIRMATION ORDER AND EFFECTIVE DATE 13.1. Conditions Precedent to Entry of the Confirmation Order. The following conditions must occur and be satisfied or waived in accordance with Section 13.3 of this Plan on or before the Confirmation Date for this Plan to be confirmed on the Confirmation Date. (a) The Confirmation Order is in form and substance reasonably acceptable to the Debtor, Magten and Apollo. 13.2. Conditions Precedent to the Effective Date. The following conditions must occur and be satisfied or waived by the Debtor on or before the Effective Date for this Plan to become effective on the Effective Date. (a) Final Order. The Confirmation Order shall have become a Final Order; (b) Working Capital Facility. Reorganized Salant shall have executed an agreement for a working capital facility on terms reasonably satisfactory to Apollo and Magten; (c) Certificate of Incorporation. The Reorganized Salant Certificate of Incorporation, in the form of Exhibit F hereto, shall have been filed with the Secretary of State of the State of Delaware, in accordance with sections 103 and 303 of the Delaware General Corporation Law; and (d) Authorizations, Consents and Approvals. All authorizations, consents and regulatory approvals required (if any) in connection with this Plan's effectiveness shall have been obtained. 13.3. Waiver of Conditions. With the prior written consent (which consent shall not be unreasonably withheld) of Magten and Apollo, but not otherwise, the Debtor may waive one or more of the conditions precedent to the confirmation or effectiveness of this Plan set forth in Sections 13.1 and 13.2 of this Plan. 13.4. Effect of Failure of Conditions. If each of the conditions to effectiveness and the occurrence of the Effective Date has not been satisfied or duly waived on or before the first Business Day that is more than 179 days after the date the Court enters an order confirming this Plan, or by such later date as is proposed and approved, after notice and a hearing, by the Court, then upon motion by the Debtor or any party in interest made before the time that each of the conditions has been satisfied or duly waived, the order confirming this Plan may be vacated by the Court; provided, however, that notwithstanding the filing of such a motion, the order confirming this Plan shall not be vacated if each of the conditions to consummation is either satisfied or duly waived before the Court enters an order granting the relief requested in such motion. If the order confirming this Plan is vacated pursuant to this section, this Plan shall be null and void in all respects, and nothing contained in this Plan shall (a) constitute a waiver or release of any claims against or equity interests in the Debtor or (b) prejudice in any manner the rights of the Holder of any claim or equity interest in the Debtor. ARTICLE FOURTEEN MISCELLANEOUS PROVISIONS 14.1. Bankruptcy Court to Retain Jurisdiction. The business and assets of the Debtor shall remain subject to the jurisdiction of the Bankruptcy Court until the Effective Date. From and after the Effective Date, the Bankruptcy Court shall retain and have exclusive jurisdiction of all matters arising out of, and related to the Chapter 11 Case or this Plan pursuant to, and for purposes of, subsection 105(a) and section 1142 of the Bankruptcy Code and for, among other things, the following purposes: (a) to determine any and all disputes relating to Claims and Interests and the allowance and amount thereof; (b) to determine any and all disputes among creditors with respect to their Claims; (c) to consider and allow any and all applications for compensation for professional services rendered and disbursements incurred in connection therewith; (d) to determine any and all applications, motions, adversary proceedings and contested or litigated matters pending on the Effective Date and arising in or related to the Chapter 11 Case or this Plan; (e) to remedy any defect or omission or reconcile any inconsistency in the Confirmation Order; (f) to enforce the provisions of this Plan relating to the distributions to be made hereunder; (g) to issue such orders, consistent with section 1142 of the Bankruptcy Code, as may be necessary to effectuate the consummation and full and complete implementation of this Plan; (h) to enforce and interpret any provisions of this Plan; (i) to determine such other matters as may be set forth in the Confirmation Order or that may arise in connection with the implementation of this Plan; (j) to determine the amounts allowable as compensation or reimbursement of expenses pursuant to section 503(b) of the Bankruptcy Code; (k) to hear and determine disputes arising in connection with the interpretation, implementation, or enforcement of this Plan and the Related Documents; (l) to hear and determine any issue for which this Plan