UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-6666
SALANT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3402444
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1114 Avenue of the Americas, New York, New York 10036
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 221-7500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
As of July 31, 2002 there were outstanding 8,782,198 shares of the Common Stock
of the registrant.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Statements of Comprehensive Income/(Loss) 4
Condensed Consolidated Balance Sheets 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Events 22
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURE 24
Salant Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
Net sales $ 49,648 $ 44,028 $109,923 $ 93,476
Cost of goods sold 35,378 32,384 79,572 71,319
Gross profit 14,270 11,644 30,351 22,157
Selling, general and
administrative expenses (13,242) (11,276) (28,646) (24,293)
Royalty income 125 77 166 80
Amortization of intangibles (280) (157) (559) (313)
Other income/(expense) 201 (14) 204 (28)
Income/(loss) before interest and
income taxes 1,074 274 1,516 (2,397)
Interest income, net 76 33 100 267
Income/(loss) before income taxes 1,150 307 1,616 (2,130)
Income taxes benefit 50 -- 47 37
Net income/(loss) $ 1,200 $ 307 $ 1,663 $ (2,093)
Basic and diluted income/(loss)
per share $ 0.12 $ 0.03 $ 0.17 $ (0.21)
Weighted average common
stock outstanding - Basic 9,901 9,901 9,901 9,901
Weighted average common
stock outstanding - Diluted 9,990 9,901 9,968 9,901
See Notes to Condensed Consolidated Financial Statements.
Salant Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
(Amounts in thousands)
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
Net income/(loss) $1,200 $ 307 $1,663 $(2,093)
Other comprehensive income/(loss), net of tax:
Foreign currency translation adjustments (9) 2 (7) 2
Comprehensive income/(loss) $1,191 $ 309 $1,656 $(2,091)
See Notes to Condensed Consolidated Financial Statements.
Salant Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
June 29, December 29, June 30,
2002 2001 2001
(Unaudited) (*) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 31,178 $ 19,820 $ 9,227
Accounts receivable, net 15,565 28,544 19,792
Inventories (Note 3) 35,719 34,735 53,814
Prepaid expenses and other current assets 2,294 3,658 2,874
Total current assets 84,756 86,757 85,707
Property, plant and equipment, net 12,098 12,179 12,933
Intangible assets (Notes 2 and 4) 22,991 11,217 11,516
Other assets 7,439 7,579 7,200
Total assets $ 127,284 $ 117,732 $ 117,356
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,148 $ 10,576 $ 9,347
Accrued liabilities 6,915 6,619 6,812
Net liabilities of discontinued
operations (Note 7) 481 493 743
Reserve for business restructuring (Note 6) 567 584 862
Total current liabilities 26,111 18,272 17,764
Deferred liabilities 4,434 4,377 4,310
Shareholders' equity:
Common stock 10,000 10,000 10,000
Additional paid-in capital 206,040 206,040 206,040
Deficit (114,230) (115,893) (116,110)
Accumulated other comprehensive loss (Note 5) (4,873) (4,866) (4,450)
Less - treasury stock, at cost (198) (198) (198)
Total shareholders' equity 96,739 95,083 95,282
Total liabilities and shareholders' equity $ 127,284 $ 117,732 $ 117,356
(*) Derived from the audited financial statements.
See Notes to Condensed Consolidated Financial Statements.
Salant Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Six Months Ended
June 29, June 30,
2002 2001
Cash Flows from Operating Activities:
Net income/(loss) $ 1,663 $ (2,093)
Adjustments to reconcile income/(loss)from continuing
operations to net cash provided/(used) by
operating activities:
Depreciation 2,335 2,249
Amortization 559 313
Change in operating assets and liabilities (net of businesses acquired):
Accounts receivable 12,979 (3,204)
Inventories (423) (6,584)
Prepaid expenses and other assets 1,603 (867)
Accounts payable 7,572 (5,451)
Accrued and other liabilities 310 (3,893)
Reserve for business restructuring (17) (208)
Net cash provided/(used) by continuing operations 26,581 (19,738)
Cash used by discontinued operations (12) (1)
Net cash provided/(used) by operating activities 26,569 (19,739)
Cash Flows from Investing Activities:
Capital expenditures (1,531) (1,359)
Store fixture expenditures (489) (321)
Acquisition of a business (13,184) --
Asset purchase -- (4,039)
Net cash used by investing activities (15,204) (5,719)
Cash Flows from Financing Activities:
Other, net (7) 2
Net cash (used)/provided by financing activities (7) 2
Net increase/(decrease) in cash and cash equivalents 11,358 (25,456)
Cash and cash equivalents - beginning of year 19,820 34,683
Cash and cash equivalents - end of quarter $ 31,178 $ 9,227
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 46 $ 13
Income taxes $ 5 $ 64
Guaranteed future purchase price payment $ -- $ 250
See Notes to Condensed Consolidated Financial Statements.
