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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-6666
SALANT CORPORATION
(Exact name of registrant as specified in its charter)
1114 Avenue of the Americas, New York, New York 10036
Telephone: (212) 221-7500
Incorporated in the State of Delaware Employer Identification No. 13-3402444
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $1 per share,
Trading Over-The-Counter - Bulletin Board
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
-
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No __
-
As of March 23, 2001, there were outstanding 9,901,140 shares of the
Common Stock of the registrant. Based on the closing price of the Common Stock
on such date, the aggregate market value of the voting stock held by
non-affiliates of the registrant on such date was $10,897,507. For purposes of
this computation, shares held by affiliates and by directors and executive
officers of the registrant have been excluded. Such exclusion of shares held by
directors and executive officers is not intended, nor shall it be deemed, to be
an admission that such persons are affiliates of the registrant.
Documents incorporated by reference: The definitive Proxy Statement of Salant
Corporation to be filed relating to the 2001 Annual Meeting of Stockholders is
incorporated by reference in Part III hereof.
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
PART I
ITEM 1. BUSINESS
Introduction. Salant Corporation ("Salant" or 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, produces, imports and
markets to retailers throughout the United States brand name and private label
menswear apparel products. The Company currently sells its products to
department and specialty stores, and for a portion of 1999 made limited sales of
certain products to national chains, major discounters and mass volume retailers
throughout the United States. In December 1998, the Company determined to
discontinue and sell its Salant Children's Apparel Group (the "Children's
Group"), which manufactured and marketed blanket sleepers, pajamas and
underwear. Also at that time, the Company decided to sell or close its non-Perry
Ellis menswear businesses in order to focus on the Perry Ellis brand. During
1999, the Company substantially completed the process of closing or selling
these businesses. (As used herein, the "Company" includes Salant and its
subsidiaries.)
Bankruptcy Court Case. On December 29, 1998 (the "Filing Date"), Salant filed a
voluntary petition under chapter 11 of the Bankruptcy Code with the Bankruptcy
Court (the "1998 Case") in order to implement a restructuring of its 10-1/2 %
Senior Secured Notes due December 31, 1998 (the "Senior Notes"). Salant also
filed its plan of reorganization (the "Plan") with the Bankruptcy Court on the
Filing Date in order to implement its restructuring. On April 16, 1999, the
Bankruptcy Court issued an order confirming the Plan (the "Confirmation Order").
The Plan was consummated on May 11, 1999 (the "Effective Date").
In accordance with the Plan, Salant's focus is primarily on its Perry Ellis
men's apparel business and, as a result, Salant has exited its other businesses,
including its Children's Group and non-Perry Ellis menswear divisions. To that
end, Salant has sold its John Henry and Manhattan businesses. These businesses
included the John Henry, Manhattan and Lady Manhattan trade names, the John
Henry and Manhattan dress shirt inventory, the leasehold interest in a dress
shirt facility located in Valle Hermosa, Mexico, and the equipment located at
the Valle Hermosa facility and at Salant's facility located in Andalusia,
Alabama. Salant has also sold its Children's Group business. This sale was
primarily for inventory related to the Children's Group business and the Dr.
Denton trademark.
Pursuant to the Plan (i) all of the outstanding principal amount of Senior
Notes, plus all accrued and unpaid interest thereon, was converted into 95% of
Salant's new common stock, subject to dilution, and (ii) all of Salant's
existing old common stock was converted into 5% of Salant's new common stock,
subject to dilution. Salant's general unsecured creditors (including trade
creditors) were unimpaired under the Plan and were entitled to be paid in full.
The Plan was approved by all of the holders of Senior Notes that voted and over
96% of the holders of Salant's old common stock that voted.
Salant operates its Perry Ellis businesses under certain licensing agreements
(the "Perry Ellis Licenses") between Salant and Perry Ellis International, Inc.
("PEI"). During the 1998 Case, Supreme International Corporation ("Supreme")
entered into discussions with PEI to acquire PEI and, thereafter, Supreme
acquired PEI. Prior to the hearing on the confirmation of the Plan, Supreme (in
its own capacity and on behalf of PEI (collectively, referred to herein as
"Supreme-PEI")) filed an objection to the confirmation. In connection with the
confirmation of the Plan, Salant and Supreme-PEI settled and resolved their
differences and the material terms of such settlement were set forth in a term
sheet (the "Term Sheet") attached to and incorporated into the Confirmation
Order (the "PEI Settlement").
The PEI Settlement. The following is a summary of the material provisions of the
Term Sheet setting forth the terms of the PEI Settlement. The following
description is qualified in its entirety by the provisions of the Term Sheet.
The PEI Settlement provided that: (i) Salant would return to PEI the license to
sell Perry Ellis products in Puerto Rico, the U.S. Virgin Islands, Guam and
Canada (Salant retained the right to sell its existing inventory in Canada
through January 31, 2000); (ii) the royalty rate due PEI under Salant's Perry
Ellis Portfolio pants license with respect to regular price sales in excess of
$15.0 million annually would be increased to 5%; (iii) Salant would provide
Supreme-PEI with the option to take over any real estate lease for a retail
store that Salant intends to close; (iv) Salant would assign to Supreme-PEI its
sublicense with Aris Industries, Inc. for the manufacture, sale and distribution
of the Perry Ellis America brand sportswear and, depending on certain
circumstances, Salant would receive certain royalty payments from Supreme-PEI
through the year 2005; (v) Salant would pay PEI its pre-petition invoices of
$616,844 and post-petition invoices of $56,954 on the later of (a) the Effective
Date of the Plan or (b) the due date with respect to such amounts; (vi)
Supreme-PEI (a) agreed and acknowledged that the sales of businesses made by
Salant during the 1998 Case did not violate the terms of the Perry Ellis
Licenses and did not give rise to the termination of the Perry Ellis Licenses
and (b) consented to the change of control arising from the conversion of debt
into equity under the Plan and acknowledged that such change of control did not
give rise to any right to terminate the Perry Ellis Licenses; and (vii)
Supreme-PEI withdrew with prejudice, its objection to confirmation of the Plan,
and supported confirmation of the Plan.
Men's Apparel. In fiscal 2000, the Company's ongoing business was primarily
comprised of Perry Ellis products. The Company markets accessories, dress
shirts, slacks and sportswear under the PERRY ELLIS and PORTFOLIO BY PERRY ELLIS
trademarks and a limited amount of private label products.
Retail Outlet Stores. The retail outlet stores business of the Company consists
of a chain of outlet stores (the "Stores division"), through which it sells
products manufactured by the Company and other Perry Ellis licensed
manufacturers. At the end of fiscal 2000, the Company operated 36 Perry Ellis
outlet stores.
Significant Customers. In 2000 and 1999 approximately 19% of the Company's sales
were made to Federated Department Stores, Inc. ("Federated") and approximately
18% of the Company's sales were made to Dillards Corporation ("Dillards"). Also
in 2000 and 1999, approximately 17% and 16% of the Company's sales were made to
the May Company ("May"), respectively and approximately 13% of the Company's
sales were made to Marmaxx Corporation ("Marmaxx") in 2000 and 1999. In 1998
approximately 20% of the Company's sales were made to Sears Roebuck & Company,
and approximately 14% of the Company's sales were made to Federated. Also in
1998, approximately 11% of the Company's sales were made to Dillards and
approximately 10% of the Company's sales were made to Marmaxx.
No other customer accounted for more than 10% of the sales during 1998, 1999 or
2000.
Trademarks. 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.
Approximately 97.9% of the Company's net sales for 2000 were attributable to
products sold under Company owned or licensed designer trademarks, primarily
PERRY ELLIS and PORTFOLIO BY PERRY ELLIS trademarks (the "Perry Ellis
Trademarks"); these products are sold through leading department and specialty
stores. The balance was attributable to products sold under retailers' private
labels.
In January 2001, the Company purchased the assets and trademarks of Tricots St.
Raphael, Inc. ("Tricot"). Tricot designs, produces and markets men's designer
knitwear and sweaters for better department and specialty stores.
Trademarks Licensed to the Company. The Perry Ellis Trademarks are licensed to
the Company under the Perry Ellis Licenses with 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 had rights of first refusal
worldwide for certain new licenses granted by PEI for men's apparel and
accessories through February 1, 2001. On January 28, 1999, PEI and Supreme
announced that they had entered into a definitive agreement under which Supreme
would acquire for cash all of the stock of PEI for $75 million. On April 7,
1999, Supreme completed the acquisition of PEI and became Salant's licensor
under the Perry Ellis Licenses.
In the second quarter of 2000, the Company entered into an agreement with Hartz
& Company, Inc. ("Hartz") to design, produce and distribute sportswear and
furnishings for Hartz's exclusive Tallia brand. No sales for this license were
recorded in 2000, however the Company did incur expenses related to the
development of the spring 2001 line.
Design and Production. Products sold by the Company's various divisions are
produced 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 the Company's licensors on general themes or color
palettes.
During 2000, approximately 6.0% of the units produced by the Company were
manufactured in the United States, with the balance manufactured in foreign
countries. The units produced by the Company were attributable to unaffiliated
contract manufacturers. In 2000, approximately 22.6% of the Company's foreign
production was manufactured in Guatemala, approximately 21.6% was manufactured
in Hong Kong, approximately 20.4% was manufactured in China and approximately
15.3% 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 production 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. During fiscal 2000, two suppliers accounted for more than 10%, on an
individual basis, of Salant's raw material purchases.
