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 28, 2002
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)
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)
Telephone: (212) 221-7500
(Registrants Telephone Number, Including Area Code)
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 __
X 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 is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes __ No X
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 6, 2003, there were outstanding 8,782,198 shares of the
Common Stock of the registrant. Based on the closing price of the Common Stock
on June 28, 2002, the last business day of the registrants most recently
computed second fiscal quarter, the aggregate market value of the voting stock
held by non-affiliates of the registrant on such date was $5,785,214. 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.
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item7A. Quantitative and Qualitative Disclosures about Market Risk 23
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 49
PART III
Item 10. Directors and Executive Officers of the Registrant 49
Item 11. Executive Compensation 51
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 68
Item 13. Certain Relationships and Related Transactions 70
Item 14. Controls and Procedures 70
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 71
SIGNATURES 81
CERTIFICATIONS 82
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 stores, specialty stores, major discounters and national chains
throughout the United States. As an adjunct to its apparel operations, the
Company currently operates 38 retail outlet stores in various parts of the
United States. 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. The Company
operates in the following business segments: (i) men's apparel wholesale and
(ii) retail outlet operations. These segments are more fully described below. As
used herein, the "Company" includes Salant and its subsidiaries.
On December 29, 1998 (the "Filing Date"), Salant Corporation filed a petition
under chapter 11 of title 11 of the United States 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 confirming the Plan. The effective date of the Plan occurred on
May 11, 1999. On November 30, 2001, the Bankruptcy Court approved the closing of
the Company's 1998 Case.
Men's Apparel - Wholesale. In fiscal 2002, the Company's wholesale business was
primarily comprised of Perry Ellis and Axis products. The Company markets men's
accessories, dress shirts, slacks and sportswear under the PERRY ELLIS and
PORTFOLIO BY PERRY ELLIS trademarks and sportswear under the AXIS, A(X)IST and
AXIS LA trademarks. The Company also markets sportswear under the TRICOTS ST.
RAPHAEL, JNCO and OCEAN PACIFIC trademarks, as well as, private label sportswear
and accessories.
Retail Outlet Operations. The Company's retail outlet stores business 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 2002, the Company operated 40 Perry Ellis
outlet stores.
Significant Customers. Approximately 16%, 12% and 17% of the Company's sales
were made to The May Department Stores Company in 2002, 2001 and 2000,
respectively. Approximately 14%, 15% and 19% of the Company's sales were made to
Federated Department Stores, Inc. in 2002, 2001 and 2000, respectively. In
addition, approximately 12%, 18% and 18% of the Company's sales were made to
Dillard's Inc. in 2002, 2001 and 2000, respectively. Also in 2002, approximately
10% of the Company's sales were made to J.C. Penney Company, Inc. ("J.C.
Penney") In 2001 and 2000, approximately 12% and 13% of the Company's sales were
made to The TJX Companies, Inc., respectively.
Trademarks. Approximately 65.2% of the Company's net sales for 2002 were
attributable to products sold under the licensed Perry Ellis trademarks,
primarily PERRY ELLIS and PORTFOLIO BY PERRY ELLIS (the "Perry Ellis
Trademarks"); these products are sold primarily through leading department and
specialty stores. The balance is attributable to products sold under retailers'
private labels and other owned or licensed trademarks.
In January 2001, the Company purchased certain assets of Tricots St. Raphael,
Inc. ("Tricots"). Tricots is a better menswear brand distributed primarily
through better department and men's specialty stores in the U.S. and Canada.
In January 2002, the Company purchased the assets and trademarks of Axis
Clothing Corporation ("Axis"). Axis designs, produces and markets men's designer
sportswear for various channels of distribution, including better department and
specialty stores.
Trademarks Licensed to the Company. The Perry Ellis Trademarks are licensed to
the Company under Licenses with Perry Ellis International, Inc. ("PEI"). The
license agreements contain renewal options, which, subject to compliance with
certain conditions contained therein, permit the Company to extend the terms of
such license agreements. Assuming the exercise by the Company of all available
renewal options, the license agreements covering men's apparel and accessories
will expire on December 31, 2015.
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 entered into a license agreement with Ocean Pacific Apparel
Corporation ("OP") to design, produce and distribute men's sportswear, including
big and tall lines, throughout the United States. In connection with the OP
license agreement, the Company signed an agreement providing for J.C. Penney to
be the exclusive retailer of OP regular priced products through fiscal 2003.
In 2000, the Company entered into a license agreement with Hartz & Company, Inc.
("Hartz") to design, produce and distribute sportswear and furnishings for
Hartz's exclusive Tallia brand. This agreement was terminated, by its terms, at
the end of the first quarter 2002.
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
also receive input from the Company's licensors on general themes and color
palettes.
During 2002, approximately 1.1% 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 2002, approximately 21.9% of the Company's foreign
production was manufactured in Hong Kong, approximately 19.3% was manufactured
in Guatemala and approximately 10.7% was manufactured in China, with the balance
produced in various other foreign countries.