SALANT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Amounts in Thousands of Dollars, Except Share Data)
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying unaudited Condensed Consolidated Financial Statements include
the accounts of Salant Corporation and its subsidiaries (collectively, the
"Company" or "Salant").
The Company's principal business is the designing, sourcing, importing and
marketing of men's apparel and accessories. The Company sells its products to
retailers, including department stores, specialty stores and off-price
retailers, in addition to its own retail outlet stores.
The results of the Company's operations for the six months ended June 29, 2002
and June 30, 2001 are not necessarily indicative of a full year's operations. In
the opinion of management, the accompanying financial statements include all
adjustments of a normal recurring nature, which are necessary to present fairly
such financial statements. Certain reclassifications were made to the prior
period financial statements to conform to the 2002 presentation. Significant
intercompany balances and transactions have been eliminated in consolidation.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's annual report on form 10-K for the
fiscal year ended December 29, 2001.
New Accounting Standards
Effective December 30, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
which addresses the financial accounting and reporting standards for the
acquisition of intangible assets outside of a business combination and for
goodwill and other intangible assets subsequent to their acquisition. This
accounting standard requires that goodwill be separately disclosed from other
intangible assets in the statement of financial position and no longer be
amortized, but tested for impairment on a periodic basis. The provisions of this
accounting standard also require the completion of a transitional impairment
test within six months of adoption, with any impairments identified treated as a
cumulative effect of a change in accounting principle. The Company did not
recognize any impairment after completion of the transitional impairment test.
In accordance with SFAS No. 142, the Company discontinued the amortization of
goodwill effective December 30, 2001. Previously reported net loss/income for
the quarter and six months ended June 30, 2001 would have improved by $27 and
$54 respectively had amortization of goodwill been discontinued at the beginning
of fiscal 2001.
In October 2001, the Financial Accounting Standards Board issued ("FASB") SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses the financial accounting and reporting for the impairment or disposal
of long-lived assets. This statement supercedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" and
was effective for the first quarter in the fiscal year ending December 28, 2002.
The adoption of this Statement did not have an impact on the consolidated
financial statements.
In April 2002, the FASB issued SFAS No.145, "Recession of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections". In
addition to amending and rescinding other existing authoritative pronouncements
to make various technical corrections, clarify meanings, or describe their
applicability under changed conditions, SFAS No. 145 precludes companies from
recording gains and losses from the extinguishment of debt as an extraordinary
item. SFAS No. 145 is effective for the first quarter in the fiscal year ending
January 3, 2004. The Company does not expect the adoption of this pronouncement
to have a material effect on the consolidated results of operations or financial
position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. The Company does not expect the adoption of this pronouncement to have
a material effect on the consolidated results of operations or financial
position.
Note 2. Acquisition of a Business
On January 4, 2002, Salant, through its wholly owned subsidiary, Salant Holding
Corporation ("SHC"), acquired from Axis Clothing Corporation ("Axis"), certain
of its assets pursuant to an Asset Purchase Agreement dated October 15, 2001
between SHC, Axis and Richard Solomon ("Solomon") an individual. The assets
acquired from Axis consisted of, among other things, trademarks, inventory,
contract rights, fixed assets and certain office equipment primarily located in
California (collectively, the "Axis Assets"). As a result of the acquisition,
Salant further diversified its channels of distribution beyond traditional
department stores. The results of Axis' operations are included in the statement
of operations from the acquisition date.
The Company did not assume any accounts payable, accrued liabilities or debt,
however it did assume several leases and contracts. In conjunction with the
Asset Purchase Agreement, a three-year employment contract was signed between
Solomon and SHC, along with SHC signing an agreement to lease office space (at
current market rates) from Solomon. The Company has obtained third-party
valuations of certain intangible assets. Of the total intangibles acquired,
$9,700 has been allocated to trademarks and $2,333 has been allocated to
goodwill. Neither the trademarks nor goodwill will be subject to amortization,
but will be tested for impairment on a periodic basis. The remaining $300 of
miscellaneous intangibles have been amortized over the first six months of 2002.
The following table summarizes the estimated fair values of the assets acquired
at the date of acquisition:
Current assets $ 751
Property, plant, and equipment 100
Intangible assets 300
Trademarks 9,700
Goodwill 2,333
Total assets acquired $13,184
The aggregate purchase price for the Axis Assets was approximately $12,448, plus
estimated direct acquisition costs of $736. Of the total purchase price, $10,648
was paid at closing and $1,800 has been placed in escrow and is payable in equal
payments over the next 2 years. The purchase price was based upon arms-length
negotiations considering (i) the value of the Axis brand, (ii) the quality of
the Axis Assets and (iii) the estimated cash flow from the Axis Assets. The
principal source of funds for the acquisition of the Axis Assets was from
working capital.