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 companies 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.
Seasonality of Business and Backlog of Orders. This information is included
under Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Employees. As of the end of 2000, the Company employed 618 persons, of whom 187
were engaged in distribution operations and the remainder were employed in
executive, marketing and sales, product design, general and administrative,
engineering and purchasing activities and in the operation of the Company's
retail outlet stores. The Company believes that its relations with its employees
are satisfactory. Pursuant to the business plan implemented in connection with
the Plan, the Company no longer engages in manufacturing and has closed all of
its distribution facilities, except for its Winnsboro, South Carolina facility,
which is covered by a collective bargaining agreement.
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 1114 Avenue of the
Americas, New York, New York 10036. During 1999 and 2000, the Company sold or
closed all manufacturing and distribution facilities, except for the owned
distribution facility in South Carolina which has 360,000 square feet of space
devoted to distribution. The Company leases approximately 97,000 square feet of
combined office, design and showroom space. As of the end of 2000, the Company's
Stores division operated 36 retail outlet stores, comprising approximately
88,000 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 facilities and equipment are adequately
maintained, in good operating condition, and are adequate for the Company's
present needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in several 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. In addition, the Company notes the following legal proceedings.
1. Bankruptcy Case. On the Filing Date, Salant filed a voluntary petition
for relief under chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the Southern District of New York. The Company filed its
Plan on the Filing Date and the Plan was confirmed by the Bankruptcy Court on
April 16, 1999. The Plan was consummated on the Effective Date. The 1998 Case is
currently pending under the caption In re Salant Corporation, Chapter 11 Case
No. 98-10107 (CB). All pre-Filing Date non-disputed and allowed claims against
Salant have been or will be satisfied pursuant to the terms of the Plan. Salant
has filed, and expects to continue to file, objections to all disputed
pre-Filing Date claims asserted against Salant in the 1998 Case.
2. Declaratory Judgement Action. The Company is a defendant in a
declaratory judgment action, captioned Hartford Fire Insurance Company v. Salant
Corporation, Index No. 60233/98, in the Supreme Court of the State of New York,
County of New York (the "Hartford Action"). The Company's insurers seek a
declaratory judgment that the claims asserted against the Company in a lawsuit
captioned Maria Delores Rodriguez-Olvera, et al. v. Salant Corp., et al., Case
No. 97-07-14605-CV, in the 365th Judicial District Court of Maverick County,
Texas (the "Rodriguez-Olvera Action") are not covered under the policies that
the insurers had issued. The Company's insurers nevertheless provided a defense
to the Company in the Rodriguez-Olvera Action and paid $30 million to settle the
case without prejudice to their positions in the Hartford Action. Currently,
there are discussions being held with a view to reaching an agreement for the
settlement of the Hartford Action; if the settlement proposal is achieved as
contemplated, management believes there would be no material impact on the
Company's financial position or the results of operations. Pending such a
settlement of this action, Salant's insurers have not withdrawn their
reservation of rights, and the possibility remains that one or more of such
insurers will seek recourse against Salant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2000, no matter was submitted to a vote of security
holders of Salant by means of the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Salant's common stock is currently trading on the Over-the-Counter Bulletin
Board under the trading symbol SLNT.OB.
The high and low sale prices per share of common stock (old and new) for each
quarter of 2000 and 1999 are set forth below. The price of the old common stock
is reflected for the first two quarters of 1999, while the price of the new
common stock is reflected in the third and fourth quarters of 1999 and all of
2000. The Company did not declare or pay any dividends during such years. The
Company's financing agreement requires the satisfaction of certain net worth
tests and other financial benchmarks prior to having the right to pay any cash
dividends. As of December 30, 2000, the Company was prohibited from paying cash
dividends by reason of, among other things, these provisions.
High and Low Sale Prices Per Share of the New Common Stock *
Quarter High Low
2000
Fourth $3.000 $1.875
Third 3.250 2.500
Second 3.060 1.620
First 3.120 1.870
1999
Fourth $4.250 $1.060
Third 6.500 4.120
High and Low Sale Pricese Per Share of the Old Common Stock *
Quarter High Low
1999
Second $0.310 $0.125
First 0.200 0.046
* The Company's new common stock was issued in conjunction with the
restructuring of the Company's debt pursuant to the Plan on the Effective Date,
at which time the Company's old common stock was cancelled. Shareholders of the
old common stock received .03337 shares of new common stock for each share of
the old common stock. No adjustment has been made to the price of the old common
stock reflected above. Although the Effective Date of the Plan was May 11, 1999,
trading of the Company's new common stock did not occur until August 11, 1999,
therefore no prices are reflected for the second quarter of 1999 for the new
common stock. See Note 1 - Financial Reorganization to the Consolidated
Financial Statements.
On March 23, 2001 there were 968 holders of record of shares of common stock,
and the closing market price was $3.25.
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.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(Amounts in thousands except share, per share and ratio data)
The following selected consolidated financial data as of January 1, 2000 and
December 30, 2000 and for each of the fiscal years in the three year period
ended December 30, 2000 have been derived from the Consolidated Financial
Statements of the Company, which have been audited by Deloitte & Touche LLP,
whose report thereon appears under Item 8, "Financial Statements and
Supplementary Data". The selected consolidated balance sheet data for fiscal
years 1996 through 1998 and statement of operations data for fiscal years 1996
and 1997 have been derived from the Company's audited consolidated financial
statements, which are not included herein. Such consolidated financial data
should be read in conjunction with Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and with the Consolidated
Financial Statements, including the related notes thereto, included elsewhere
herein.
Dec. 30, Jan. 01, Jan. 02, Jan. 03, Dec. 28,
2000 2000 1999 1998 1996
(52 Weeks) (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks)
For The Year Ended:
Continuing Operations:
Net sales $208,303 $248,730 $300,586 $ 347,667 $ 371,958
Restructuring costs (a) 629 (4,039) (24,825) (2,066) (11,730)
Income/(loss) from continuing operations 12,711 (2,148) (56,775) (8,394) (12,652)
Discontinued Operations:
Income/(loss) from operations, net of income taxes 569 (1,955) (10,163) (10,464) 3,329
Loss on disposal, net of income taxes - - (5,724) (1,330) -
Extraordinary gain (b) - 24,703 - 2,100 -
Net income/(loss)(a) 13,280 20,600 (72,662) (18,088) (9,323)
Pro forma basic and diluted earnings/(loss) per share:
Earnings/(loss) per share from continuing
operations before extraordinary gain (a) $1.28 $(0.21) $(5.68)$ (0.84) $ (1.26)
Earnings/(loss) per share from discontinued
operations .06 (0.20) (1.59) (1.18) 0.33
Earnings per share from extraordinary gain - 2.47 - 0.21 -
Pro forma basic and diluted earnings/(loss) per share (a)1.34 2.06 (7.27) (1.81) (0.93)
Cash dividends per share - - - - -
At Year End:
Current assets $102,859 $93,331 $149,697 $147,631 $149,476
Total assets 130,548 121,803 176,129 228,583 231,717
Current liabilities (c) 27,533 32,069 201,766 180,898 56,032
Long-term debt (c) - - - - 106,231
Deferred liabilities 5,642 4,133 5,273 5,382 8,863
Working capital/(deficiency) 75,326 61,262 (52,069) (33,267) 93,444
Current ratio 3.7:1 2.9:1 0.7:1 0.8:1 2.7:1
Shareholders' equity / (deficiency) $97,373 $85,601 $(30,910) $42,303 $60,591
Book value per share $9.83 $8.65 $(2.04) $2.79 $4.01
Number of shares outstanding 9,901 9,901 15,171 15,171 15,094
Pro forma Book value per share - - $(3.09) $4.23 $6.06
Pro forma number of shares outstanding - - 10,000 10,000 10,000
(a)Includes, for the year ended December 30, 2000 a reversal of $629
($0.06 per share; tax benefit not available) related primarily to better
than anticipated recovery on the sale of assets and settlement of
previously recorded liabilities. For the year ended January 1, 2000, a
provision for $4,039 ($0.40 per pro forma share; tax benefit not available)
for restructuring costs related primarily to severance for employees
terminated in connection with the Company's restructuring and exit from its
non-Perry Ellis businesses. For the year ended January 2, 1999, a provision
of $24,825 ($2.48 per pro forma share; tax benefit not available) for
restructuring costs primarily related to the Company's intention to focus
solely on its Perry Ellis men's apparel business and, as a result, exit its
non-Perry Ellis menswear divisions. For the year ended January 3, 1998, a
provision of $2,066 ($0.21 per pro forma share; tax benefit not available)
for restructuring costs principally related to (i) $3,530 in connection
with 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 ($1.17 per pro forma 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. See Note 3. -
Restructuring Costs to the Consolidated Financial Statements for additional
discussion regarding years 1998-2000.
(b) Includes, for the year ended January 1, 2000, a gain of $24,703 ($2.47 per
pro forma share) related to the conversion of all the Senior Notes and the
related unpaid interest into equity. For the year ended January 3, 1998, a
gain of $2,100 ($0.21 per pro forma share) related to the reversal of
excess liabilities previously provided for the anticipated settlement of
claims arising from the 1990 Chapter 11 proceeding.