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. Most 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 import duty levels, material decrease in
quota levels or material decrease in quota allocations could adversely affect
the Company's operations.
Raw Materials. The raw materials used in the Company's 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 2002, two suppliers each accounted for more than 10% of the Company'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/wholesalers (such as the Company) and a larger number of specialty
manufacturers/wholesalers. 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 2002, the Company employed 712 persons, of whom 208
were engaged in distribution operations and the remainder were employed in
executive, marketing and sales, product design, general and administrative,
purchasing activities and in the operation of the Company's retail outlet
stores. The Company believes that its relations with its employees are
satisfactory. Employees at the Company's Winnsboro, South Carolina distribution
facility are covered by a collective bargaining agreement.
Subsequent Events. On February 3, 2003, the Company entered into an Agreement
and Plan of Merger (the "Merger Agreement") with PEI and Connor Acquisition
Corp., a Delaware corporation and wholly-owned subsidiary of PEI. PEI is the
licensor of the Perry Ellis Trademarks to the Company.
Under the terms of the Merger Agreement, PEI will acquire the Company in a
stock/cash transaction with a total merger consideration of approximately
$91,000,000, comprised of approximately $52,000,000 in cash and approximately
$39,000,000 worth of newly issued shares of PEI common stock (the "Merger").
Each holder of outstanding common stock of the Company will receive
approximately $9.3691 per share comprised of at least $5.3538 per share of cash
and up to $4.0153 per share of PEI common stock. The Merger Agreement provides
that the maximum number of shares of PEI common stock to be issued in the Merger
is limited to 3,250,000, in which case the remaining merger consideration will
be paid in cash. The exact fraction of a share of PEI common stock that the
Company stockholders will receive for each of their shares will be determined
based on the Nasdaq average closing sale price of the PEI common stock for the
20-consecutive trading day period ending three trading days prior to the closing
date. Upon consummation of the Merger, the Company will become a wholly owned
subsidiary of PEI.
The Merger has been approved by all of the members of the Board of Directors of
the Company. The Merger requires that a majority of the stockholders of the
Company approve the Merger and that a majority of the stockholders of PEI
approve the issuance of up to 3,250,000 shares of PEI's common stock in
connection with the Merger Agreement, and is subject to SEC approval,
Hart-Scott-Rodino regulatory review, the absence of material adverse changes,
and certain other customary closing conditions. Stone Ridge Partners LLC is
serving as financial advisor to the Company and has delivered a fairness opinion
to the Company's board of directors. In addition, George Feldenkreis, PEI's
Chairman and CEO, and Oscar Feldenkreis, PEI's President and COO, have each
agreed to vote the PEI shares they control in favor of the issuance of the PEI
common stock in the transaction. Pursuant to the Merger Agreement, PEI also
agreed to file and maintain in effect a registration statement for the Company's
affiliates to enable them to resell shares of PEI common stock they receive in
the Merger without legal restriction. The Company has amended the Rights
Agreement dated May 17, 2002, between the Company and Mellon Investor Services
LLC to provide that the Merger will not trigger any rights or events thereunder.
It is anticipated that the Merger will be consummated in June 2003.
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 also has a short-term lease for an
additional 26,000 square feet of distribution space. The Company leases
approximately 136,000 square feet of combined office, design and showroom space.
As of the end of fiscal 2002, the Company's Stores Division operated 40 retail
outlet stores, comprising approximately 104,000 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, retail outlet stores 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2002, 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 traded on the Over-the-Counter Bulletin Board
under the trading symbol SLNT.OB.
The high and low sale prices per share of common stock for each quarter of 2002
and 2001 are set forth below. 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. The Company did not declare or pay
any dividends during such years.
High and Low Sale Prices Per Share of Salant's Common Stock
Quarter High Low
2002
Fourth $4.990 $2.140
Third 2.800 2.150
Second 3.100 2.650
First 2.700 1.750
2001
Fourth $2.050 $1.640
Third 2.590 1.600
Second 4.000 2.650
First 3.250 2.625
On March 6, 2003 there were 282 holders of record of shares of common stock, and
the closing market price was $8.90.
All of the outstanding voting securities of the Company's subsidiaries are owned
beneficially and of record by the Company, except for shares of certain foreign
subsidiaries of the Company owned of record by others to satisfy local laws.