The following unaudited consolidated pro forma results of operations of the
Company for the three months and six months ended June 30, 2001 give effect to
the acquisition as if it occurred on January 2, 2001:
Three Months Six Months
Ended Ended
June 30, June 30,
2001 2001
(Unaudited) (Unaudited)
Net Sales $ 51,940 $112,346
Net Income $ 721 $ 36
Basic and Diluted Income per Share $ 0.07 $ 0.00
The unaudited pro forma information above has been prepared for comparative
purposes only and includes certain adjustments to the Company's historical
statements of income, such as the recording of goodwill and increased interest
expense, or reduction of interest income, due to the cost of the acquisition.
The results do not purport to be indicative of the results of operations that
would have resulted had the acquisition occurred at the beginning of the period
or of future results of operations of the consolidated entities.
Note 3. Inventories
June 29, December 29, June 30,
2002 2001 2001
Finished goods $ 23,276 $ 23,188 $ 42,105
Work-in-Process 10,323 9,310 7,943
Raw materials and supplies 4,118 4,047 6,938
Total inventories 37,717 36,545 56,986
Inventory markdown reserves (1,998) (1,810) (3,172)
Net inventories $ 35,719 $ 34,735 $ 53,814
Note 4. Intangible Assets
In accordance with SFAS No. 142, the Company discontinued the amortization of
goodwill effective December 30, 2001. During the first half of 2002, the Company
recorded amortization expense for identified intangible assets with finite lives
of $559 and estimated amortization expense for fiscal years 2003 through 2007
will be approximately $650 per year. The intangible assets (unamortized and
amortized) are associated with the wholesale segment of the Company and are as
follows:
June 29, 2002 December 29, 2001
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
Amortizable Intangible Assets
Licenses $11,161 $(5,241) $ 5,920 $11,161 $(5,039) $ 6,122
Trademarks 4,600 (1,629) 2,971 4,600 (1,572) 3,028
Other 300 (300) -- -- -- --
Total $16,061 $(7,170) $ 8,891 $15,761 $(6,611) $ 9,150
Unamortizable Intangible Assets
Goodwill $ 2,333 $ -- $ 2,333 $ --$ -- $ --
Trademarks 11,875 (108) 11,767 2,175 (108) 2,067
Total $14,208 $ (108) $14,100 $ 2,175 $ (108) $ 2,067
Total Intangible Assets $30,269 $(7,278) $22,991 $17,936 $(6,719) $11,217
Note 5. Accumulated Other Comprehensive Income/(Loss)
Foreign Minimum Accumulated
Currency Pension Other
Translation Liability Comprehensive
Adjustment Adjustment Income/(Loss)
2002
Beginning of year balance $ (113) $ (4,753) $ (4,866)
Six months ended
June 29, 2002 change (7) -- (7)
End of quarter balance $ (120) $ (4,753) $ (4,873)
2001
Beginning of year balance $ (118) $ (4,334) $ (4,452)
Six months ended
June 30, 2001 change 2 -- 2
End of quarter balance $ (116) $ (4,334) $ (4,450)
Note 6. Restructuring Reserve
In the first half of 2002, the Company used $17 of the restructuring reserve
primarily for employee costs necessary to complete the shut down of Mexican
operations. As of June 29, 2002, the reserve balance was $567 of which $475 was
reserved for severance and other employee costs and $92 was reserved for various
other restructuring costs.
Note 7. Discontinued Operations
In the first half of 2002, the net liabilities of discontinued operations
decreased by $12, due to the reduction of the reserve for miscellaneous legal
fees. As of June 29, 2002, the net liabilities of discontinued operations
consist of $450 of reserve for discontinued operations and $31 of miscellaneous
liabilities. The reserve for discontinued operations consists of $390 for
severance and other employee costs, and $60 of other restructuring costs.
Note 8. Segment Reporting
The Company operates in two business segments, wholesale and retail. The
wholesale apparel segment consists of businesses that design, source, import and
market men's apparel and accessories under various trademarks owned or licensed
by the Company, or by its customers. The retail segment consists of a chain of
retail outlet stores, through which it sells products made under the Perry Ellis
trademarks by the Company and other Perry Ellis licensees. As of June 29, 2002,
the Company operated 39 Perry Ellis retail outlet stores.
The Company's total assets as of June 29, 2002, June 30, 2001 and December 29,
2001 and the results of operations for the six months, and the quarters ending
June 29, 2002 and June 30, 2001, by segment, were as follows:
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
Net Sales
Wholesale $ 42,881 $ 38,048 $ 97,802 $ 82,953
Retail 6,767 5,980 12,121 10,523
$ 49,648 $ 44,028 $ 109,923 $ 93,476
Gross Profit
Wholesale $ 11,249 $ 8,994 $ 24,989 $ 17,514
Retail 3,021 2,650 5,362 4,643
$ 14,270 $ 11,644 $ 30,351 $ 22,157
Income/(loss) before Interest
and Taxes
Wholesale $ 1,202 $ 479 $ 2,553 $ (1,339)
Retail (128) (205) (1,037) (1,058)
$ 1,074 $ 274 $ 1,516 $ (2,397)
June 29, June 30, December 29,
2002 2001 2001
Total Assets
Wholesale $ 118,744 $ 106,997 $ 108,547
Retail 8,540 10,359 9,185
$ 127,284 $ 117,356 $117,732
Note 9. Subsequent Events
On July 15, 2002, the Company purchased 1,118,942 shares of its common stock,
par value $1.00 per share, at a price of two and a half dollars ($2.50) per
share, for an aggregate purchase price of $2,797. The shares will be held as
treasury stock of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Results of Operations
Overview
In January of 2001, the Company acquired the assets of Tricots St. Raphael, Inc.