(c) At January 1, 2000 the Senior Notes had been converted into equity. At
January 2, 1999 and January 3, 1998, long term debt of $104,879 was
classified as liabilities subject to compromise and reflected as a current
liability, respectively. See Note 1. - Financial Reorganization to the
Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
In connection with the 1998 Case, Salant filed the Plan with the Bankruptcy
Court in order to implement its restructuring. The restructuring consisted of
two key components: (i) the conversion of all principal and accrued interest on
the Senior Notes into 95% of new common stock of Salant; and (ii) the sale or
disposal of substantially all of the Company's businesses other than the
businesses conducted under the Perry Ellis Trademarks. In fiscal 2000, the
Company's ongoing business was primarily comprised of Perry Ellis products. The
Company markets accessories, dress shirts, slacks and sportswear to department
stores and better specialty stores primarily under the PERRY ELLIS and PORTFOLIO
BY PERRY ELLIS trademarks.
Results of Operations
Fiscal 2000 Compared with Fiscal 1999
Net Sales
In fiscal 2000, net sales of $208.3 million were $40.1 million, or 16.1%, less
than net sales of $248.4 million in fiscal 1999. The decrease resulted from the
Company's exit from its non-Perry Ellis businesses during 1999, namely its
Manhattan, John Henry, Gant and private label dress shirt and accessories
businesses and its private label bottoms business. Net sales for these
businesses in fiscal 1999 were $44.5 million, compared to none in fiscal 2000.
Net sales for the Company's ongoing Perry Ellis and private label businesses for
fiscal 2000 were $208.3 million, an increase of $ 4.4 million, or 2.1%, over
fiscal 1999 net sales of $203.9 million. Of the increase, net sales of the
Company's Perry Ellis retail outlet stores (36 stores at the close of fiscal
2000 compared to 28 stores at the close of fiscal 1999) increased $8.1 million,
or 47.0%. Net sales of Perry Ellis men's apparel at wholesale in fiscal 2000
were unchanged at $178 million compared to fiscal 1999. Weakness at retail in
the men's accessories business in 2000 and closing the Company's Canadian
operations in fiscal year 1999 offset increases in other product lines.
Excluding the men's accessories business, the Company's net sales of men's
apparel at wholesale increased 5.4% in 2000.
Gross Profit
In fiscal 2000, gross profit of $55.6 million was $0.4 million less than gross
profit of $56.0 million in fiscal 1999. Gross profit margin increased from 22.5%
in fiscal 1999 to 26.7% in fiscal 2000. Gross profit for the non-Perry Ellis
businesses exited by the Company in fiscal 1999 (as noted above) was $(1.5)
million, or (3.5)%, which caused the decline in the Company's overall margin for
1999. Gross profit for the Company's ongoing Perry Ellis and private label
businesses decreased to $55.5 million, or 26.7% of net sales, in fiscal 2000
compared to $57.1 million, or 28.1%, in fiscal 1999. The decline in margin was
primarily due to the weakness in the men's accessories business, noted above.
The Company has also experienced a decline in the margins for closeout sales of
prior season Perry Ellis products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (S,G&A) for fiscal 2000 were $45.2
million, or 21.7% of net sales, compared to $54.9 million, or 22.1% of net
sales, in fiscal 1999, a decrease of $9.7 million, or 17.7%. As part of the
Company's restructuring noted above, headcount in S,G&A was reduced resulting in
a reduction in salaries and related benefits. In addition, the Company realized
savings due to the reduced overhead associated with its reorganization.
Royalty Income
Royalty income decreased $1.2 million, or 61.4%, to $0.7 million in fiscal 2000
from $1.9 million in fiscal 1999. The decrease in royalties was due to the sale
of the John Henry and Manhattan trademarks at the end of the first quarter of
fiscal 1999.
Provision for Restructuring
During fiscal 2000, the Company realized $0.6 million in favorable recoveries on
the disposal and sale of buildings and other assets and settlements of
previously recorded liabilities, partially offset by an increase in the
estimated severance related to the closure of the Company's Mexican
manufacturing operations. During 2000, the Company incurred approximately $0.9
million of restructuring costs that were provided for in 1999 and 1998. These
costs included severance and employee costs of $0.5 million, lease payments of
$0.1 million and the remaining balance for other restructuring costs, offset by
$0.3 million of gains from the sale of property, plant and equipment.
During the first quarter of 1999, the Company recorded a provision for
restructuring of $4.0 million, primarily for severance pay for employees
terminated in 1999, as part of the Company's restructuring and exit from its
non-Perry Ellis businesses. During 1999, the Company incurred approximately $5.7
million (mostly cash related items) of restructuring costs that were either
provided for in 1999 or included in the restructuring reserve balance at January
2, 1999. These costs included severance and employee costs of $4.1 million,
lease payments of $0.8 million, royalty payments of $0.5 million and the
remaining balance for other restructuring costs, offset by $0.4 million of gains
from the sale of fixed assets.
Interest Income / Expense, Net
In fiscal 2000, net interest income was $1.2 million compared to net interest
expense of $0.4 million in fiscal 1999. The change resulted primarily from the
sale of the Company's Manhattan and John Henry trademarks for $27 million, as
well as the Company's operating cash flow for fiscal 2000 of $8.4 million, both
of which have significantly reduced the Company's needs under its existing
credit facility.
Income/Loss from Continuing Operations
In fiscal 2000, the Company's income from continuing operations was $12.7
million, or $1.28 per share, compared to a loss of $2.1 million, or $0.21 per
pro forma share, in fiscal 1999.
Earnings before Interest, Taxes, Depreciation, Amortization, Reorganization
Costs, Debt Restructuring Costs, Restructuring Charges, Discontinued
Operations, and Extraordinary Gain
Earnings before interest, taxes, depreciation, amortization, reorganization
costs, debt restructuring costs, restructuring charges, discontinued operations
and extraordinary gain was $15.5 million (7.4% of net sales) in fiscal 2000,
compared to $8.6 million (3.5% of net sales) in fiscal 1999, an increase of $6.9
million, or 80.2%. The Company believes this information is helpful in
understanding cash flow from operations, which is available for debt service and
capital expenditures. This measure is not included in generally accepted
accounting principles and is not a substitute for operating income, net income
or cash flows from operating activities.
Extraordinary Gain
In fiscal 1999, the Company recorded an extraordinary gain of $24.7 million, or
$2.47 per pro forma share, on the conversion of its Senior Notes and related
unpaid interest into new common stock, as part of its restructuring. The holders
of the Senior Notes exchanged $104.9 million of Senior Notes and $14.8 million
of accrued and unpaid interest for 9.5 million shares of new common stock,
representing 95% of the issued and outstanding shares of the Company.
Income / Loss from Discontinued Operations
In fiscal 2000, the Company recorded income of $0.6 million related to the
discontinuance of the Children's group. The income related primarily to better
than anticipated recovery on the sale of assets (primarily the real estate
holdings) related to the Children's business.
In fiscal 1999, the Company recorded a charge of $2.0 million related to the
discontinuance of its Children's Group. The charge of $2.0 million related to
additional losses incurred during the phase-out period and additional expenses
incurred in disposing of the assets related to the Children's business.
Net Income
Net income for fiscal 2000 was $13.3 million, or $1.34 per share, compared to
income of $20.6 million, or $2.06 per pro forma share for fiscal year 1999.
Fiscal 1999 Compared with Fiscal 1998
Net Sales
In fiscal 1999, net sales of $248.4 million were $52.2 million, or 17.4%, less
than net sales of $300.6 million in fiscal 1998. The decrease resulted from the
Company's exit from its non-Perry Ellis businesses during 1999, namely its
Manhattan, John Henry, Gant and private label dress shirt and accessories
businesses and its private label bottoms business. Net sales for these
businesses in fiscal 1999 were $44.5 million, compared to $112.7 million in
fiscal 1998, a decrease of $68.3 million, or 60.6%. Net sales for the Company's
ongoing Perry Ellis and private label businesses for fiscal 1999 were $203.9
million, an increase of $16.0 million, or 8.5%, over fiscal 1998 net sales of
$187.9 million. Of the increase, net sales of the Company's Perry Ellis retail
outlet stores (28 stores in fiscal 1999 compared to 20 stores in fiscal 1998)
increased $3.4 million, or 25.0%, net sales of Perry Ellis men's apparel at
wholesale increased $12.4 million, or 7.5%, and net sales of the Company's
private label accessories business increased $0.2 million, or 2.1%.
Gross Profit
In fiscal 1999, gross profit of $56.0 million was $6.4 million less than gross
profit of $62.4 million in fiscal 1998. Gross profit margin increased from 20.8%
in fiscal 1998 to 22.5% in fiscal 1999. Gross profit for the Company's ongoing
Perry Ellis and private label businesses increased to $57.5 million, or 28.2%,
in fiscal 1999 compared to $51.8 million, or 27.6%, in fiscal 1998. Gross profit
for the non-Perry Ellis businesses exited by the Company in fiscal 1999, noted
above, was $(1.5) million, or (3.5)%, compared to $10.6 million, or 9.4%, in
fiscal 1998. The decrease resulted from markdowns required to dispose of the
inventories of these businesses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (S,G&A) for fiscal 1999 were $54.9
million, or 22.1% of net sales, compared to $72.0 million, or 23.9% of net
sales, in fiscal 1998, a decrease of $17.1 million, or 23.7%. As part of the
Company's restructuring noted above, headcount in S,G&A was reduced from 525 in
fiscal 1998 to 400 in fiscal 1999, resulting in savings of $8.3 million in
salaries and related benefits. In addition, the Company realized savings due to
the reduced overhead associated with the reorganization of the Company, along
with the reduction of consulting fees.