or any Related Document requires a Final Order of the Bankruptcy Court; (m) to hear and determine matters concerning state, local, and federal taxes in accordance with sections 346, 505, and 1146 of the Bankruptcy Code; (n) to hear and determine any issue related to the composition of the initial Board of Reorganized Salant; (o) to hear any other matter not inconsistent with the Bankruptcy Code; and (p) to enter a Final Decree closing the Chapter 11 Case. 14.2. Binding Effect of this Plan. The provisions of this Plan shall be binding upon and inure to the benefit of the Debtor, Reorganized Salant, Magten, Apollo, any Holder of a Claim or Interest, their respective predecessors, successors, assigns, agents, officers, managers and directors and any other Entity affected by this Plan. 14.3. Nonvoting Stock. In accordance with section 1123(a)(6) of the Bankruptcy Code, the Reorganized Salant Certificate of Incorporation shall contain a provision prohibiting the issuance of nonvoting equity securities by Reorganized Salant for a period of one year following the Effective Date. 14.4. Authorization of Corporate Action. The entry of the Confirmation Order shall constitute a direction and authorization to and of the Debtor to take or cause to be taken any action necessary or appropriate to consummate the provisions of this Plan and the Related Documents prior to and through the Effective Date (including, without limitation, the filing of the Reorganized Salant Certificate of Incorporation), and all such actions taken or caused to be taken shall be deemed to have been authorized and approved by the Bankruptcy Code. 14.5. Retiree Benefits. On and after the Effective Date, to the extent required by section 1129(a)(13) of the Bankruptcy Code, Reorganized Salant shall continue to pay all retiree benefits (if any), as the term "retiree benefits" is defined in section 1114(a) of the Bankruptcy Code, maintained or established by the Debtor prior to the Confirmation Date. 14.6. Withdrawal of this Plan. The Debtor reserves the right, at any time prior to the entry of the Confirmation Order, to revoke or withdraw this Plan. If the Debtor revokes or withdraws this Plan, if the Confirmation Date does not occur, or if the Effective Date does not occur then (i) this Plan will be deemed null and void and (ii) this Plan shall be of no effect and shall be deemed vacated, and the Chapter 11 Case shall continue as if this Plan had never been filed and, in such event, the rights of any Holder of a Claim or Interest shall not be affected nor shall such Holder be bound by, for purposes of illustration only, and not limitation, (a) this Plan, (b) any statement, admission, commitment, valuation or representation contained in this Plan, the Proxy Statement/Prospectus, the Exchange Restructuring Prospectus or the Related Documents or (c) the classification and proposed treatment (including any allowance) of any Claim in this Plan. 14.7. Captions. Article and Section captions used in this Plan are for convenience only and will not affect the construction of this Plan. 14.8. Method of Notice. All notices required to be given under this Plan, if any, shall be in writing and shall be sent by facsimile transmission (with hard copy to follow), by first class mail, postage prepaid, by hand delivery or by overnight courier to: Salant Corporation 1114 Avenue of the Americas New York, New York 10036 Attn: Todd Kahn, Esq. Fax No.: (212) 354-3614 Fried, Frank, Harris, Shriver & Jacobson (A Professional Partnership Including Professional Corporations) One New York Plaza New York, New York 10004 Attn: Brad Eric Scheler, Esq. Lawrence A. First, Esq. Fax No.: (212) 859-4000 Hebb & Gitlin, a Professional corporation (Special counsel to Magten Asset Management Corp.) One State Street Hartford, Connecticut 06103-3178 Attn: Evan D. Flaschen, Esq. Fax No.: (860) 278-8968 Apollo Apparel Partners, L.P. c/o Apollo Management, L.P. 1301 Avenue of the Americas 38th Floor New York, New York 10019 Attn: Edward Yorke Fax No.: (212) 261-4007 Any of the above may, from time to time, change its address for future notices and other communications hereunder by filing a notice of the change of address with the Bankruptcy Court. Any and all notices given under this Plan shall be effective when received. 