("Tricots"). In January of 2002, the Company made another acquisition with the
purchase of the assets of Axis Clothing Corporation ("Axis"). Tricots and Axis
are both highly respected better menswear brands distributed primarily through
better men's department and specialty stores in the U.S. These acquisitions were
an important step in the plan to diversify the Company's distribution channels.
The Company's licensed product offerings under the PERRY ELLIS trademarks
continue to be the core of the Company's business. Perry Ellis products compete
in the highly competitive department store arena of retail. The Company also
entered into a licensee agreement in 2001 to develop the Ocean Pacific menswear
label and the Company began shipping in January 2002. During 2002, the Company
entered into a license agreement to develop the JNCO young men's sportswear
label and shipping began in the second quarter of 2002.
In 2001, the Company started a private brands division to focus on the
development of additional channels of distribution for men's apparel products
and in January 2002, the Company made its first delivery.
Second Quarter of 2002 Compared with Second Quarter of 2001
Net Sales
Net sales increased $5.6 million, or 12.8%, in the second quarter of 2002, as
compared to the second quarter of 2001. This increase was the result of net
sales generated by newly acquired and licensed wholesale businesses. Net sales
for the wholesale segment increased $4.8 million, or 12.7%, in the second
quarter of 2002, as compared to the second quarter of 2001. Existing wholesale
businesses decreased $4.9 million in the second quarter of 2002, primarily due
to a reduction of excess and prior season inventory sales. Newly acquired and
licensed wholesale businesses accounted for an increase of $9.7 million for the
second quarter of 2002. Net sales for the Perry Ellis retail outlet stores
("retail segment") increased $0.8 million, or 13.2%, in the second quarter of
2002, as compared to the second quarter of 2001. The primary reason for this
increase was additional Perry Ellis retail outlet stores opened between June 30,
2001 and June 29, 2002.
Gross Profit
The gross profit percentage in the second quarter of 2002 increased to 28.7%
from 26.4% in the second quarter of 2001. Total wholesale gross profit increased
$2.3 million from the second quarter of 2001, and the gross profit percentage
for the wholesale segment increased to 26.2% in the second quarter of 2002 from
23.6% in the second quarter of 2001. The increase was primarily the result of
lower sales returns and allowances from customers and a decrease in prior-season
inventory disposition losses. Total gross profit for the retail segment
increased, due to additional stores, by $0.4 million in the second quarter of
2002, from the second quarter of 2001. The retail segment gross profit
percentage remained relatively constant at 44.6% for the second quarter of 2002,
as compared to the second quarter of 2001 at 44.3%.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses in the first quarter of
2002 increased to $13.2 million (26.7% of sales) from $11.3 million (25.6% of
sales) as compared to the second quarter of 2001. The increase in total SG&A was
the result of additional expenses related to newly acquired and licensed
businesses along with additional retail outlet stores.
Income/Loss Before Interest and Income Taxes
Income before interest and income taxes was $1.1 million for the second quarter
of 2002 as compared to income of $0.3 million for the second quarter of 2001.
The increase was primarily the result of higher net sales and improved gross
margins contributed by the new businesses. The retail segment's loss from
operations before interest and income taxes decreased to $0.1 million in the
second quarter of 2002 from a loss of $0.2 million in the second quarter of
2001.
Interest Income, Net
Net interest income was $76 thousand for the second quarter of 2002 as compared
to $33 thousand for the second quarter of 2001. The increase was the result of
higher invested cash balances during the quarter due to lower inventory levels
and higher receivable collections.
Net Income
In the second quarter of 2002, the Company reported net income of $1.2 million,
or $.12 per share, as compared to income of $0.3 million, or $.03 per share in
the second quarter of 2001.
Earnings Before Interest, Taxes, Depreciation and Amortization
Earnings before interest, taxes, depreciation and amortization charges were $2.6
million (5.1% of sales) for the second quarter of 2002, compared to $1.6 million
(3.5% of net sales) in the second quarter of 2001. The Company believes this
information is helpful in understanding cash flow from operations that is
available for potential acquisitions and capital expenditures. This measure is
not contained in Generally Accepted Accounting Principles and is not a
substitute for operating income, net income or net cash flows from operations.