ITEM 6. SELECTED FINANCIAL DATA
(Amounts in thousands except share, per share and ratio data)
The following selected consolidated financial data as of December 28, 2002 and
December 29, 2001 and for each of the fiscal years in the three year period
ended December 28, 2002 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 1998 through 2000 and statement of operations data for fiscal years 1998
and 1999 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 28, Dec. 29, Dec. 30, Jan. 01, Jan. 02,
2002 2001 2000 2000 1999
(52 Weeks) (52 Weeks) (52 Weeks) (52 Weeks) (52 Weeks)
For The Year Ended:
Continuing Operations:
Net sales $251,903 $207,773 $208,303 $248,730 $300,586
Restructuring reversal/(costs) (a) - 100 629 (4,039) (24,825)
Income/(loss) from continuing operations before
discontinued operations and extraordinary gain 19,522 (2,149) 12,711 (2,148) (56,775)
Discontinued Operations:
Income/(loss) from operations, net of income taxes 31 273 569 (1,955) (10,163)
Loss on disposal, net of income taxes - - - - (5,724)
Extraordinary gain (b) - - - 24,703 -
Net income/(loss)(a) 19,553 (1,876) 13,280 20,600 (72,662)
Basic earnings/(loss) per share (d)
Earnings/(loss) per share from continuing
operations before discontinued operations and
extraordinary gain (a) $2.08 $(0.22) $1.28 $(0.21) $(5.68)
Earnings/(loss) per share from discontinued
operations .00 .03 .06 (0.20) (1.59)
Earnings per share from extraordinary gain (b) - - - 2.47 -
Basic earnings/(loss) per share (a) 2.08 (0.19) 1.34 2.06 (7.27)
Diluted earnings/(loss) per share (d)
Earnings/(loss) per share from continuing
operations before discontinued operations and
extraordinary gain (a) $2.06 $(0.22) $1.28 $(0.21) $(5.68)
Earnings/(loss) per share from discontinued
operations .00 .03 .06 (0.20) (1.59)
Earnings per share from extraordinary gain(b) - - - 2.47 -
Diluted earnings/(loss) per share (a) 2.06 (0.19) 1.34 2.06 (7.27)
Cash dividends per share - - - - -
At Year End:
Current assets $104,506 $86,757 $102,859 $93,331 $149,697
Total assets 142,529 117,732 130,548 121,803 176,129
Current liabilities (c) 31,336 18,272 27,533 32,069 201,766
Deferred liabilities 10,105 4,377 5,642 4,133 5,273
Working capital/(deficiency) 73,170 68,485 75,326 61,262 (52,069)
Current ratio 3.3:1 4.7:1 3.7:1 2.9:1 0.7:1
Shareholders' equity / (deficiency) $101,065 $95,083 $97,373 $85,601 $(30,910)
Book value per share $11.51 $9.60 $9.83 $8.65 $(2.04)
Number of shares outstanding 8,782 9,901 9,901 9,901 15,171
Pro forma book value per share - - - - $(3.09)
Pro forma number of shares outstanding - - - - 10,000
(a) Includes, for the year ended December 29, 2001 a reversal of $100 ($0.01
per share; tax benefit not available) related primarily to better than
anticipated recovery on certain assets. 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. See
Note 3. - Restructuring Costs to the consolidated financial statements for
additional discussion regarding years 2000-2002.
(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
(c) At January 1, 2000 the Senior Notes had been converted into equity. At
January 2, 1999, long term debt of $104,879 was classified as liabilities
subject to compromise and as a current liability, respectively. See Note 1.
- Financial Reorganization to the consolidated financial statements.
(d) 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 for fiscal 1999 and1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
The Company markets men's accessories, dress shirts, slacks and sportswear
primarily to department stores principally under various trademarks including
the PERRY ELLIS and PORTFOLIO BY PERRY ELLIS trademarks. In fiscal 2001, the
Company's business was primarily comprised of Perry Ellis products. In fiscal
2002, the Company's business was primarily comprised of Perry Ellis and Axis
products. The Company also sells men's products under the trademarks of Tricot
St. Raphael, JNCO and Ocean Pacific. As an adjunct to its apparel wholesale
operations the Company currently operates 38 retail outlet stores in various
parts of the United States.
See "Critical Accounting Policies and Estimates" and "Factors that May Affect
Future Results and Financial Condition", included as part of this "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
factors that may effect the results of operations or liquidity.
Results of Operations
Fiscal 2002 Compared with Fiscal 2001
Net Sales
In fiscal 2002, net sales increased by $44.1 million, or 21.2%, from $207.8
million in fiscal 2001, to $251.9 million. In the Company's wholesale segment,
net sales for fiscal 2002 were $224.7 million, an increase of 23.7%, compared to
net sales of $181.6 million in fiscal 2001. Perry Ellis net sales decreased by
$21.4 million in fiscal 2002 compared to fiscal 2001. The decrease was due
primarily to a decrease in prior season inventory dispositions. Axis, which was
purchased in January 2002, accounted for a $38.3 million increase in net sales.
Other brands and labels accounted for the remaining increase of $27.2 million in
fiscal 2002 compared to fiscal 2001. The Company's retail segment had net sales
of $27.2 million in fiscal 2002, an increase of 4.1%, compared to net sales of
$26.1 million for fiscal 2001. The increase in net sales for the retail segment
was the result of additional net sales from new retail outlet stores opened
during 2002.