14.9. Dissolution of Statutory Committees. On the Effective Date, any statutory committees appointed in the Chapter 11 Case pursuant to Section 1102 of the Bankruptcy Code shall cease to exist and its members and employees or agents (including, without limitation, attorneys, investment bankers, financial advisors, accountants and other professionals) shall be released and discharged from further duties, responsibilities and obligations relating to and arising from and in connection with this Chapter 11 Case. 14.10. Fees, Costs and Expenses of Indenture Trustee. Subject to applicable provisions of the Bankruptcy Code and Bankruptcy Court authorization and approval to the extent necessary, the Indenture Trustee shall be entitled to payment for its reasonable fees, costs and expenses as provided for pursuant to the Indenture; provided, however, that if the Debtor or Reorganized Salant decides, in its sole discretion, that the fees, costs and expenses of the Indenture Trustee are reasonable, the Debtor or Reorganized Salant may pay the same without application to or further order of the Bankruptcy Court unless the Confirmation Order provides otherwise. 14.11. Amendments and Modifications to Plan. This Plan may be altered, amended or modified by the Debtor, after consultation with Magten, before or after the Confirmation Date, as provided in Section 1127 of the Bankruptcy Code. 14.12. Section 1125(e) of the Bankruptcy Code. (i) The Debtor has, and upon confirmation of this Plan shall be deemed to have, solicited acceptances of this Plan in good faith and in compliance with the applicable provisions of the Bankruptcy Code and (ii) the Debtor, Magten, Apollo, and each of the members of the Creditors' Committee, if any (and each of their respective affiliates, agents, directors, officers, employees, advisors, and attorneys) have participated in good faith and in compliance with the applicable provisions of the Bankruptcy Code in the offer, issuance, sale, and purchase of the securities offered and sold under this Plan, and therefore are not, and on account of such offer, issuance, sale, solicitation, and/or purchase will not be, liable at any time for the violation of any applicable law, rule, or regulation governing the solicitation of acceptances or rejections of this Plan or the offer, issuance, sale, or purchase of the securities offered and sold under this Plan. Dated: New York, New York ______________, 1998 Respectfully submitted, SALANT CORPORATION Debtor and Debtor-In-Possession By:_____________________________ FRIED, FRANK, HARRIS, SHRIVER & JACOBSON (A Partnership Including Professional Corporations) Attorneys for the Debtor and Debtor-in-Possession One New York Plaza New York, New York 10004 (212)859-8000 By:__________________________________ Brad Eric Scheler, Esq. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company is a Delaware corporation. Section 145 of the Delaware General Corporation Law (the "DGCL") provides for, among other things: (a) permissive indemnification for expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by designated persons, including directors and officers of a corporation, in the event such persons are parties to litigation other than stockholder derivative actions if certain conditions are met; (b) permissive indemnification for expenses (including attorneys' fees) actually and reasonably incurred by designated persons, including directors and officers of a corporation, in the event such persons are parties to stockholder derivative actions if certain conditions are met; (c) mandatory indemnification for expenses (including attorneys' fees) actually and reasonably incurred by designated persons, including directors and officers of a corporation, in the event such persons are successful on the merits or otherwise in defense of litigation covered by (a) and (b) above; and (d) that the indemnification provided for by Section 145 is not deemed exclusive of any other rights which may be provided under any by-law, agreement, stockholder or disinterested director vote, or otherwise. Section 1 of Article VI of the Company's By-Laws provides that the Company shall indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that he is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Section 2 of Article VI of the Company's By-Laws provides that the Company shall indemnify any person or officer who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, provided that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Company unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 3 of Article VI of the Company's By-Laws provides that, to the extent that a director, officer, employee or agent of the Company has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1 and 2 of Article VI, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 5 of Article VI of the Company's By-Laws provides that, expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall be ultimately determined that he is not entitled to be indemnified by the Company as authorized in Article VI. Section 6 of Article VI of the Company's By-Laws provides that, the indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any law, bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Section 9 of Article VI of the Company's By-Laws provides that, the indemnification and advancement of expenses provided by, or granted pursuant to, this Article VI shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. The Company has entered into employment agreements with Messrs. Politzer, Franzel and Kahn which provide for, among other things, indemnification of such officers by the Company on substantially the same terms and conditions as described above. The Company may from time to time enter into agreements with additional individuals who become officers or directors which provide indemnifications to such officers and directors. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits The exhibits to this Post-Effective Amendment No. 2 to the Registration Statement incorporated herein by reference are listed in the Exhibit Index attached hereto. The following exhibits were filed as part of the Registration Statement: Exhibit No. Exhibit ----------- ------- 5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson to be filed. 8.1 Tax Opinion of Fried, Frank, Harris, Shriver & Jacobson. 9.1 Form of Voting Agreement between Apollo Apparel Partners, L.P. and Salant Corporation. 10.42 Letter Agreement, dated March 2, 1998, by and among Salant Corporation, Magten Asset Management Corp., as agent on behalf of certain of its accounts, and Apollo Apparel Partners, L.P. 10.43 Twelfth Amendment and Forbearance Agreement to Credit Agreement, dated as of March 2, 1998, by and between Salant Corporation and the CIT Group/Commercial Services, Inc. 10.50 Form of Salant Corporation 1998 Stock Award and Incentive Plan. 10.51 Form of Registration Rights Agreement. 10.52 Form of Warrant Agreement. 10.55 Letter Agreement Amendment, dated June 1, 1998, by and among Salant Corporation, Magten Asset Management Corp., as agent on behalf of certain of its accounts, and Apollo Apparel Partners, L.P. 10.56 Letter Agreement Amendment, dated July 8, 1998, by and among Salant Corporations, Magten Asset management Corp., as agent on behalf of certain of its accounts, and Apollo Apparel Partners, L.P. 21 List of Subsidiaries of the Company. (b) Financial Statement Schedules. The information required of the Company is incorporated herein at pages F-1 to F-31. (c) Fairness Opinion. A copy of the E&Y Fairness Opinion is attached as Annex I to each of the Proxy Statement/Prospectus and the Exchange Restructuring Prospectus. ITEM 22. UNDERTAKINGS (a) (1) The undersigned registrant hereby undertakes as follows: That prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form. (2) The registrant undertakes that every prospectus (i) that is filed pursuant to paragraph (a)(1) immediately preceding, or (ii) that purports to meet the requirements of section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (d) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (e) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS POST EFFECTIVE AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW YORK, ON THIS 31st DAY OF AUGUST, 1998. SALANT CORPORATION By: s/ Jerald S. Politzer ----------------------------- JERALD S. POLITZER CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS POST-EFFECTIVE AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE /s/ Jerald S. Politzer Chairman of the Board August 31, 1998 - ---------------------- of Directors and Chief Jerald S. Politzer Executive Officer /s/ Philip A. Franzel Executive Vice August 31, 1998 - ---------------------- President and Chief Philip A. Franzel Financial Officer /s/ Ann Dibble Jordan Director August 31, 1998 - ---------------------- Ann Dibble Jordan /s/ Harold Leppo Director August 31, 1998 - ---------------------- Harold Leppo /s/ Bruce F. Roberts Director August 31, 1998 - ---------------------- Bruce F. Roberts /s/ Robert H. Falk Director August 31, 1998 - ---------------------- Robert H. Falk /s/ Robert Katz Director August 31, 1998 - ---------------------- Robert Katz /s/ John S. Rodgers Director August 31, 1998 - ---------------------- John S. Rodgers INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of Salant Corporation on Post-Effective Amendment No. 2 to Form S-4 of our report dated March 6, 1998, April 8, 1998 as to Note 1 and 9, (which expresses an unqualified opinion and includes an explanatory paragraph relating to the Company's ability to continue as a going concern), appearing in the Proxy Statement/Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the headings "Selected Financial Data" and "Experts" in such Proxy Statement/Prospectus. /s/ Deloitte & Touche LLP - -------------------------- New York, New York August 31, 1998 August 20, 1998 Salant Corporation 1114 Avenue of the Americas New York, New York 10036 Attention: Mr. Todd Kahn Dear Mr. Kahn: We hereby consent to the inclusion of our opinion dated April 21, 1998 to the Board of the Directors of Salant Corporation (the "Company") as an annex and/or exhibit to amendment number two to the Company's Registration Statement on Form S-4 (the "Registration Statement") to be filed by September 1, 1998 with the Securities and Exchange Commission in connection with the Restructuring (as defined in the Registration Statement) and references made to our firm and such opinion in the Registration Statement. In giving such consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules or regulations of the SEC thereunder. Very truly yours, /s/ Ernst & Young LLP SALANT CORPORATION EXHIBIT INDEX TO FORM S-4 Incorporation Number Description By Reference To - ------ ----------- --------------- 2.1 Third Amended Disclosure Exhibit 1 to Statement of Salant Form 8-A dated Corporation, and Denton July 28, 1993. Mills, Inc., dated May 12,1993. 