Year to Date 2002 Compared with Year to Date 2001
Net Sales
Net sales increased $16.4 million, or 17.6%, in the first half of 2002, as
compared to the first half of 2001. This increase was the result of net sales
generated by newly acquired and licensed wholesale businesses. Net sales for the
wholesale segment increased $14.8 million, or 17.9%, in the first six months of
2002, as compared to the first six months of 2001. Existing wholesale businesses
decreased $12.5 million in the first half of 2002, primarily due to a reduction
of sales because of lower levels of excess and prior season inventory. Newly
acquired and licensed wholesale businesses accounted for an increase of $27.3
million for the first six months of 2002. Net sales for the retail segment
increased $1.6 million, or 15.2%, in the first half of 2002, as compared to the
first half of 2001. The primary reason for this increase was the additional
Perry Ellis retail stores opened between June 29, 2001 and June 29, 2002.
Gross Profit
The gross profit percentage in the first half of 2002 increased to 27.6% from
23.7% in the first half of 2001. Total wholesale gross profit increased $7.5
million from the first six months of 2001, and the gross profit percentage for
the wholesale segment increased to 25.6% in the first half of 2002 from 21.1% in
the first half of 2001. The increase was primarily the result of lower sales
returns and allowances and a decrease in prior-season inventory disposition
losses. Total gross profit for the retail segment increased, due to additional
stores, by $0.7 million in the first six months of 2002, from the first six
months of 2001. The retail segment gross profit percentage remained relatively
constant at 44.2% for the first half of 2002, as compared to the first half of
2001 at 44.1%.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses in the first six months of
2002 increased to $28.6 million (26.1% of sales) from $24.3 million (26.0% of
sales) as compared to the first six months of 2001. The increase in total SG&A
was the result of additional expenses related to new businesses and additional
retail outlet stores.
Income/Loss Before Interest and Income Taxes
Income before interest and income taxes was $1.5 million for the first six
months of 2002 as compared to a loss of $2.4 million for the first half of 2001.
The increase was primarily the result of higher net sales and improved gross
margins contributed by the new businesses. The retail segment's loss from
operations before interest and income taxes was $1.0 million in the first half
of 2002 as compared to a loss of $1.1 million in the first half of 2001.
Interest Income, Net
Net interest income was $100 thousand for the first half of 2002 as compared to
$267 thousand for the first half of 2001. The decrease was the result of lower
average invested cash balances due to the acquisition of the Axis Assets and a
lower interest rate in the first six months of 2002. This was partially offset
by higher cash balances due to lower inventory levels and higher receivable
collections.
Net Income/Loss
In the first half of 2002, the Company reported net income of $1.7 million, or
$.17 per share, as compared to the net loss of $2.1 million, or $.21 per share
in the first half of 2001.
Earnings Before Interest, Taxes, Depreciation and Amortization
Earnings before interest, taxes, depreciation and amortization charges were $4.4
million (4.0% of sales) for the first six months of 2002, compared to $0.2
million (0.2% of net sales) in the first half of 2001. The Company believes this
information is helpful in understanding cash flow from operations that is
available for potential acquisitions and capital expenditures. This measure is
not contained in Generally Accepted Accounting Principles and is not a
substitute for operating income, net income or net cash flows from operations.
Liquidity and Capital Resources
On May 11, 1999, the Company entered into a syndicated revolving credit
facility, (the "Credit Agreement"), as amended and restated on November 30,
2001, with The CIT Group/Commercial Services, Inc. ("CIT"). Effective May 11,
2002, the Company signed an amendment with CIT to extend the Credit Agreement
for an additional three years.
The Credit Agreement provides for a general working capital facility, in the
form of direct borrowings and letters of credit, up to $85 million subject to an
asset-based borrowing formula. The Credit Agreement consists of an $85 million
revolving credit facility, with at least a $45 million letter of credit
sub-facility. As collateral for borrowings under the Credit Agreement, the
Company granted to CIT a first priority lien on and security interest in
substantially all of the assets of the Company.
The Credit Agreement also provides, among other things, that (i) the Company
will be charged an interest rate on direct borrowings of the Prime Rate or at
the Company's request, 2.25% in excess of LIBOR (as defined in the Credit
Agreement), and (ii) the Lenders may, in their sole discretion, make loans to
the Company in excess of the borrowing formula but within the $85 million limit
of the revolving credit facility. The Company is required under the agreement to
maintain certain financial covenants, including but not limited to, consolidated
tangible net worth, capital expenditures, minimum pre-tax income, minimum
interest coverage ratio and an annual provision to reduce cash borrowings to
zero for 30 consecutive days. The Company was in compliance with all applicable
covenants at June 29, 2002.