Royalty Income
Royalty income decreased $3.4 million, or 64.2%, to $1.9 million in fiscal 1999
from $5.3 million in fiscal 1998. The decrease in royalties was due to the sale
of the John Henry and Manhattan trademarks, which resulted in royalty income
from these trademarks for only the first quarter of 1999 versus the entire year
of 1998.
Provision for Restructuring
During the first quarter of 1999, the Company recorded a provision for
restructuring of $4.0 million, primarily for severance pay for employees
terminated in 1999, as part of the Company's restructuring and exit from its
non-Perry Ellis businesses. During 1999 the Company incurred approximately $5.7
million (mostly cash related items) of restructuring costs that were either
provided for in 1999 or included in the restructuring reserve balance at January
2, 1999. These costs included severance and employee costs of $4.1 million,
lease payments of $0.8 million, royalty payments of $0.5 million and the
remaining balance for other restructuring costs, offset by $0.4 million of gains
from the sale of fixed assets.
At January 1, 2000 the Company had a building in Andalusia, Alabama still
available for sale. Additional costs of $0.1 million were anticipated and
accrued due to holding the Andalusia facility and additional employee related
expenses of $0.2 million were accrued and anticipated for 2000. The additional
employee related expenses are primarily related to increased insurance costs for
closed facilities. These additional costs were offset by the favorable results
of settlements of royalties and other restructuring costs of $0.1 million and
$0.2 million, respectively.
In fiscal 1998, the Company recorded a provision for restructuring of $24.8
million, also related to the Company's exit from its non-Perry Ellis businesses.
The provision included $16.2 million for the loss on sale of the Company's
Manhattan and John Henry trademarks, goodwill and related operating assets. The
provision also included (i) $6.3 million for write downs of property, plant and
equipment of the Company's manufacturing, distribution and office facilities to
be disposed of as part of its restructuring, (ii) $2.9 million for the write off
of other assets, severance costs, lease termination and other restructuring
costs, and (iii) an offset of $0.6 million relating to adjustments of previously
recorded restructuring reserves and the gain on sale of a facility in Thomson,
Georgia.
Interest Expense, Net
For fiscal 1999, net interest expense was $0.4 million compared to $13.9 million
in fiscal 1998. The decrease resulted primarily from the conversion of $104.9
million aggregate principal face amount of Senior Notes into equity, as part of
the Company's restructuring in fiscal 1999. In addition, the sale of the
Company's Manhattan and John Henry trademarks for $27 million, as well as the
Company's operating cash flow for fiscal 1999 of $45.2 million, has
significantly reduced the Company's borrowing needs under its credit facility.
At January 1, 2000 there were no borrowings outstanding under the Company's
credit facility, compared to $38.5 million at January 2, 1999.
Loss from Continuing Operations
In fiscal 1999, the Company's loss from continuing operations was $2.1 million,
or $0.21 per pro forma share, compared to a loss of $56.8 million, or $5.68 per
pro forma share, in fiscal 1998.
Earnings before Interest, Taxes, Depreciation, Amortization, Reorganization
Costs, Debt Restructuring Costs, Restructuring Charges, Discontinued
Operations, and Extraordinary Gain
Earnings before interest, taxes, depreciation, amortization, reorganization
costs, debt restructuring costs, restructuring charges, discontinued operations
and extraordinary gain was $8.6 million (3.5% of net sales) in fiscal 1999,
compared to $3.3 million (1.1% of net sales) in fiscal 1998, an increase of $5.3
million, or 160.6%. The Company believes this information is helpful in
understanding cash flow from operations which is available for debt service and
capital expenditures. This measure is not included in generally accepted
accounting principles and is not a substitute for operating income, net income
or cash flows from operating activities.
Extraordinary Gain
In fiscal 1999, the Company recorded an extraordinary gain of $24.7 million, or
$2.47 per pro forma share, on the conversion of its Senior Notes and related
unpaid interest into new common stock, as part of its restructuring. The holders
of the Senior Notes exchanged $104.9 million of Senior Notes and $14.8 million
of accrued and unpaid interest for 9.5 million shares of new common stock,
representing 95% of the issued and outstanding shares of the Company.
Loss from Discontinued Operations
In fiscal 1999, the Company recorded a charge of $2.0 million related to the
discontinuance of its Children's Group. The charge of $2.0 million related to
additional losses incurred during the phase-out period and additional expenses
incurred in disposing of the assets related to the Children's business.
In fiscal 1998, the Company recorded a charge of $15.9 million, also relating to
the discontinuance of the Children's Group. Of the $15.9 million, $10.2 million
related to operating losses of the Children's Group prior to the date of
discontinuance, and $5.7 million represented estimated future operating losses
and the estimated loss on the sale of the business. The $5.7 million consisted
of asset write-offs of $2.9 million, estimated losses from operations during the
phase out period of $1.6 million, severance pay of $1.5 million and royalty and
lease payments of $1.5 million, offset by $1.8 million for the sale of the
Company's Dr. Denton trademark.
The Children's Group had net sales of $5.5 million and $42.8 million in fiscal
1999 and 1998, respectively.
Net Income/(Loss)
Net income for fiscal 1999 was $20.6 million, or $2.06 per pro forma share,
compared to a net loss of $72.7 million, or $7.27 per pro forma share for fiscal
1998. In addition to the items noted above, the improvement was due to lower
chapter 11 reorganization costs ($.5 million in 1999 as compared to $3.2 million
in 1998) and a debt restructuring charge of $8.6 million recorded in 1998.
Liquidity and Capital Resources
Upon commencement of the 1998 Case, Salant filed a motion seeking the authority
of the Bankruptcy Court to enter into a revolving credit facility with The CIT
Group/Commercial Services, Inc. ("CIT"), Salant's existing working capital
lender pursuant to and in accordance with the terms of the Ratification and
Amendment Agreement, dated as of December 29, 1998 (the "Amendment") which,
together with related documents are referred to as the "CIT DIP Facility,"
effective as of the Filing Date, which would replace the Company's existing
working capital facility under its then existing credit agreement. On December
29, 1998, the Bankruptcy Court approved the CIT DIP Facility on an interim basis
and on January 19, 1999 the Bankruptcy Court approved the CIT DIP Facility on a
final basis.
On May 11, 1999, the effective date of the Plan, the Company entered into a
syndicated revolving credit facility (the "Credit Agreement") with CIT pursuant
to and in accordance with the terms of a commitment letter dated December 7,
1998, which replaced the CIT DIP Facility described above.
The Credit Agreement provides for a general working capital facility, in the
form of direct borrowings and letters of credit, up to $85 million subject to an
asset-based borrowing formula. The Credit Agreement consists of an $85 million
revolving credit facility, with at least a $35 million letter of credit
subfacility. As collateral for borrowings under the Credit Agreement, the
Company granted to CIT and a syndicate of lenders arranged by CIT (the
"Lenders") a first priority lien on and security interest in substantially all
of the assets of the Company. The Credit Agreement has an initial term of three
years.
The Credit Agreement also provides, among other things, that (i) the Company
will be charged an interest rate on direct borrowings of .25% in excess of the
Prime Rate or at the Company's request, 2.25% in excess of LIBOR (as defined in
the Credit Agreement), and (ii) the Lenders may, in their sole discretion, make
loans to the Company in excess of the borrowing formula but within the $85
million limit of the revolving credit facility. The Company is required under
the agreement to maintain certain financial covenants relating to consolidated
tangible net worth, capital expenditures, maximum pre-tax losses/minimum pre-tax
income and minimum interest coverage ratios. The Company was in compliance with
all applicable covenants at December 30, 2000.
Pursuant to the Credit Agreement, the Company will pay or paid the following
fees: (i) a documentary letter of credit fee of 1/8 of 1.0% on issuance and 1/8
of 1.0% on negotiation; (ii) a standby letter of credit fee of 1.0% per annum
plus bank charges; (iii) a commitment fee of $325 thousand; (iv) an unused line
fee of .25%; (v) an agency fee of $100 thousand (only for the second and third
years of the term of the Credit Agreement); (vi) a collateral management fee of
$8,333 per month; and (vii) a field exam fee of $750 per day plus out-of-pocket
expenses.
At the end of fiscal 2000, there were no direct borrowings outstanding under the
Credit Agreement. Letters of credit outstanding were $30.0 million and the
Company had unused availability, based on outstanding letters of credit and
existing collateral, of $21.7 million. In addition to the unused availability,
the Company had approximately $34.7 million of cash available to fund its
operations. At the end of fiscal 1999, there were no direct borrowings
outstanding and letters of credit outstanding under the Credit Agreement were
$30.1 million, at which time the Company had unused availability of $16.5
million. In addition to the unused availability, the Company had approximately
$30.1 million of cash available to fund its operations. During fiscal 2000, the
maximum aggregate amount of direct borrowings and letters of credit outstanding
at any one time was $36.3 million, at which time the Company had unused
availability of $16.9 million. During fiscal 1999, the maximum aggregate amount
of direct borrowings and letters of credit outstanding at any one time was $66.9
million, at which time the Company had unused availability of $13.0 million.