2.2 Third Amended Joint Included as Chapter 11 Plan of Exhibit D-1 Reorganization of to Exhibit 1 Salant Corporation to Form 8-A and Denton Mills, Inc. dated July 28, 1993. 3.1 Form of Amended and Included as Exhibit Restated Certificate of D-1 to Exhibit 2 Incorporation of Salant to Form 8-A dated Corporation. July 28, 1993. 3.2 Form of Bylaws, as amended, of Salant Corporation, effective September 21, 1994. 4.1 Rights Agreement dated as of Exhibit 1 to Current Report December 8, 1987 between Salant on Form 8-K dated December 8, Corporation and The Chase 1987. Manhattan Bank, N.A., as Rights Agent. The Rights Agreement includes as Exhibit B the form of Right Certificate. 4.2 Form of First Amendment Exhibit 3 to to the Rights Agreement Amendment No. 1 to between Salant Corporation Form 8-A dated and Mellon Securities. July 29, 1993. 4.3 Indenture, dated as of Exhibit 10.34 to September 20, 1993, between Salant Quarterly Report Corporation and Bankers on Form 10-Q for Trust Company, as trustee, the quarter ended for the 10-1/2% Senior October 2, 1993. Secured Notes due December 31, 1998. 5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson to be filed. 8.1 Tax Opinion of Fried, Frank, Harris, Shriver & Jacobson 9.1 Form of Voting Agreement between Apollo Apparel Partners, L.P. and Salant Corporation. 10.1 Revolving Credit, Exhibit 10.33 to Factoring and Security Quarterly Report Agreement dated September 29, 1993, on Form 10-Q for between Salant Corporation the quarter ended and The CIT Group/Commercial October 2, 1993. Services, Inc. 10.2 Salant Corporation 1987 Stock Plan. Exhibit 19.2 to Annual Report on Form 10-K for fiscal year 1987. 10.3 Salant Corporation 1987 Stock Plan Exhibit 10.12 to Form S-2 Agreement, dated as of June 13, Registration Statement filed 1988, between Nicholas P. DiPaolo June 17, 1988. and Salant Corporation. 10.4 Salant Corporation 1988 Stock Plan. Exhibit 19.3 to Annual Report on Form 10-K for fiscal year 1988. 10.5 First Amendment, effective Exhibit 19.1 to Quarterly as of July 25, 1989, to the Salanton Report Form 10-Q for the Corporation 1988 Stock Plan. quarter ended September 30, 1989. 10.6 Form of Salant Corporation 1988 Exhibit 19.7 to Annual Report Stock Plan Employee Agreement. on Form 10-K for fiscal year 1988. 10.7 Form of Salant Corporation Exhibit 19.8 to 1988 Stock Plan Director Annual Report on Agreement. Form 10-K for fiscal year 1988. 10.8 License Agreement, dated Exhibit 19.1 to Annual Report January 1, 1991, by and between on Form 10-K for fiscal year Perry Ellis International Inc. 1992. and Salant Corporation regarding men's sportswear. 10.9 License Agreement, dated Exhibit 19.2 to Annual Report January 1, 1991, by and between on Form 10-K for Perry Ellis International Inc. fiscal year 1992. and Salant Corporation regarding men's dress shirts. 10.10 Employment Agreement, dated Exhibit 10.36 to as of September 20, 1993, between Quarterly Report on Nicholas P. DiPaolo and Form 10-Q for the Salant Corporation. * quarter ended October 2, 1993. 10.11 Employment Agreement, dated Exhibit 10.38 to as of July 30, 1993, between Quarterly Report on Richard P. Randall and Form 10-Q for the Salant Corporation. * quarter ended October 2, 1993. 10.12 Agreement, dated as of Exhibit 10.33 to Annual Report September 22, 1993, between Nicholas on Form 10-K for Fiscal Year P. DiPaolo and Salant Corporation. * 1993. 10.13 Forms of Salant Corporation 1993 Exhibit 10.34 to Annual Stock Plan Directors' Option Report on Form Agreement. * 10-K for Fiscal Year 1993. 10.14 Letter Agreement, dated as of Exhibit 10.45 to August 24, 1994, amending the Quarterly Report on Revolving Credit, Factoring and Form 10-Q for the Security Agreement, dated quarter ended October 1, 1994. September 20, 1993, between The CIT Group/Commercial Services, Inc. and Salant Corporation. 10.15 Letter Agreement, dated Exhibit 10.47 to October 25, 1994, amending the Quarterly Report on Employment Agreement, dated Form 10-Q for the July 30, 1993, between Richard quarter ended October 1, 1994. Randall and Salant Corporation. * 10.16 Third Amendment to Credit Agreement, Exhibit 10.48 to Current dated February 28, 1995, to the Report on Form 8-K, dated Revolving Credit, Factoring and March 2, 1995. Security Agreement, dated September 20, 1993, as amended, between The CIT Group/Commercial Services, Inc. and Salant Corporation. 