At June 29, 2002, there were no direct borrowings outstanding; letters of credit
outstanding under the Credit Agreement were $37.8 million and the Company had
unused availability, based on outstanding letters of credit and existing
collateral, of $9.7 million and cash of approximately $31.2 million available to
fund its operations. At the end of the second quarter of 2001, there were no
direct borrowings outstanding; letters of credit outstanding were $23.1 million,
and the Company had unused availability of $21.5 million and cash of
approximately $9.2 million available to fund its operations.
June 29, June 30,
2002 2001
Maximum Availability under Credit Agreement $47.5 $44.6
Borrowings under Credit Agreement -- --
Outstanding Letters of Credit 37.8 23.1
Current Availability under Credit Agreement $ 9.7 $21.5
Cash on Hand 31.2 9.2
Available to fund operations $40.9 $30.7
The Company's cash provided by operating activities for the first six months of
2002 was $26.6 million, which primarily reflects (i) a decrease in net accounts
receivable of $13.0 million, (ii) an increase in net inventories of $0.4
million, (iii) a decrease in prepaid and other assets of $1.6 million, (iv) an
increase in accounts payable of $7.6 million, (v) an increase in accrued
liabilities and reserve for business restructuring of $0.3 million, and (vi) net
income from continuing operations of $1.7 million. In addition, non-cash charges
for depreciation and amortization totaled $2.9 million.
Cash used by investing activities for the first six months of 2002 was $15.2
million, which reflects $13.2 million used to purchase certain assets of Axis
Clothing Corporation, $1.5 million for capital expenditures and $0.5 million for
store fixtures. During fiscal 2002, the Company plans to make capital
expenditures of approximately $5.1 million and to spend $1.0 million for the
installation of fixtures in department stores.
Working Capital
At June 29, 2002, working capital totaled $58.6 million as compared to $67.9
million at the end of the second quarter of 2001 and the current ratio was 3.2:1
as compared to 4.8:1 in the second quarter of 2001. The primary decrease in
working capital was due to the purchase of the Axis assets. The components of
working capital also changed significantly on June 29, 2002 as compared to June
29, 2001. Cash increased by $22.0 million and current liabilities increased by
$8.3 million, which were offset by a decrease in inventory, and the purchase of
the Axis Assets. The decrease in inventory is due to increased inventory
turnover. Liabilities increased $8.3 million at the end of the second quarter of
2002 as compared to the second quarter of 2001 due to the timing of inventory
purchases and receipts. Accounts receivable decreased by $4.2 million due to
timing of sales within the quarter.
Factors that May Affect Future Results and Financial Condition.
This report contains or incorporates by reference forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Where any such forward-looking statement includes a statement of the assumptions
or bases underlying such forward-looking statement, the Company cautions that
assumed facts or bases almost always vary from the actual results, and the
differences between assumed facts or bases and actual results can be material,
depending on the circumstances. Where, in any forward-looking statement, the
Company or its management expresses an expectation or belief as to future
results, there can be no assurance that the statement of the expectation or
belief will result or be achieved or accomplished. The words "believe",
"expect", "estimate", "project", "seek", "anticipate" and similar expressions
may identify forward-looking statements. The Company's future operating results
and financial condition are dependent upon the Company's ability to successfully
design, source, import and market its products.
Because of the following factors, as well as other factors affecting the
Company's operating results and financial condition, past financial performance
should not be considered to be a reliable indicator of future performance, and
investors are cautioned not to use historical trends to anticipate results or
trends in the future. In addition, the Company's participation in the highly
competitive apparel industry often results in significant volatility in the
Company's common stock price. The following are identified as important factors
that could cause results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company:
Competition. The apparel industry in the United States is highly competitive and
characterized by a relatively small number of multi-line manufacturers (such as
the Company) and a large number of specialty manufacturers. The Company faces
substantial competition in its markets from manufacturers in both categories.
Many of the Company's competitors have greater financial resources than the
Company. The Company also competes for private label programs with the internal
sourcing organizations of many of its own customers.
Trademarks Licensed to the Company. Approximately two-thirds of the Company's
net sales are attributable to trademarked products sold under license by the
Company. The principal trademarks licensed to the Company are PERRY ELLIS,
PORTFOLIO BY PERRY ELLIS, OCEAN PACIFIC and JNCO. The licenses contain
provisions related to, among other things, products which may be sold,
territories where products may be sold, restrictions on sales to certain levels
of distribution, minimum sales and royalty requirements, advertising and
promotion requirements, sales reporting, design and product standards, renewal
options, assignment and change of control provisions, defaults, cures and
termination provisions. The change of control provisions and their potential
effect vary with each licensing agreement (see Item 5. Other Events). Assuming
the exercise of all renewal options by the Company, The Perry Ellis licenses
will expire on December 31, 2015, the Ocean Pacific license will expire on
December 31, 2008 and the JNCO license will expire on December 31, 2011. Should
any of the Company's material licenses be terminated, outside the normal course
of business, there can be no assurance that the Company's financial condition
and results of operations would not be adversely affected.