The Company's cash provided by operating activities for fiscal 2000 was $8.4
million, which primarily reflects (i) income from continuing operations of $12.7
million, (ii) an increase in accounts payable of $2.7 million, and (iii)
non-cash charges, such as depreciation and amortization of $ 4.6 million. These
items were offset by an increase in inventory of $3.6 million, a decrease in
liabilities subject to compromise of $3.0 million, a decrease in accrued
liabilities of $2.4 million and a decrease in the reserve for business
restructuring of $1.2 million.
Cash used by investing activities for fiscal 2000 was $3.8 million, which
reflects $1.9 million of capital expenditures and $1.9 million for the
installation of store fixtures in department stores. During fiscal 2001, the
Company plans to make capital expenditures of approximately $4.1 million and to
spend an additional $1.1 million for the installation of store fixtures in
department stores.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for all fiscal years
beginning after June 15, 1999. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. Under SFAS 133, certain
contracts that were not formerly considered derivatives may now meet the
definition of a derivative. The Company adopted SFAS 133 effective as of
December 31, 2000. Management does not expect the adoption of SFAS 133 to have a
significant impact on the financial position or results of operations of the
Company because the Company does not have significant derivative activity.
Seasonality
Although the Company typically introduces and withdraws various individual
products throughout the year, its principal products are organized into the
customary retail Spring, Transition, 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 20, 2001, the Company's backlog of orders was
approximately $44.6 million, which was 6.4% more than the backlog of orders of
approximately $41.9 million that existed at March 20, 2000.
Factors that May Affect Future Results and Financial Condition
This report contains or incorporates by reference forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Where any such forward-looking statement includes a statement of the assumptions
or bases underlying such forward-looking statement, the Company cautions that
assumed facts or bases almost always vary from the actual results, and the
differences between assumed facts or bases and actual results can be material,
depending on the circumstances. Where, in any forward-looking statement, the
Company or its management expresses an expectation or belief as to future
results, there can be no assurance that the statement of the expectation or
belief will result or be achieved or accomplished. The words "believe",
"expect", "estimate", "project", "seek", "anticipate" and similar expressions
may identify forward-looking statements. The Company's future operating results
and financial condition are dependent upon the Company's ability to successfully
design, manufacture, import and market apparel. Taking into account the
foregoing, the following are identified as important factors that could cause
results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the Company:
Competition. The apparel industry in the United States is highly competitive and
characterized by a relatively small number of multi-line manufacturers (such as
the Company) and a large number of specialty manufacturers. The Company faces
substantial competition in its markets from manufacturers in both categories.
Many of the Company's competitors have greater financial resources than the
Company. The Company also competes for private label programs with the internal
sourcing organizations of many of its own customers.
Strategic Initiatives. During the second quarter of 2000, the Company entered
into a licensing agreement with Hartz to design, produce and distribute men's
sportswear and furnishings for Hartz's exclusive Tallia brand. In the first
quarter of 2001, the Company purchased the assets and trademarks of Tricots
which designs, produces, and markets better men's sweaters and sportswear.
Management of the Company is continuing to consider various strategic
opportunities, including but not limited to, new menswear licenses and/or
acquisitions. Management is also exploring ways to increase productivity and
efficiency, and to reduce the cost structures of its respective businesses.
Through this process management expects to increase its distribution channels
and achieve effective economies of scale. No assurance may be given that any
transactions resulting from this process will be announced or completed.
Apparel Industry Cycles and other Economic Factors. 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,
Transition, Fall and Holiday Seasons. Typically, the Company's products are
designed as much as one year in advance and manufactured approximately one
season in advance of the related retail selling season. Accordingly, the success
of the Company's products is often dependent on the ability of the Company to
successfully anticipate the needs of the Company's retail customers and the
tastes of the ultimate consumer up to a year prior to the relevant selling
season.
Foreign Operations. The Company's foreign sourcing operations are subject to
various risks of doing business abroad, including currency fluctuations
(although the predominant currency used is the U.S. dollar), quotas and, in
certain parts of the world, political instability. Any substantial disruption of
its relationship with its foreign suppliers could adversely affect the Company's
operations. Some of the Company's imported merchandise is subject to United
States Customs duties. In addition, bilateral agreements between the major
exporting countries and the United States impose quotas, which limit the amount
of certain categories of merchandise that may be imported into the United
States. Any material increase in duty levels, material decrease in quota levels
or material decrease in available quota allocation could adversely affect the
Company's operations. The Company's operations in Asia are subject to certain
political and economic risks including, but not limited to, political
instability, changing tax and trade regulations and currency devaluations and
controls. Although the Company has experienced no material foreign currency
transaction losses, its operations in the region are subject to an increased
level of economic instability. The impact of these events on the Company's
business, and in particular its sources of supply, cannot be determined at this
time.
Dependence on Contract Manufacturing. As of December 30, 2000, the Company
produced all of its products (in units) through arrangements with independent
contract manufacturers, as the Company closed its manufacturing facilities
during 1999. The use of such contractors and the resulting lack of direct
control could subject the Company to difficulty in obtaining timely delivery of
products of acceptable quality. In addition, as is customary in the industry,
the Company does not have any long-term contracts with its fabric suppliers or
product manufacturers. While the Company is not dependent on one particular
product manufacturer or raw material supplier, the loss of several such product
manufacturers and/or raw material suppliers in a given season could have a
material adverse effect on the Company's performance.
Because of the foregoing factors, as well as other factors affecting the
Company's operating results and financial condition, past financial performance
should not be considered to be a reliable indicator of future performance, and
investors are cautioned not to use historical trends to anticipate results or
trends in the future. In addition, the Company's participation in the highly
competitive apparel industry often results in significant volatility in the
Company's common stock price.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in the trading of market risk sensitive instruments
in the normal course of business. Financing arrangements for the Company are
subject to variable interest rates including rates primarily based on the
Reference Rate (as defined in the Credit Agreement), with a LIBOR option. An
analysis of the Credit Agreement can be found in Note 9 to the Consolidated
Financial Statements, Financing Agreements, included in this report of Form
10-K. On December 30, 2000 there were no direct borrowings outstanding under the
Credit Agreement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 (the "Company") as of December 30, 2000 and January
1, 2000, and the related consolidated statements of operations, comprehensive
income, shareholders' equity/deficiency and cash flows for each of the three
years in the period ended December 30, 2000. 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 auditing standards generally accepted
in the United States of America. 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 consolidated financial statements present fairly, in all
material respects, the financial position of Salant Corporation and subsidiaries
at December 30, 2000 and January 1, 2000, the results of their operations and
their cash flows for each of the three years in the period ended December 30,
2000 in conformity with accounting principles generally accepted in the United
States of America. 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.
As discussed in Note 1 to the financial statements, the Bankruptcy Court has
entered an order confirming the Plan of Reorganization which became effective on
May 11, 1999.
/s/ Deloitte & Touche LLP
March 9, 2001
New York, New York
Salant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
Year Ended
---------------------------------------------------------------------------
December 30, January 1, January 2,
2000 2000 1999
------------------ ------------ -------------
Net sales $ 208,303 $ 248,370 $ 300,586
Cost of goods sold 152,708 192,391 238,192
-------------- ----------- -----------
Gross profit 55,595 55,979 62,394
Selling, general and administrative expenses (45,188) (54,909) (71,999)
Royalty income 750 1,945 5,254
Goodwill amortization (519) (519) (1,881)
Other income, net 213 579 199
Restructuring reversal/(costs) (Note 3) 629 (4,039) (24,825)
Reorganization costs (Note 1) -- (500) (3,200)
Debt restructuring costs (Note 10) -- -- (8,633)
----------------- --------------- ----------
Income/(loss) from continuing operations before interest,
income taxes and extraordinary gain 11,480 (1,464) (42,691)
Interest (income)/expense, net (Notes 9 and 10) (1,244) 439 13,944
------------- ------------- ----------
Income/(loss) from continuing operations
before income taxes and extraordinary gain 12,724 (1,903) (56,635)
Income taxes (Note 12) 13 245 140
-------------- ------------- ------------
Income/(loss) from continuing operations
before extraordinary gain 12,711 (2,148) (56,775)
Discontinued operations (Note 17):
Income/(loss) from discontinued operations 569 (1,955) (10,163)
Loss on disposal -- - (5,724)
Extraordinary gain (Note 4) -- 24,703 --
--------------- ---------- ----------------
Net Income/(loss) $ 13,280 $ 20,600 $ (72,662)
========== ========== ===========
Basic and diluted income/(loss) per share (Note 2):
Income/(loss) per share from continuing
operations before extraordinary gain $ 1.28 $ (0.21)* $ (5.68)*
Income/(loss) per share from discontinued operations .06 (0.20)* (1.59)*
Extraordinary gain -- 2.47* --*
------------- -------------- -----------------
Basic and diluted income/(loss) per share $ 1.34 $ 2.06* $ (7.27)*
=========== ============= ===============
Weighted average common stock outstanding 9,901 9,998* 10,000*
============ ============= ================
*The year ended January 2, 1999 and January 1, 2000 information is pro-forma --
See Note 2.