Gross Profit
In fiscal 2002, gross profit increased $28.7 million to $74.1 million from $45.4
million in fiscal 2001. Gross profit percentage increased to 29.4% in fiscal
2002 from 21.9% in fiscal 2001. The Company's wholesale segment's gross profit
percentage for fiscal 2002 increased to 27.4% of net sales compared to 18.7% of
net sales in fiscal 2001. The increase was primarily the result of lower sales
deductions and a decrease in prior season inventory dispositions. In the
Company's retail segment, gross profit percentage was 45.7% of net sales in
fiscal 2002 compared to 43.8% in fiscal 2001.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") for fiscal 2002 were $59.7
million, or 23.7% of net sales, compared to $47.8 million, or 23.0% of net
sales, in fiscal 2001, an increase of $11.9 million, or 24.9%. A portion of the
increase in SG&A of $3.8 million was for incentive payments and was offset
primarily by a $2.0 million decrease in advertising and a $1.5 million decrease
in selling expenses. SG&A expenses for newly acquired and licensed businesses
were responsible for $10.4 million of the total increase for fiscal 2002. SG&A
for the Company's retail segment increased $1.2 million, primarily due to
additional stores opened in 2002.
Royalty Income
Royalty income increased by $0.3 million, to $0.5 million in fiscal 2002 from
$0.2 million in fiscal 2001. The increase in royalties was due primarily to
additional license agreements signed or acquired in 2002.
Provision for Restructuring
In fiscal 2002 the Company recognized no income or expense relating to
restructuring. At the end of fiscal 2002, $0.6 million remained in the reserve
of which $0.5 million relates to severance and other employee costs and $0.1
million for other restructuring items.
In the fourth quarter of fiscal 2001, the Company recorded a net reversal of
$0.1 million due to favorable recovery of assets and settlement of previously
recorded liabilities, partially offset by increased severance costs related to
medical benefits. During 2001, the Company used approximately $0.4 million of
its restructuring reserves related to consulting and employee costs of $0.3
million and for lease payments, operating expenses and other restructuring costs
of $0.1 million.
Interest Income, Net
In fiscal 2002, net interest income was $0.2 million compared to net interest
income of $0.3 million in fiscal 2001. The decrease was due to lower interest
rates and the use of cash for the acquisition of Axis.
Income Tax Benefit
In fiscal 2002, the Company recorded $5.1 million of income tax benefit,
including $5.0 million related to the reversal of a valuation allowance
previously recorded against the deferred tax assets for operating loss
carry-forwards. Management has evaluated the available evidence about future
taxable income and other possible sources of realization of deferred tax assets
and has concluded that it is more likely than not, that the recognized deferred
tax assets will be fully utilized. The remaining $0.1 million in benefit was due
to foreign income tax refunds. In fiscal 2001, the Company recorded $46 thousand
of income tax benefit due to foreign tax refunds.
Loss/Income from Continuing Operations before Discontinued Operations
In fiscal 2002, the Company's income from continuing operations before
discontinued operations was $19.5 million, or $2.06 per share, compared to a
loss of $2.1 million, or $0.22 per share, in fiscal 2001.
Income from Discontinued Operations
In fiscal 2002 the Company recorded $31 thousand of income related to favorable
settlement of liabilities related to it's children's business which consisted of
selling children's sleepwear and underwear by the Salant Children's Apparel
Group (the "Children's Group"). At the end of fiscal 2002, $0.4 million remained
in the reserve, all of which relates to severance and the other miscellaneous
closing costs.
In fiscal 2001, the Company recorded income of $0.3 million due to better than
anticipated settlement of liabilities related to it's Children's Group. At the
end of fiscal 2001, $0.5 million remained in the reserve of which approximately
$0.4 million was for severance and the remaining balance related to the
settlement of liabilities and other closing costs.
Net Income/Loss
Net income for fiscal 2002 was $19.6 million, or $2.06 per fully diluted share,
compared to a loss of $1.9 million, or $.19 per fully diluted share for fiscal
year 2001.
Earnings before Interest, Taxes, Depreciation, Amortization, Reorganization
Costs, Restructuring Charges and Discontinued Operations
Earnings before interest, taxes, depreciation, amortization, reorganization
costs, restructuring charges and discontinued operations was $20.0 million, or
7.9% of net sales in fiscal 2002, compared to $2.3 million, or 1.1% of net sales
in fiscal 2001, an increase of $17.7 million. The Company believes this
information is helpful in understanding cash flow from continuing operations,
which is available for potential acquisitions and capital expenditures. This
measure is not included in accounting principles generally accepted in the
United States of America ("GAAP") and is not a substitute for operating income,
net income or cash flows from operating activities. Below is a reconciliation
from the financial statements to the non-GAAP measurement.