Strategic Initiatives. In the first quarter of 2002, the Company acquired
certain assets and trademarks of Axis which designs, produces, and markets
better men's sportswear. In the first quarter of 2001, the Company purchased
certain assets and trademarks of Tricots St. Raphael, Inc. which designs,
produces, and markets better men's sweaters and sportswear. The Company also
entered into a licensee agreement in 2001 to develop the Ocean Pacific menswear
label and the Company began shipping in January 2002. During 2002, the Company
entered into a license agreement to develop the JNCO young men's sportswear
label and shipping began in the second quarter of 2002. In 2001, the Company
started a private brands division to focus on the development of additional
channels of distribution for men's apparel products and in January 2002, the
Company delivered its first shipments. As a result of these acquisitions and
licenses, Salant has diversified its operations by expanding into alternate
channels of distribution. Management of the Company is continuing to explore
various strategic opportunities, including but not limited to, new licensing
opportunities and/or acquisitions. Management is also exploring ways to increase
productivity and efficiency, and to reduce the cost structures of its respective
businesses. Through this process management expects to expand its distribution
channels and achieve effective economies of scale. No assurance may be given
that any transactions resulting from this process will be announced or
completed.
Apparel Industry Cycles and other Economic Factors. Historically, the apparel
industry has been subject to substantial cyclical variation, with consumer
spending on apparel tending to decline during recessionary periods. A decline in
the general economy or uncertainties regarding future economic prospects may
affect consumer-spending habits, which, in turn, could have a material adverse
effect on the Company's results of operations and financial condition.
Retail Environment. Various retailers, including some of the Company's
customers, have experienced declines in revenue and profits in recent periods.
To the extent that these difficult financial conditions continue at retail,
there can be no assurance that the Company's financial condition and results of
operations would not be adversely affected.
Seasonality of Business and Fashion Risk. The Company's principal products are
organized into seasonal lines for resale at the retail level during the Spring,
Transition, Fall and Holiday Seasons. Typically, the Company's products are
designed as much as one year in advance and manufactured approximately one
season in advance of the related retail selling season. Accordingly, the success
of the Company's products is often dependent on the ability of the Company to
successfully anticipate the needs of the Company's retail customers and the
tastes of the ultimate consumer up to a year prior to the relevant selling
season.
Foreign Operations. The Company's foreign sourcing operations are subject to
various risks of doing business abroad, including currency fluctuations
(although the predominant currency used is the U.S. dollar), quotas, and in
certain parts of the world, political instability. Any substantial disruption of
its relationship with its foreign suppliers could adversely affect the Company's
operations. Some of the Company's imported merchandise is subject to United
States Customs duties. In addition, bilateral agreements between the major
exporting countries and the United States impose quotas, which limit the amount
of certain categories of merchandise that may be imported into the United
States. Any material increase in duty levels, material decrease in quota levels
or material decrease in available quota allocation could adversely affect the
Company's operations. The Company's operations in Asia are subject to certain
political and economic risks including, but not limited to, political
instability, changing tax and trade regulations and currency devaluations and
controls. Although the Company has experienced no material foreign currency
transaction losses, its operations in the region are subject to an increased
level of economic instability. The impact of these events on the Company's
business, and in particular its sources of supply, could have a material adverse
effect on the Company's performance.
Dependence on Contract Manufacturing. The Company produces substantially all of
its products (in units) through arrangements with independent contract
manufacturers. The use of such contractors and the resulting lack of direct
control could subject the Company to difficulty in obtaining timely delivery of
products of acceptable quality. In addition, as is customary in the industry,
the Company does not have any long-term contracts with its fabric suppliers or
product manufacturers. While the Company is not dependent on one particular
product manufacturer or raw material supplier, the loss of several such product
manufacturers and/or raw material suppliers in a given season could have a
material adverse effect on the Company's performance.
New Accounting Pronouncements. Effective December 30, 2001, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets," which addresses the financial accounting and reporting
standards for the acquisition of intangible assets outside of a business
combination and for goodwill and other intangible assets subsequent to their
acquisition. This accounting standard requires that goodwill be separately
disclosed from other intangible assets in the statement of financial position
and no longer be amortized, but tested for impairment on a periodic basis. The
provisions of this accounting standard also require the completion of a
transitional impairment test within six months of adoption, with any impairments
identified treated as a cumulative effect of a change in accounting principle.
The Company did not recognize any impairment after completion of the
transitional impairment test.
In accordance with SFAS No. 142, the Company discontinued the amortization of
goodwill effective December 30, 2001. Previously reported net income for the
quarter and six months ended June 30, 2001 would have increased by $27 and $54
respectively due to the amounts adjusted for the exclusion of goodwill
amortization.
In October 2001, the Financial Accounting Standards Board issued ("FASB") SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses the financial accounting and reporting for the impairment or disposal
of long-lived assets. This statement supercedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" and
was effective for the first quarter in the fiscal year ending December 28, 2002.