See Notes to Consolidated Financial Statements
Salant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Amounts in thousands)
December 30, January 1, January 2,
2000 2000 1999
------------------ ------------- ------------
Net income/(loss) $13,280 $20,600 $(72,662)
Other comprehensive income/(loss), net of tax:
Foreign currency translation adjustments 25 54 (203)
Minimum pension liability adjustments (1,533) 1,055 (348)
--------- --------- -----------
Comprehensive income/(loss) $11,772 $21,709 $(73,213)
======= ======= ========
See Notes to Consolidated Financial Statements
Salant Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
December 30, January 1,
2000 2000
------------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 34,683 $ 30,116
Accounts receivable - net of allowance for doubtful accounts
of $2,625 in 2000 and $2 419 in 1999 16,588 15,956
Inventories (Notes 5 and 9) 45,283 41,669
Prepaid expenses and other current assets 6,305 5,490
Assets held for sale (Note 3) -- 100
----------------- ------------------
Total current assets 102,859 93,331
Property, plant and equipment, net (Notes 6 and 9) 13,185 14,185
Other assets (Notes 7 and 12) 14,504 14,287
------------- ----------------
$ 130,548 $ 121,803
=========== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY / (DEFICIENCY)
Current liabilities:
Accounts payable $ 14,798 $ 12,097
Reserve for business restructuring (Note 3) 1,070 2,308
Liabilities subject to compromise (Notes 1 and 10) 1,611 4,604
Accrued salaries, wages and other liabilities (Note 8) 9,310 11,751
Net liabilities of discontinued operations (Note 17) 744 1,309
--------------- ----------------
Total current liabilities 27,533 32,069
Deferred liabilities (Note 15) 5,642 4,133
Commitments and contingencies (Notes 9, 10, 13, 14, 16 and 20)
Shareholders' equity / (deficiency) (Notes 2 and 14): Preferred stock, par value
$2 per share:
Authorized 5,000 shares; none issued -- --
Common stock, par value $1 per share
Authorized 45,000 shares;
Issued and issuable - 10,000 in 2000 and 1999 10,000 10,000
Additional paid-in capital 206,040 206,040
Deficit (114,017) (127,297)
Accumulated other comprehensive income/(loss) (Note 18) (4,452) (2,944)
Less - treasury stock, at cost - 99 shares in 2000 and 1999 (198) (198)
--------------- -----------------
Total shareholders' equity 97,373 85,601
------------- ----------------
$ 130,548 $ 121,803
=========== ==============
See Notes to Consolidated Financial Statements
Salant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY / (DEFICIENCY)
(Amounts in thousands)
Accum-
ulated
Other Total
Compre- Share-
Common Stock Add'l hensive Treasury Stock holders'
Number Paid-In Income/ Number Equity/
of Shares Amount Capital Deficit (Loss) of Shares Amount (Deficiency)
--------- -------------------------------------------------------------------
Balance at January 3, 1998 15,405 $15,405 $107,249 $(75,235)$(3,502) 234 $(1,614) $42,303
Net loss (72,662) (72,662)
Other Comprehensive Loss (551) (551)
-------------------------------------------------------------- ------------------
Balance at January 2, 1999 15,405 $15,405 $107,249 $(147,897)$(4,053) 234 $(1,614) $(30,910)
Net Income 20,600 20,600
Other Comprehensive Income 1,109 1,109
Reorganization:
Cancel Old Common Stock (15,405) (15,405) 13,791 (234) 1,614 --
Issue New Common Stock 10,000 10,000 85,000 95,000
Purchase of Treasury Stock 99 (198) (198)
-------------------------------------------------------------------------------
Balance at January 1, 2000 10,000 $10,000 $206,040 $(127,297)$(2,944) 99 $(198) $85,601
Net Income 13,280 13,280
Other Comprehensive Loss (1,508) (1,508)
---------------------------------------------------------------- ---------------
Balance at December 30, 2000 10,000 $10,000 $206,040 $(114,017)$(4,452) 99 $(198) $97,373
====== ======= ======== ========= ======= ========= ====== =======
See Notes to Consolidated Financial Statements
Salant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended
---------------------------------------------------------
December 30, January 1, January 2,
2000 2000 1999
------------------- ------------- --------------
Cash Flows from Operating Activities
Income/(loss) from continuing operations $ 12,711 $ (2,148) $ (56,775)
Adjustments to reconcile income/(loss) from continuing operations
to net cash provided by operating activities:
Depreciation 4,101 5,027 7,474
Amortization of intangibles 519 519 1,881
Write-down of fixed assets - - 10,931
Write-down of other assets - - 39,952
Changes in operating assets and liabilities:
Accounts receivable (632) 22,403 1,276
Inventories (3,614) 27,921 15,187
Prepaid expenses and other current assets (815) (224) (1,730)
Assets held for sale 100 - (28,400)
Other assets (14) (521) 301
Accounts payable 2,701 9,266 (21,058)
Accrued salaries, wages and other liabilities (2,441) (1,209) (1,222)
Liabilities subject to compromise (2,993) (19,621) 38,928
Reserve for business restructuring (1,238) (1,243) 787
Deferred liabilities (24) (85) (1,720)
-------------- ------------ ------------
Net cash provided by continuing operating activities 8,361 40,085 5,812
Cash provided by/(used in) discontinued operations 4 6,214 (5,257)
--------------- ---------- -------------
Net cash provided by operations 8,365 46,299 555
------------ --------- -------------
Cash Flows from Investing Activities
Capital expenditures, net of disposals (1,959) (4,579) (4,871)
Store fixture expenditures (1,864) (2,486) (1,148)
Proceeds from sale of assets - 28,300 -
--------------- --------- -----------------
Net cash (used in)/provided by investing activities (3,823) 21,235 (6,019)
----------- --------- -------------
Cash Flows from Financing Activities
Net short-term borrowings/(repayments) - (38,496) 4,696
Purchase of treasury stock - (198) -
Other, net 25 54 (203)
------------- ------------ -------------
Net cash (used in)/provided by financing activities 25 (38,640) 4,493
------------- --------- ------------
Net increase/(decrease) in cash and cash equivalents 4,567 28,894 (971)
Cash and cash equivalents - beginning of year 30,116 1,222 2,193
---------- ---------- ------------
Cash and cash equivalents - end of year $ 34,683 $ 30,116 $ 1,222
========= ========= ===========
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 93 $ 1,054 $ 5,441
============ ========= =========
Income taxes $ 179 $ 90 $ 321
=========== =========== ==========
Supplemental investing and financing non-cash transactions:
Common Stock issued for Senior Notes -- $104,879 --
Common Stock issued for pre-petition interest -- $ 14,703 --
Common Stock issued for post-petition interest -- $ 121 --
Change in minimum pension liability $ (1,533) $ 1,055 $ (348)
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 Reorganization
On December 29, 1998 (the "Filing Date"), Salant Corporation filed a petition
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") (the "1998 Case") in order to implement a restructuring
of its 10-1/2 % Senior Secured Notes due December 31, 1998 (the "Senior Notes").
Salant also filed its plan of reorganization (the "Plan") with the Bankruptcy
Court on the Filing Date in order to implement its restructuring. On April 16,
1999, the Bankruptcy Court issued an order (the "Confirmation Order") confirming
the Plan. The effective date of the Plan occurred on May 11, 1999 (the
"Effective Date").
Pursuant to the Plan (i) all of the outstanding principal amount of Senior
Notes, plus all accrued and unpaid interest thereon, was converted into 95% of
Salant's new common stock, subject to dilution, and (ii) all of Salant's
existing common stock was converted into 5% of Salant's new common stock,
subject to dilution. Salant's general unsecured creditors (including trade
creditors) were unimpaired and are entitled to be paid in full. The Plan was
approved by all of the holders of Senior Notes that voted and over 96% of the
holders of Salant common stock that voted.
Salant operates its Perry Ellis businesses under certain licensing agreements
(the "Perry Ellis Licenses") between Salant and Perry Ellis International, Inc.
("PEI"). During the 1998 Case, Supreme International Corporation ("Supreme")
entered into discussions with PEI to acquire PEI and, thereafter, Supreme
acquired PEI. Prior to the hearing on the confirmation of the Plan, Supreme (in
its own capacity and on behalf of PEI (collectively, referred to herein as
"Supreme-PEI")) filed an objection to the confirmation. In connection with the
confirmation of the Plan, Salant and Supreme-PEI settled and resolved their
differences and the material terms of such settlement were set forth in a term
sheet (the "Term Sheet") attached to and incorporated into the Confirmation
Order (the "PEI Settlement").