Fiscal Fiscal
2002 2001
Income/(loss) from continuing operations before
interest, income taxes and discontinued operations $ 14.2 $ (2.5)
Reversal of restructuring costs -- (0.1)
Reversal of reorganization costs -- (0.3)
Depreciation expense 4.8 4.6
Amortization of intangibles 1.0 0.6
Non-GAAP financial measurement $ 20.0 $ 2.3
Fiscal 2001 Compared with Fiscal 2000
Net Sales
In fiscal 2001, net sales of $207.8 million were $0.5 million, or 0.3%, less
than net sales of $208.3 million in fiscal 2000. In the Company's wholesale
segment, net sales for fiscal 2001 were $181.6 million, a decrease of 0.7%,
compared to net sales of $182.9 million in fiscal 2000. Newly acquired and
licensed wholesale businesses offset the sales declines in the ongoing
businesses and accounted for $17.1 million of net sales in fiscal 2001. The
Company's retail segment had net sales of $26.1 million in fiscal 2001, an
increase of 2.8%, compared to net sales of $25.4 million for fiscal 2000. The
decrease in the wholesale segment reflects the overall softness in the retail
apparel sector of the economy, particularly at the department store level of
distribution. This market softness caused an increase in the level of returns
and order cancellations from retail accounts, additional markdowns to retail
accounts to clear out unsold inventory, and lower recoveries on the disposal of
closeout inventory. The increase in net sales for the retail segment was the
result of additional net sales from new retail outlet stores opened during 2001.
Gross Profit
In fiscal 2001, gross profit of $45.4 million was $10.2 million less than gross
profit of $55.6 million in fiscal 2000. Gross profit percentage decreased from
26.7% in fiscal 2000 to 21.9% in fiscal 2001. The Company's wholesale segment's
gross profit percentage for fiscal 2001 was 18.7% of net sales, compared to
24.0% in fiscal 2000. In the Company's retail segment, gross profit percentage
was 43.8% of net sales in fiscal 2001 compared to 46.2% in fiscal 2000. The
margin decrease in both of the Company's segments was caused by the various
factors discussed in Net Sales above.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for fiscal 2001 were $47.8 million,
or 23.0% of net sales, compared to $45.2 million, or 21.7% of net sales, in
fiscal 2000, an increase of $2.6 million, or 5.8 %. SG&A expenses for newly
acquired and licensed businesses increased from $0.8 million for fiscal 2000 to
$5.5 million in fiscal 2001. This increase was partially offset by $1.0 million
reversal of accruals established for claims relating to the Company's 1998 Case
and by lower employee costs and other reductions of overhead.
Royalty Income
Royalty income decreased by $0.5 million, or 74.1%, to $0.2 million in fiscal
2001 from $0.7 million in fiscal 2000. The decrease in royalties was due to the
termination of a sublicense.
Provision for Restructuring
In the fourth quarter of fiscal 2001, the Company recorded a net reversal of
$0.1 million due to favorable recovery of assets and settlement of previously
recorded liabilities, partially offset by increased severance costs related to
medical benefits. During 2001, the Company used approximately $0.4 million of
its restructuring reserves related to consulting and employee costs of $0.3
million and for lease payments, operating expenses and other restructuring costs
of $0.1 million. At the end of fiscal 2001, $0.6 million remained in the reserve
of which $0.5 million related to severance and other employee costs, $0.1
million for lease buyouts and other restructuring items.
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.
Interest Income, Net
In fiscal 2001, net interest income was $0.3 million compared to net interest
income of $1.2 million in fiscal 2000. The decrease was due to lower interest
rates and the use of cash for operations.
Loss/Income from Continuing Operations before Discontinued Operations
In fiscal 2001, the Company's loss from continuing operations before
discontinued operations was $2.1 million, or $0.22 per share, compared to income
of $12.7 million, or $1.28 per share, in fiscal 2000.
Income from Discontinued Operations
In fiscal 2001, the Company recorded income of $0.3 million related to better
than anticipated settlement of liabilities related to it's Children's Group. At
the end of fiscal 2001, $0.5 million remained in the reserve of which
approximately $0.4 million was for severance and the remaining balance related
to the settlement of liabilities and other closing costs.
In fiscal 2000, the Company recorded income of $0.6 million related to the
discontinuance of its Children's Group. The income related primarily to better
than anticipated recovery on the sale of assets (primarily real estate holdings)
related to the Children's Group.
Net Loss/Income
Net loss for fiscal 2001 was $1.9 million, or $0.19 per share, compared to
income of $13.3 million, or $1.34 per share for fiscal year 2000.
Earnings before Interest, Taxes, Depreciation, Amortization, Reorganization
Costs, Restructuring Charges and Discontinued Operations
Earnings before interest, taxes, depreciation, amortization, reorganization
costs, restructuring charges and discontinued operations was $2.3 million (1.1%
of net sales) in fiscal 2001, compared to $15.5 million (7.4% of net sales) in
fiscal 2000, a decrease of $13.2 million, or 84.5%. The Company believes this
information is helpful in understanding cash flow from continuing operations,
which is available for potential acquisitions and capital expenditures. This
measure is not included in GAAP and is not a substitute for operating income,
net income or cash flows from operating activities. Below is a reconciliation
from the financial statements to the non-GAAP measurement.