10.17 Salant Corporation Retirement Plan, Exhibit 10.23 to Annual as amended and restated. * Report on Form 10-K for Fiscal Year 1994. 10.18 Salant Corporation Pension Plan, Exhibit 10.24 to Annual Report as amended and restated. * on Form 10-K for Fiscal Year 1994. 10.19 Salant Corporation Long Term Savings Exhibit 10.25 to Annual and Investment Plan as amended Report on Form 10-K for Fiscal and restated.* Year 1994. 10.20 Letter Agreement, dated Exhibit 10.26 to Annual Report February 15, 1995, amending the on Form 10-K for Fiscal Year Employment Agreement, dated 1994. July 30, 1993, between Richard Randall and Salant Corporation. * 10.21 Fourth Amendment to Credit Exhibit 10.27 to Agreement, dated as of March 1, Quarterly Report 1995, to the Revolving Credit, on Form 10-Q for Factoring and Security Agreement, the quarter dated as of September 20, 1993, ended April 1, as amended, between Salant 1995. Corporation and The CIT Group/ Commercial Services, Inc. 10.22 Fifth Amendment to Credit Exhibit 10.29 Agreement, dated as of to Quarterly June 28, 1995, to the Report on Revolving Credit, Factoring Form l0-Q for and Security Agreement, the quarter dated as of September 20, ended July 1, 1993, as amended, between 1995. Salant Corporation and The CIT Group/Commercial Services, Inc. 10.23 Sixth Amendment to Credit Exhibit 10.30 Agreement, dated as of to Quarterly August 15, 1995, to the Report on Revolving Credit, Factoring Form l0-Q for and Security Agreement, the quarter dated as of September 20, ended July 1, 1993, as amended, between 1995. Salant Corporation and The CIT Group/Commercial Services, Inc. 10.24 Letter from The CIT Group/ Exhibit 10.31 Commercial Services, Inc., to Quarterly dated as of July 11, 1995, Report on regarding the waiver of a Form l0-Q for default. the quarter ended July 1, 1995. 10.25 Letter Agreement between Exhibit 10.31 Salant Corporation and The to Quarterly CIT Group/Commercial Services, Report on Inc. dated as of July 11, 1995, Form l0-Q for regarding the Seasonal Overadvance the quarter Subfacility. ended July 1, 1995. 10.26 Letter Agreement, dated as of Exhibit 10.33 to August 31, 1995, amending the Quarterly Report Employment Agreement, dated on Form l0-Q for September 20, 1993, between the quarter Nicholas P. DiPaolo and ended September Salant Corporation. * 30, 1995. 10.27 Letter Agreement, dated Exhibit 10.33 to December 1, 1995, between Annual Report on Lubin, Delano & Company and Form 10-K for Salant Corporation. fiscal year 1995. 10.28 Seventh Amendment to Credit Exhibit 10.34 to Agreement, dated as of Annual Report on March 27, 1996, to the Form 10-K for Revolving Credit, Factoring fiscal year 1995. and Security Agreement, dated as of September 20, 1993, as amended, between Salant Corporation and The CIT Group/Commercial Services, Inc. 10.29 First Amendment to the Salant Exhibit 10.35 to Corporation Retirement Plan, dated Quarterly Report on as of January 31, 1996. Form 10-Q for the quarter ended March 30, 1996. 10.30 First Amendment to the Salant Exhibit 10.36 to Corporation Long Term Savings and Quarterly Report on Investment Plan, effective as of Form 10-Q for the January 1, 1994. quarter ended March 30, 1996. 10.31 Eighth Amendment to Credit Agreement, Exhibit 10.37 to dated as of June 1, 1996, to the Quarterly Report on Revolving Credit, Factoring and Form 10-Q for the Security Agreement, dated as of quarter ended September 20, 1993, as amended, June 29, 1996. between Salant Corporation and The CIT Group/Commercial Services, Inc. 10.32 Ninth Amendment to Credit Agreement, Exhibit 10.38 to dated as of August 16,1996, to the Quarterly Report on Revolving Credit, Factoring and Form 10-Q for the Security Agreement, dated as of quarter ended September 20, 1993, as amended, June 29, 1996. between Salant Corporation and The CIT Group/Commercial Services, Inc. 10.33 Employment Agreement, dated as Exhibit 10.39 to Annual Report of January 1, 1997, between on Form 10-K for Fiscal Year Nicholas P. DiPaolo and 1996. Salant Corporation. * 10.34 Salant Corporation 1996 Stock Plan Exhibit 10.40 to Annual Report on Form 10-K for Fiscal Year 1996. 10.35 Tenth Amendment to Credit Agreement, Exhibit 10.41 to Annual Report dated as of February 20, 1997, to on Form 10-K for Fiscal Year the Revolving Credit, Factoring and 1996. Security Agreement, dated as of September 20, 1993, as amended, between Salant Corporation and The CIT Group/Commercial Services, Inc. 10.36 Employment Agreement, dated as Exhibit 10.42 to Annual Report of February 11, 1997, between on Form 10-K for Fiscal Year Michael A. Lubin and 1996. Salant Corporation. * 10.37 Employment Agreement, dated as Exhibit 10.43 to Annual Report of March 24, 1997, between on Form 10-K for Fiscal Year Jerald S. Politzer and 1996. Salant Corporation. * 10.38 Employment Agreement, dated as of Exhibit 10.44 to Quarterly May 1, 1997, between Todd Kahn and Report Form on 10-Q for the Salant Corporation. quarter ended June 28, 1997. 