The following is a summary of the material provisions of the Term Sheet setting
forth the terms of the PEI Settlement. The following description is qualified in
its entirety by the provisions of the Term Sheet. The PEI Settlement provided
that: (i) Salant would return to PEI the license to sell Perry Ellis products in
Puerto Rico, the U.S. Virgin Islands, Guam and Canada (Salant retained the right
to sell its existing inventory in Canada through January 31, 2000); (ii) the
royalty rate due PEI under Salant's Perry Ellis Portfolio pants license with
respect to regular price sales in excess of $15.0 million annually would be
increased to 5%; (iii) Salant would provide Supreme-PEI with the option to take
over any real estate lease for a retail store that Salant intends to close; (iv)
Salant would assign to Supreme-PEI its sublicense with Aris Industries, Inc. for
the manufacture, sale and distribution of the Perry Ellis America brand
sportswear and, depending on certain circumstances, Salant would receive certain
royalty payments from Supreme-PEI through the year 2005; (v) Salant would pay
PEI its pre-petition invoices of $616,844 and post-petition invoices of $56,954
on the later of (a) the Effective Date of the Plan or (b) the due date with
respect to such amounts; (vi) Supreme-PEI (a) agreed and acknowledged that the
sales of businesses made by Salant during the 1998 Case did not violate the
terms of the Perry Ellis Licenses and did not give rise to the termination of
the Perry Ellis Licenses and (b) consented to the change of control arising from
the conversion of debt into equity under the Plan and acknowledged that such
change of control did not give rise to any right to terminate the Perry Ellis
Licenses; and (vii) Supreme-PEI withdrew with prejudice its objection to
confirmation of the Plan, and supported confirmation of the Plan.
As of the Filing Date, Salant had $143,807 (consisting of $14,703 in Senior Note
interest, $104,879 of Senior Notes and $24,225 of unsecured pre-bankruptcy
claims) of liabilities subject to compromise, in addition to $38,496 of loans
payable to CIT. In addition Salant accrued the estimated fees of $3,200 in the
1998 fourth quarter in connection with the administration of the 1998 Case.
Pursuant to the Plan, on the Effective Date, all of Salant's then existing
common stock ("Old Common Stock"), $1.00 par value per share, was cancelled. In
accordance with the Plan, 10,000,000 shares of new common stock, $1.00 par value
per share (the "New Common Stock"), were issued by Salant as follows: (i)
9,500,000 shares of the New Common Stock were distributed to the holders (the
"Noteholders") of Salant's Senior Notes, in full satisfaction of all of the
outstanding principal amount, plus all accrued and unpaid interest on the Senior
Notes and (ii) 500,000 shares of the New Common Stock were distributed to the
holders of Salant's Old Common Stock, in full satisfaction of any and all
interests of such holders in Salant.
Accordingly, under the Plan, as of the Effective Date, Salant's stockholders
immediately prior to the Effective Date, who at that time owned 100% of the
outstanding Old Common Stock of Salant, received, in the aggregate, 5% of the
issued and outstanding shares of New Common Stock, subject to dilution, and the
Noteholders received, in the aggregate, 95% of the issued and outstanding shares
of New Common Stock, subject to dilution. The Company reserved 1,111,111 shares
(10% of the outstanding shares) of New Common Stock for the 1999 Stock Award and
Incentive Plan.
The authorized capital stock of Salant as of the Effective Date consists of (i)
45,000,000 shares of New Common Stock, $1.00 par value per share and (ii)
5,000,000 shares of Preferred Stock, $2.00 par value per share (the "Preferred
Stock"). No Preferred Stock has been issued either in connection with the Plan
or otherwise.
Post-restructuring, Salant has focused primarily on its Perry Ellis men's
apparel business and, as a result, Salant exited its other businesses, including
its Children's Group and non-Perry Ellis menswear divisions. During 1999, the
Company sold its John Henry and Manhattan businesses. These businesses included
the John Henry, Manhattan and Lady Manhattan trade names, the John Henry and
Manhattan dress shirt inventory, the leasehold interest in the dress shirt
facility located in Valle Hermosa, Mexico, and the equipment located at the
Valle Hermosa facility and at Salant's facility located in Andalusia, Alabama.
During 1999, Salant also sold its Children's Group, which primarily involved the
sale of inventory related to the Children's Group. As a result of the above,
Salant will now report its business operations as a single segment.
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 Children's Group.) In December 1998, the
Company decided to discontinue the operations of the Children's Group, which
produced and marketed children's blanket sleepers primarily using a number of
well-known licensed characters created by, among others, DISNEY and WARNER
BROTHERS. The Children's Group also marketed pajamas under the DR. DENTON and
OSHKOSH B'GOSH trademarks, and sleepwear and underwear under the JOE BOXER
trademark. As further described in Note 17, the consolidated financial
statements and the notes thereto reflect the Children's Group division as a
discontinued operation. Intercompany balances and transactions are eliminated in
consolidation.
The Company's principal business is the designing, producing, importing and
marketing of men's apparel and as such, management believes that the Company
only operates in one reportable segment. The Company currently sells its
products to retailers, including department and specialty stores, and for a
portion of 1999 made limited sales of certain products to 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.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to December 31. The 2000,
1999 and 1998 fiscal years were comprised of 52 weeks.
Reclassifications
Certain reclassifications were made to the 1998 and 1999 consolidated financial
statements to conform to the 2000 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.
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% - 33.3%
Leasehold improvements Shorter of the life of the asset or the lease
term
Other Assets
Intangible assets are being amortized on a straight-line basis over their useful
lives of 25 years. Costs in excess of fair value of net assets acquired 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 Standards No. 109,
"Accounting for Income Taxes".
Fair Value of Financial Instruments
For financial instruments, including cash and cash equivalents, accounts
receivable and payable, and accrued expenses, the carrying amounts approximated
fair value because of their short maturity. Liabilities subject to compromise
are valued based upon the amount the Company plans to pay in accordance with the
Plan. In addition, deferred liabilities have carrying amounts approximating fair
value.
Income/(Loss) Per Share
Pro forma basic income/(loss) per share is based on the weighted average number
of common shares as if the New Common Stock had been issued at the beginning of
the earliest period presented. Common stock equivalents are not considered, as
the options for the New Common Stock are anti-dilutive for the periods
presented.
The following is a comparison of basic and diluted income/(loss) per share using
the historical shares outstanding. Common stock equivalents are not considered
for the Old Common Stock, as the options were cancelled or anti-dilutive. Such
computation does not give retroactive effect to the issuance of the New Common
Stock.
1999 1998
Basic and diluted income/(loss) per share:
From continuing operations $(0.18) $(3.74)
From discontinued operations (0.17) (1.05)
From extraordinary gain 2.09 0.00
------- -------
Basic and diluted income/(loss) per share $ 1.74 $(4.79)
====== ======
Weighted average common stock outstanding 11,830 15,171
====== ======
Foreign Currency
The Company had no forward foreign exchange contracts at the end of fiscal 2000
and 1999. In fiscal 1998, the Company entered into forward foreign exchange
contracts, relating to its projected 1999 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 2, 1999, the outstanding
foreign currency contracts had a cost of $4,886 and a year end market value of
$4,851. Subsequent to year-end 1998 and in connection with the restructuring,
the outstanding foreign currency contracts were sold without a material gain or
loss.
Revenue Recognition
Revenue is recognized at the time merchandise is shipped. Retail outlet store
revenues are recognized at the time of sale.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for all fiscal years
beginning after June 15, 1999. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. Under SFAS 133, certain
contracts that were not formerly considered derivatives may now meet the
definition of a derivative. The Company adopted SFAS 133 effective as of
December 31, 2000. Management does not expect the adoption of SFAS 133 to have a
significant impact on the financial position or results of operations of the
Company because the Company does not have significant derivative activity.
Note 3. Restructuring Costs
In the fourth quarter of fiscal 2000, the Company recorded a net reversal of
$629 due to favorable recovery on the sale of its Andalusia, Alabama facility
and the recovery of other assets and settlement of previously recorded
liabilities, partially offset by increased severance costs related to the
closure of the Company's Mexican manufacturing operations. During 2000, the
Company used approximately $908 of its restructuring reserves related to
severance and employee costs of $498, lease payments of $89 and the remaining
balance for other restructuring costs, offset by gains from the sale of fixed
assets of $299. At the end of fiscal 2000, $1,070 remained in the reserve of
which $550 relates to severance and other employee costs, $200 for lease buyouts
and $320 for other restructuring items. Activity in the accrued reserve for
business restructuring for fiscal 2000 is as follows:
Balance Gains from Accrual/ Balance
1/1/00 Uses Sales Reversal 12/30/00
Lease payments and
other property costs $ 600 $ (89) $ 264 $ (575) $ 200
Severance 850 (498) -- 198 550
Other 858 (321) 35 (252) 320
-------- -------- ------ -------- --------
$2,308 $ (908) $ 299 $ (629) $1,070
====== ======= ===== ======= ======
In 1999, the Company recorded a provision for restructuring of $4,039 related
the Company's 1998 decision to focus primarily on its Perry Ellis men's apparel
business. The restructuring charge related primarily to employee costs of $3,898
that could not be accrued in 1998, as the employees were not notified until
1999. In addition, $161 of the charge was related to the write off of store
fixtures and the closing of the Company's operations in Canada. During 1999 the
Company used approximately $5,671 of its restructuring reserves related to
severance and employee costs of $4,080, lease payments of $753 offset by $389 of
gains from the sale of fixed assets, royalties of $452 and the remaining balance
for other restructuring costs. At the end of fiscal 1999, $2,308 remained in the
reserve of which approximately $850 related to severance and other employee
related costs, $600 for lease buy outs and other asset related disposal costs
and $858 for other restructuring items. Activity in the accrued reserve for
business restructuring for fiscal 1999 is as follows:
Balance Balance
1/2/99 Provisions Uses Other 1/1/00
Lease payments and
other property costs $ 845 $ (389) $ (753) $ 508 $ 600
Royalties 592 -- (452) (140) --
Severance 840 3,878 (4,080) 212 850
Other 1,274 161 (386) (191) 858
------ --------- -------- -------- --------
$3,551 $4,039 $(5,671) $ 389 $2,308
====== ====== ======= ====== ======
Assets held for sale at January 1, 2000 related to the facility in Andalusia,
Alabama. Additional costs of $119 were anticipated due to holding the Andalusia
facility and additional employee related expenses of $212 were accrued and were
anticipated for 2000. These additional costs were offset by the favorable
results of settlements of royalties and other restructuring liabilities of $140
and $191, respectively. The Company subsequently sold this facility during
fiscal 2000.