Fiscal Fiscal
2001 2000
(Loss)/income from continuing operations before
interest, income taxes and discontinued operations $ (2.5) $ 11.5
Reversal of restructuring costs (0.1) (0.6)
Reversal of reorganization costs (0.3) --
Depreciation expense 4.6 4.1
Amortization of intangibles 0.6 0.5
Non-GAAP financial measurement $ 2.3 $ 15.5
Liquidity and Capital Resources
On May 11, 1999, the Company entered into a three year 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 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 at the Prime Rate or, at
the Company's request, 2.25% in excess of LIBOR (as defined in the Credit
Agreement), and (ii) CIT 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
comply with certain financial covenants including, but not limited to,
consolidated tangible net worth, consolidated working capital, 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 December 28, 2002.
At the end of fiscal 2002, there were no direct borrowings outstanding under the
Credit Agreement. Letters of credit outstanding were $38.0 million and the
Company had unused availability, based on outstanding letters of credit and
existing collateral, of $35.9 million. In addition to the unused availability,
the Company had approximately $21.2 million of cash available to fund its
operations. At the end of fiscal 2001, there were no direct borrowings
outstanding and letters of credit outstanding under the Credit Agreement were
$19.6 million, at which time the Company had unused availability of $38.6
million. In addition to the unused availability, the Company had approximately
$19.8 million of cash available to fund its operations. During fiscal 2002, the
maximum aggregate amount of direct borrowings and letters of credit outstanding
at any one time was $39.0 million, at which time the Company had unused
availability of $42.4 million. During fiscal 2001, the maximum aggregate amount
of direct borrowings and letters of credit outstanding at any one time was $27.8
million, at which time the Company had unused availability of $17.0 million.
December 28, December 29,
2002 2001
Maximum Availability under Credit Agreement $73.9 $58.2
Borrowings under Credit Agreement - -
Outstanding Letters of Credit 38.0 19.6
Current Availability under Credit Agreement 35.9 38.6
Cash on Hand 21.2 19.8
Available to fund operations $57.1 $58.4
The Company's cash provided by operating activities for fiscal 2002 was $21.0
million, which primarily reflects (i) income from continuing operations of $19.6
million, (ii) an increase in accounts payable of $8.0 million, (iii) a net
increase in various liability accounts of $3.8 million, (iv) a decrease in
prepaid expenses and other assets of $1.7 million and (v) and non-cash charges,
such as depreciation and amortization, of $5.8 million. These items were offset
by (i) an increase in accounts receivable of $8.2 million, (ii) an increase in
deferred tax assets of $5.0 million and (iii) an increase in inventory of $4.7
million.
Cash used by investing activities for fiscal 2002 was $16.8 million, which
primarily reflected the purchase of certain Axis assets in the first quarter of
fiscal 2002. The aggregate purchase price was approximately $12.4 million, plus
estimated direct acquisition costs of $0.8 million. Of the total purchase price
$10.6 million was paid at closing and $1.8 million was placed in escrow and is
payable in two annual and equal payments on the anniversary date of the closing.
As a result, Salant has diversified its operations for men's designer sportswear
by expanding its channels of distribution, including specialty stores. The
Company also made $2.7 million of capital expenditures and spent $0.9 million
for the installation of store fixtures in department stores.
Cash used in financing activities for fiscal 2002 was $2.8 million which related
to the July 2002 purchase of 1,118,942 shares of the Company's 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 $2.8 million. The shares are being held as
treasury stock of the Company.
During fiscal 2003, the Company plans to make capital expenditures of
approximately $4.3 million and to spend an additional $1.0 million for the
installation of store fixtures in department stores.
The Company's cash used in operating activities for fiscal 2001 was $7.8
million, which primarily reflected (i) a loss from continuing operations of $2.1
million, (ii) an increase in accounts receivable of $12.0 million, (iii) an
increase in prepaid and other current assets of $2.4 million and (iv) a net
decrease in various liability accounts of $9.1 million. These items were offset
by a decrease in inventory of $12.5 million and non-cash charges, such as
depreciation and amortization, of $ 5.3 million.
Cash used by investing activities for fiscal 2001 was $7.1 million, which
primarily reflected $2.3 million of capital expenditures, $0.7 million for the
installation of store fixtures in department stores and $4.0 million for the
purchase of the assets of a business.