10.39 Employment Agreement, dated as of Exhibit 10.45 to Quarterly August 18, 1997 between Philip A. Report on Form 10-Q for the Franzel and Salant Corporation. quarter ended June 28, 1997. 10.40 Eleventh Amendment to Credit Exhibit 10.46 to Quarterly Agreement, dated as of Report on Form 10-Q for the August 8, 1997, to the Revolving quarter ended June 28, 1997. Credit, Factoring and Security Agreement, dated as of September 20, 1993, as amended, between Salant Corporation and The CIT Group/Commercial Services, Inc. 10.41 Letter Agreement, dated as of Exhibit 10.47 to Quarterly July 18, 1997, between Report on Form 10-Q for the Michael A. Lubin, quarter ended June 28, 1997. Lubin Delano & Company and Salant Corporation. 10.42 Letter Agreement, dated Exhibit 10.48 to Current March 2, 1998, by and among Salant Report on Form 8-K dated Corporation, Magten Asset Management March 4, 1998. Corp., as agent on behalf of certain of its accounts, and Apollo Apparel Partners, L.P. 10.43 Twelfth Amendment and Forbearance Exhibit 10.49 to Current Agreement to Credit Agreement, dated Report on Form 8-K dated as of March 2, 1998, by and between March 4, 1998. Salant Corporation and The CIT Group/Commercial Services, Inc. 10.50 Form of Salant Corporation 1998 Stock Award and Incentive Plan. 10.51 Form of Registration Rights Agreement. 10.52 Form of Warrant Agreement. 10.55 Letter Agreement Amendment, dated June 1, 1998, by and among Salant Corporation, Magten Asset Management Corp., as agent on behalf of its accounts, and Apollo Apparel Partners, L.P. 10.56 Letter Agreement Amendment, dated July 8, 1998, by and among Salant Corporation, Magten Asset Management Corp., as agent on behalf of its accounts, and Apollo Apparel Partners, L.P. 21 List of Subsidiaries of the Company. 27 Financial Data Schedule. * constitutes a management contract or compensatory plan or arrangement. EX-8.1 2 [FRIED, FRANK, HARRIS, SHRIVER & JACOBSON LETTERHEAD] August 31, 1998 212-859-8168 (FAX: 212-859-8588) Salant Corporation 1114 Avenue of the Americas New York, New York 10036 Ladies and Gentlemen: We have acted as your special counsel in connection with the Registration Statement on Form S-4 (File No. 333-50761) (the "Registration Statement") being filed today with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"). We hereby confirm, based on the assumptions and subject to the qualifications and limitations set forth therein, that the statements in the sections of the Registration Statement captioned "Certain Federal Income Tax Considerations: Stockholders," "Certain Federal Income Tax Considerations: Noteholders," to the extent that such statements constitute statements of law, reflect our opinion regarding the material federal income tax consequences of the Exchange Restructuring and the Prepackaged Restructuring (each as defined in the Registration Statement) to holders of Salant Common Stock and to holders of Salant's 10-1/2% Senior Secured Notes due December 31, 1998. No opinion is expressed on matters other than those specifically referred to herein. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. In giving this consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act. The opinion expressed herein is solely for your benefit and may not be relied upon in any manner or for any purpose by any other person and may not be quoted in whole or in part without our prior written consent. Very truly yours, FRIED, FRANK, HARRIS, SHRIVER & JACOBSON By:/s/ Jack Jacobson ----------------------------------- Jack Jacobson EX-10.55 3 EXHIBIT 10.55 ------------- Salant Corporation 1114 Avenue of the Americas New York, New York 10036 (212) 221-7500 June 1, 1998 Magten Asset Management Corp. 35 East 21st Street New York, New York 10010 Attention: Mr. Talton R. Embry Apollo Apparel Partners, L.P. c/o Apollo Management, L.P. 1301 Avenue of the Americas, 38th Floor New York, New York 10019 Attention: Mr. Robert Katz Mr. Edward Yorke RE: SALANT CORPORATION ("SALANT") --- ----------------------------- Gentlemen: Reference is made to that certain letter agreement, dated March 2, 1998, by and among Magten Asset Management Corp., as agent on behalf of certain of its accounts ("Magten"), Apollo Apparel Partners, L. P. ("Apollo") and Salant (the "Letter Agreement"). Initially capitalized terms not otherwise defined herein shall have their respective meanings as set forth in the Letter Agreement. Salant, Magten and Apollo hereby agree to amend the Letter Agreement as follows: 1. Amendment to Section 2(d). Section 2(d) of the Letter Agreement is hereby amended by adding "(i)" immediately prior to the phrase "promptly following" in the third line thereof and adding the following language immediately prior to the proviso contained in such section: ", and (ii) promptly following August 31, 1998, directing the Indenture Trustee to forbear during the term of this Letter Agreement from taking any action in connection with the failure by Salant to make the interest payment on the Senior Notes that is payable on August 31, 1998, including, without limitation, the exercise of any of the Indenture Trustee's rights under the Senior Note Indenture arising by virtue of such failure." 