The adoption of this Statement did not have an impact on the consolidated
financial statements.
In April 2002, the FASB issued SFAS No.145, "Recession of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections". In
addition to amending and rescinding other existing authoritative pronouncements
to make various technical corrections, clarify meanings, or describe their
applicability under changed conditions, SFAS No. 145 precludes companies from
recording gains and losses from the extinguishment of debt as an extraordinary
item. SFAS No. 145 is effective for the first quarter in the fiscal year ending
January 3, 2004. The Company does not expect the adoption of this pronouncement
to have a material effect on the consolidated results of operations or financial
position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. The Company does not expect the adoption of this pronouncement to have
a material effect on the consolidated results of operations or financial
position.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Company's Annual Meeting of Stockholders (the "Annual Meeting") was held
on June 21, 2002.
b) At the Annual Meeting, the Company's stockholders elected the following two
Class Three directors to serve until the Annual Meeting of Stockholders to be
held in 2005: Rose Peabody Lynch (Number of shares for: 4,760,940, Number of
shares withheld: 2,546,256) and Michael J. Setola (Number of shares for:
4,760,973, Number of shares withheld: 2,546,223). The remaining members of the
Board of Directors and their respective terms of offices are as follows: Class
One director, Talton R. Embry, whose term expires at the Annual Meeting to be
held in 2003 and Class Two directors, G. Raymond Empson and Ben Evans, whose
terms expire at the Annual Meeting to be held in 2004.
c) At the Annual Meeting, the Company's stockholders also voted upon and
approved the ratification of the appointment of Deloitte & Touche LLP as the
Company's independent auditors for the 2002, 2003 and 2004 fiscal years (Number
of shares for: 4,711,012, Number of shares against: 51,094, Number of shares
abstained: 2,545,090, Number of broker non-votes: 0).
ITEM 5. OTHER EVENTS
On May 16, 2002, the Company's Board of Directors declared a dividend
distribution of one preferred share purchase right (a "Right") for each
outstanding share of the Company's common stock, par value $1.00 per share (the
"Shares"). Each Right, subject to certain exceptions, when it becomes
exercisable, entitles the registered holder to purchase from the Company one
one-thousandth of a share of Series A Junior Participating Preferred Stock,
$2.00 par value (the "Preferred Shares"), of the Company at a price of $15.00
per one one-thousandth of a Preferred Share (the "Purchase Price"), subject to
adjustment. Initially, the rights will attach to all certificates representing
Common Stock and no separate Right certificates will be distributed; provided,
however, upon the occurrence of certain events the Rights will separate from the
Shares. The description and terms of the Rights are set forth in a Rights
Agreement between the Company and Mellon Investor Services LLC, a New Jersey
limited liability company, as Rights Agent, dated as of May 17, 2002, which was
previously filed with the SEC. A more detailed discussion of the Rights is set
forth in the Company's Form 8-K referenced in Item 6 below.
On July 12, 2002 Magten Asset Management Corp. ("Magten"), a registered
investment advisor, reported on a Form 4 (filed on July 12, 2002) and Amendment
No. 4 to Schedule 13D that it had distributed in kind 2,091,347 Shares to
investment advisory clients on June 30, 2002 (the Company believes 1,118,942 of
such Shares were distributed to Hughes (as defined below)) and sold 1,530 Shares
on June 20, 2002. As a result of the distribution and sale of such Shares and
Magten's previously reported distribution of 2,545,042 shares on April 15, 2002,
Magten has reported that its beneficial ownership of Shares has been reduced
since April 15, 2002 from 5,984,850 representing approximately 60.4% of the
outstanding shares at such time, to 1,346,930, representing approximately 15.3%
of the outstanding Shares as of the date hereof based upon 8,782,198 shares
reported outstanding as of July 31, 2002. Talton R. Embry, a managing director
and the sole shareholder of Magten, is a director of the Company and also filed
a Form 4 on July 12, 2002 reporting the Magten dispositions.
On July 15, 2002, the Company, pursuant to a Stock Purchase Agreement dated as
of July 11, 2002, by and among the Company, Deutsche Bank Trust Company
Americas, as Master Trustee of the Hughes Retirement Plans Trust ("Hughes"), and
Hughes Investment Management Company, purchased one million one hundred eighteen
thousand nine hundred forty-two (1,118,942) Shares, from Hughes, at a price of
two and a half dollars ($2.50) per share, for an aggregate purchase price of
$2,797,355. As a result of this transaction, the Company believes Hughes no
longer owns any Shares. The Shares acquired from Hughes will be held as treasury
stock of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K
During the second quarter of 2002, the Company filed an 8-K on May 16, 2002
relating to the adoption of the Company's Shareholder Rights Plan.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SALANT CORPORATION
Date: August 9, 2002 /s/ Awadhesh K. Sinha
Awadhesh K. Sinha
Chief Operating Officer and
Chief Financial Officer