At the end of fiscal year 2002, working capital totaled $73.1 million as
compared to $68.5 million at the end of the fiscal year 2001, and the current
ratio was 3.3:1 as compared to 4.8:1 at the end of fiscal 2001. The components
of working capital changed significantly as of fiscal year end 2002 as compared
to fiscal year end 2001. Cash increased by $1.4 million and current liabilities
increased by $13.1 million. Accounts receivable increased by $8.2 million,
inventory increased by $5.2 million, the Company recorded a current tax asset of
$5.0 million, and prepaid expenses decreased by $2.1 million. Accounts
receivable increased due to the increased sales within the fourth quarter of
2002, compared to the fourth quarter of 2001. The increase in inventory was due
to additional inventory needs for newly acquired and licensed businesses. The
current deferred tax asset was recorded based on the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes"
and the Company's positive earnings trend. Prepaid assets decreased primarily
due the reduction of prepaid pension expense. Current liabilities increased
$13.1 million at fiscal year end 2002 as compared to fiscal year end of 2001 due
to the timing of inventory purchases and receipts, and additional accrued
liabilities related to incentive payments. Below is a table of the Company's
contractual obligations as of December 28, 2002.
Contractual Obligations Payments due by period
Total 1 Year 2-3 years 4-5 years More than 5
years
Operating Leases $43,114 $5,925 $10,994 $8,164 $18,031
Employment Agreements $2,971 $2,496 $ 475 -- --
Total $46,085 $7,7911 $11,469 $8,164 $18,031
Critical Accounting Policies and Estimates
The Company's significant accounting policies are more fully described in Note 2
to the Company's consolidated financial statements. Certain of the Company's
accounting policies require the application of significant judgement by
management in selecting the appropriate assumptions for calculating financial
estimates. By their nature, these judgements are subject to an inherent degree
of uncertainty. These judgements are based on historical experience, the
Company's observation of trends in the industry, information provided by
customers and information available from other outside sources, as appropriate.
The Company's significant accounting policies include:
Revenue Recognition - Sales are recognized upon shipment of products to
customers since title passes upon shipment and, in the case of sales by the
Company's retail outlet stores, when goods are sold to consumers. Allowances for
estimated uncollectible accounts, discounts, returns and allowances are provided
when sales are recorded based upon historical experience and current trends. The
Company has met with its significant customers prior to the issuance of its
financial statements and does not expect a material deviation from the recorded
allowances. While such allowances have historically been within the Company's
expectations and the provisions established, there can be no assurance that the
Company will continue to experience the same allowance rate as in the past.
Inventories - Inventories are valued at the lower of cost or market, cost being
determined on the first-in, first-out method. Reserves for slow moving and aged
merchandise are provided based on historical experience and current product
demand. The Company evaluates the adequacy of the reserves quarterly. While
markdowns have historically been within the Company's expectations and the
provisions established, there can be no assurance that the Company will continue
to experience the same level of markdowns as in the past.
Valuation of Long-Lived Assets - The Company periodically reviews the carrying
value of the Company's long-lived assets for recoverability. The review is based
upon the Company's projections of anticipated future cash flows. While the
Company believes that the estimates of future cash flows are reasonable,
different assumptions regarding such cash flows could materially affect the
Company's evaluations.
Deferred Taxes -- The Company accounts for income taxes under the liability
method. Deferred tax assets and liabilities are recognized based on differences
between financial statement and tax basis of assets and liabilities using
presently enacted tax rates. A valuation allowance is recorded to reduce
deferred tax assets to that portion which is expected to more likely than not be
realized. The ultimate realization of the deferred tax assets is dependent upon
the generation of future taxable income during periods prior to the expiration
of the related net operating losses.
Retirement-Related Benefits -- The pension obligations related to the Company's
defined benefit pension plans are developed from actuarial valuations. Inherent
in these valuations are key assumptions, including the discount rate, expected
return of plan assets, future compensation increases, and other factors, which
are updated on an annual basis. Management is required to consider current
market conditions, including changes in interest rates, in making these
assumptions. Actual results that differ from the assumptions are accumulated and
amortized over future periods and, therefore, generally affect the recognized
pension expense or benefit and the Company's pension obligation in future
periods.
The fair value of plan assets is based on the performance of the financial
markets, particularly the equity markets. The equity markets can be, and
recently have been, very volatile. Therefore, the market value of plan assets
can change dramatically in a relatively short period of time. Additionally, the
measurement of the plans' benefit obligations is highly sensitive to changes in
interest rates. As a result, if the equity markets decline and/or interest rates
decrease, the plans' estimated accumulated benefit obligation could exceed the
fair value of plan assets and, therefore, the Company would be required to
establish an additional minimum liability, which would result in a reduction in
shareholders' equity for the amount of the shortfall. For fiscal 2002, 2001 and
2000, the Company recorded an additional minimum pension liability calculated
under the provisions of SFAS No. 87 of $10.8 million, $0.4 million and $1.5
million, respectively, as an adjustment to accumulated other comprehensive loss.
(See Note 13 of Notes to Consolidated Financial Statements under Item 8,
"Financial Statements and Supplementary Data".)
New Accounting Standards
Effective December 30, 2001, the Company adopted 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 for the
fiscal year ended December 29, 2001 would have decreased by $0.1 million due to
the amount adjusted for the exclusion of goodwill amortization.