2. Amendment of Section 4. Section 4 of the Letter Agreement is hereby amended by adding the phrase "(subject to the proviso in Section 4(g) hereof)" immediately following the phrase "Magten's obligations hereunder shall" in the first line thereof. 3. Amendment of Sections 4(a), 4(b) and 4(c). Sections 4(a), 4(b) and 4(c) of the Letter Agreement are hereby amended in their entirety to read as follows: "(a) Salant shall not have obtained the requisite shareholder consent at the Special Meeting (as such term is defined in the Term Sheet) on or before November 30, 1998; (b) the Exchange Offer shall not have commenced on or before July 15, 1998; (c) the Effective Date (as such term is defined in the Term Sheet) shall not have occurred on or before November 30, 1998;" 4. Amendment of Section 4(g). Section 4(g) of the Letter Agreement is hereby amended by replacing the proviso at the end of such section in its entirety with the following language: "provided, that, an Agreement Termination Event arising pursuant to this Section 4(g) shall apply only to, and shall result in the termination of Magten's obligations hereunder solely with respect to, those Senior Notes as to which Magten's engagement has been terminated or as to which such a disposal direction has been issued, and further, provided, that such Agreement Termination Event shall have no effect whatsoever on any of Magten's other obligations hereunder." Except as hereinabove amended, the Letter Agreement remains in full force and effect in accordance with its terms. Please indicate your agreement to the foregoing by executing a copy of this letter where indicated below and returning it to us. Very truly yours, SALANT CORPORATION By: /s/ Todd Kahn ----------------------------- Name: Todd Kahn Title: EVP & General Counsel Accepted and Agreed as of the date first written above MAGTEN ASSET MANAGEMENT CORP., as agent on behalf of certain of its accounts By: /s/ Talton R. Embry ---------------------------- Name: Talton R. Embry Title: Chairman APOLLO APPAREL PARTNERS, L.P. By: AIF II, L.P., its General Partner By: /s/ Edward Yorke ---------------------------- Name: Edward Yorke Title: EX-10.56 4 EXHIBIT 10.56 ------------- Salant Corporation 1114 Avenue of the Americas New York, New York 10036 (212) 221-7500 July 8, 1998 Magten Asset Management Corp. 35 East 21st Street New York, New York 10010 Attention: Mr. Talton R. Embry Apollo Apparel Partners, L.P. c/o Apollo Management, L.P. 1301 Avenue of the Americas, 38th Floor New York, New York 10019 Attention: Mr. Robert Katz Mr. Edward Yorke RE: SALANT CORPORATION ("SALANT") ----------------------------------- Gentlemen: Reference is made to that certain letter agreement, dated March 2, 1998, by and among Magten Asset Management Corp., as agent on behalf of certain of its accounts ("Magten"), Apollo Apparel Partners, L. P. ("Apollo") and Salant, as amended by that certain letter agreement, dated June 1, 1998 (the "Letter Agreement"). Capitalized terms not otherwise defined herein shall have their respective meanings set forth in the Letter Agreement. Salant, Magten and Apollo hereby agree to amend the Letter Agreement as follows: 1. Amendment of Section 4(b). Section 4(b) of the Letter Agreement is hereby amended in its entirety to read as follows: "b) the Exchange Offer shall not have commenced on or before August 31, 1998; " Except as hereinabove amended, the Letter Agreement remains in full force and effect in accordance with its terms. Please indicate your agreement to the foregoing by executing a copy of this letter where indicated below and returning it to us. Very truly yours, SALANT CORPORATION By: /s/ Todd Kahn ----------------------------- Name: Todd Kahn Title: EVP & General Counsel Accepted and Agreed as of the date first written above MAGTEN ASSET MANAGEMENT CORP., as agent on behalf of certain of its accounts By: /s/ Talton R. Embry ------------------------------ Name: Talton R. Embry Title: Chairman APOLLO APPAREL PARTNERS, L.P. By: AIF II, L.P., its General Partner By: /s/ Edward Yorke --------------------------------- Name: Edward Yorke Title: -----END PRIVACY-ENHANCED MESSAGE-----