In 1998, the Company recorded a provision for restructuring of $24,825 related
to its decision to focus primarily on its Perry Ellis men's apparel business. As
a result, the Company has substantially exited its other businesses. During
1999, Salant sold its John Henry and Manhattan businesses pursuant to a Purchase
and Sale Agreement dated December 28, 1998 (subject to and subsequently approved
by the Bankruptcy Court on February 26, 1999). These businesses included the
John Henry, Manhattan and Lady Manhattan trade names and the related goodwill,
the leasehold interest in a dress shirt facility located in Valle Hermosa,
Mexico, and equipment located at the Valle Hermosa facility and at Salant's
facility located in Andalusia, Alabama. These assets had a net book value of
$43,184 (consisting of $29,979 for goodwill, $9,680 for licenses and $3,525 for
fixed assets) and were sold for $27,000, resulting in a loss of $16,184. At the
end of fiscal 1998 the net realizable value of $27,000 for these assets was
included in the consolidated balance sheet as assets held for sale. The assets
not sold in this transaction were also included as assets held for sale and were
recorded at their estimated net realizable value of $1,400 at January 2, 1999.
In addition to the $16,184 charge noted above, the 1998 restructuring provision
consisted of (i) $6,305 of additional property, plant and equipment write-downs,
(ii) $2,936 for the write off of other assets, severance costs, lease exit costs
and other restructuring costs and (iii) offset by $600 from the reversal of
previously recorded restructuring reserves primarily resulting from the
settlement of liabilities for less than the carrying amount and the gain on the
sale of a manufacturing and distribution facility.
Note 4. Extraordinary Gain
In the second quarter of 1999, the Company recorded an extraordinary gain of
$24,703 related to the conversion of the Senior Notes and the related unpaid
interest into equity, as described in Note 1.
Pursuant to the Plan, the Noteholders received, in the aggregate, 95% of the
issued and outstanding shares of New Common Stock, subject to dilution, in full
satisfaction of all of the outstanding principal amount ($104,879), plus all
accrued and unpaid interest ($14,824) on the Senior Notes. As a result, pursuant
to the Plan, 9,500,000 shares of the New Common Stock, were distributed to the
holders of the Senior Notes.
Note 5. Inventories
December 30, January 1,
2000 2000
Finished goods $ 27,078 $ 25,385
Work-in-process 11,009 10,208
Raw materials and supplies 7,196 6,076
----------- -----------
$ 45,283 $ 41,669
========= =========
Finished goods inventory includes in transit merchandise of $2,172 and $1,501 at
December 30, 2000 and January 1, 2000, respectively.
Note 6. Property, Plant and Equipment
December 30, January 1,
2000 2000
Land and buildings $ 6,901 $ 6,851
Machinery, equipment, furniture
and fixtures 18,350 16,769
Leasehold improvements 5,484 5,290
----------- -----------
30,735 28,910
Less accumulated depreciation and amortization 17,550 14,725
---------- ----------
$ 13,185 $ 14,185
========= =========
Note 7. Other Assets
December 30, January 1,
2000 2000
Excess of cost over net assets acquired,
net of accumulated amortization of
$4,635 in 2000 and $4,232 in 1999 $ 6,526 $ 6,929
Trademarks and license agreements,
net of accumulated amortization of
$1,457 in 2000 and $1,342 in 1999 3,143 3,258
Other 4,835 4,100
----------- -----------
$ 14,504 $ 14,287
========= =========
In fiscal 1998, the unamortized portion of intangible assets related to the
non-Perry Ellis menswear operations amounting to $39,952 ($29,979 representing
the excess of cost over net assets acquired, $9,680 representing licenses and
$293 representing trademarks) were included in the restructuring charge as
discussed in Note 3.
Note 8. Accrued Salaries, Wages and Other Liabilities
December 30, January 1,
2000 2000
Accrued salaries and wages $ 3,483 $ 4,247
Accrued pension, retirement and benefits 1,391 2,055
Workers Compensation 1,831 2,163
Other accrued liabilities 2,605 3,286
---------- ----------
$ 9,310 $ 11,751
========= ========
Note 9. Financing Agreements
Upon commencement of the 1998 Case, Salant filed a motion seeking the authority
of the Bankruptcy Court to enter into a revolving credit facility with The CIT
Group/Commercial Services, Inc. ("CIT"), Salant's existing working capital
lender pursuant to and in accordance with the terms of the Ratification and
Amendment Agreement, dated as of December 29, 1998 (the "Amendment") which,
together with related documents are referred to as the "CIT DIP Facility,"
effective as of the Filing Date, which would replace the Company's existing
working capital facility under its then existing credit agreement. On December
29, 1998, the Bankruptcy Court approved the CIT DIP Facility on an interim basis
and on January 19, 1999 the Bankruptcy Court approved the CIT DIP Facility on a
final basis.
On May 11, 1999, the effective date, the Company entered into a syndicated
revolving credit facility (the "Credit Agreement") with CIT pursuant to and in
accordance with the terms of a commitment letter dated December 7, 1998 which
replaced the CIT DIP Facility.
The Credit Agreement provides for a general working capital facility, in the
form of direct borrowings and letters of credit, up to $85 million subject to an
asset-based borrowing formula. The Credit Agreement consists of an $85 million
revolving credit facility, with at least a $35 million letter of credit
subfacility. As collateral for borrowings under the Credit Agreement, the
Company granted to CIT and a syndicate of lenders arranged by CIT (the
"Lenders") a first priority lien on and security interest in substantially all
of the assets of the Company. The Credit Agreement has an initial term of three
years.
The Credit Agreement also provides, among other things, that (i) the Company
will be charged an interest rate on direct borrowings of .25% in excess of the
Reference Rate or 2.25% in excess of LIBOR (as defined in the Credit Agreement),
and (ii) the Lenders may, in their sole discretion, make loans to the Company in
excess of the borrowing formula but within the $85 million limit of the
revolving credit facility. The Company is required under the agreement to
maintain certain financial covenants relating to consolidated tangible net
worth, capital expenditures, maximum pre-tax losses/minimum pre-tax income and
minimum interest coverage ratios. The Company was in compliance with all
applicable covenants at December 30, 2000.
Pursuant to the Credit Agreement, the Company paid or will pay the following
fees: (i) a documentary letter of credit fee of 1/8 of 1.0% on issuance and 1/8
of 1.0% on negotiation; (ii) a standby letter of credit fee of 1.0% per annum
plus bank charges; (iii) a commitment fee of $325 thousand; (iv) an unused line
fee of .25%; (v) an agency fee of $100 thousand (only for the second and third
years of the term of the Credit Agreement); (vi) a collateral management fee of
$8,333 per month; and (vii) a field exam fee of $750 per day plus out-of-pocket
expenses
On December 30, 2000, there were no direct borrowings outstanding under the
Credit Agreement. Letters of credit outstanding were $30,036 and the Company had
unused availability, based on outstanding letters of credit and existing
collateral, of $21,716. In addition to the unused availability, the Company had
$34,683 of cash available to fund its operations. On January 1, 2000, there were
no direct borrowings and letters of credit outstanding under the Credit
Agreement were $30,093 and the Company had unused availability of $16,497. In
addition to the unused availability, the Company had $30,116 of cash available
to fund its operations. The weighted average interest rate on borrowings under
the Credit Agreement for the years ended December 30, 2000 and January 1, 2000
was 9.4% and 8.7%, 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, the Company issued $111,851 principal amount of Senior
Notes. The Senior Notes could 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 Notes were due on December 31,
1998 and as of January 2, 1999, $104,879 of principal and $14,703 in interest
was outstanding and included in liabilities subject to compromise. In fiscal
1999 pursuant to the Plan, the Company converted the Senior Notes and the
outstanding interest into equity. (See additional discussion in Note 1. -
Financial Reorganization)
On April 22, 1998, the Company filed a registration statement on Form S-4 in
order to facilitate the debt restructuring of the Senior Notes due December 31,
1998. Thereafter, Salant filed amendments to the registration statement on May
10, 1998, May 26, 1998 and August 31, 1998. In consideration of, among other
things, the significant additional time required to consummate such transactions
and the occurrence of certain events (including, but not limited to, a reduction
in the value