In October 2001, the Financial Accounting Standards Board ("FASB") issued 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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation", to require disclosure in both interim and annual financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. SFAS No. 148 is effective
for the year ended December 31, 2002 and for interim financial statements for
the first quarter ending after December 31, 2002. The adoption of this Statement
did not have a material impact on the consolidated financial statements, as the
Company has not decided to adopt the fair value method of accounting for
stock-based compensation.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others- an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN 45"). FIN 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. However, the disclosure requirements in FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company is not a party to any agreement in which it is a
guarantor of indebtedness of others. Accordingly, this pronouncement is
currently not applicable to the Company.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities - an Interpretation of ARB No. 51" ("FIN 46"). FIN 46
addresses consolidation by business enterprises of variable interest entities
(formerly special purpose entities or SPEs). In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. The objective of FIN 46 is
not to restrict the use of variable interest entities but to improve financial
reporting by companies involved with variable interest entities. FIN 46 requires
a variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. The consolidation requirements of FIN 46 apply to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after June
15, 2003. However, certain of the disclosure requirements apply to financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company does not have any variable interest
entities as defined in FIN 46. Accordingly, this pronouncement is currently not
applicable to the Company.
Seasonality
Although the Company typically introduces and withdraws various individual
products throughout the year, its principal products are organized into the
customary Spring, Transition, Fall and Holiday retail 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 5, 2003, the Company's backlog of orders was
approximately $64.8 million, which was 41.3% more than the backlog of orders of
approximately $48.4 million that existed at March 20, 2002. The increase in the
backlog is due primarily to Axis and the other new businesses added during
fiscal 2002.
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 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 suppliers (such as the
Company) and a large number of specialty suppliers. 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 licensed by the Company. The
principal trademarks licensed by 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 effects vary with each licensing agreement. The
license arrangements with Perry Ellis grant the licensor the right to terminate
the licenses (subject to the payment of certain royalties) if any person or
group acquires 40% or more of the equity interests or voting control of the
Company. 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 purchased the
assets and trademarks of Axis which designs, produces, and markets men's
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, could have a materially
adverse effect on the Company's performance.
Dependence on Contract Manufacturing. The Company produces substantially all of
its products through arrangements with independent contract manufacturers. The
use of such contractors and the resulting lack of direct control could subject
the Company to difficulty in obtaining timely delivery of products of acceptable
quality. In addition, as is customary in the industry, the Company does not have
any long-term contracts with its fabric suppliers or product manufacturers.
While the Company is not dependent on one particular product manufacturer or raw
material supplier, the loss of several such product manufacturers and/or raw
material suppliers in a given season could have a material adverse effect on the
Company's performance.
Because of the foregoing factors, as well as other factors affecting the
Company's operating results and financial condition, past financial performance
should not be considered to be a reliable indicator of future performance, and
investors are cautioned not to use historical trends to anticipate results or
trends in the future. In addition, the Company's participation in the highly
competitive apparel industry often results in significant volatility in the
Company's common stock price.
ITEM 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 - "Financing Agreements"
to the Consolidated Financial Statements, included in this report on Form 10-K.
On December 28, 2002 and December 29, 2001 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 28, 2002 and
December 29, 2001, and the related consolidated statements of operations,
comprehensive income/(loss), shareholders' equity and cash flows for each of the
three years in the period ended December 28, 2002. Our audits also included the
financial statement schedule listed in the index at Item 15. 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 28, 2002 and December 29, 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
28, 2002 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.
/s/ Deloitte & Touche LLP
March 6, 2003
New York, New York
Salant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
Year Ended
December 28, December 29, December 30,
2002 2001 2000
Net sales $ 251,903 $ 207,773 $ 208,303
Cost of goods sold 177,819 162,348 152,708
Gross profit 74,084 45,425 55,595
Selling, general and administrative expenses (59,681) (47,804) (45,188)
Royalty income 506 194 750
Intangible amortization (Notes 2 and 4) (953) (627) (519)
Other income/(expense), net 294 (91) 213
Restructuring reversal/(costs) (Note 3) -- 100 629
Reorganization reversal/(costs) (Note 1) -- 302 --
Income/(loss) from continuing operations before interest,
income taxes and discontinued operations 14,250 (2,501) 11,480
Interest income, net (Note 9) (203) (306) (1,244)
Income/(loss) from continuing operations before income
taxes and discontinued operations 14,453 (2,195) 12,724
Income tax (benefit)/expense (Note 12) (5,069) (46) 13
Income/(loss) from continuing operations
before discontinued operations 19,522 (2,149) 12,711
Income from discontinued operations (Note 17) 31 273 569
Net income/(loss) $ 19,553 $ (1,876) $ 13,280
Basic income/(loss) per share:
Income/(loss) per share from continuing
operations before discontinued operations $ 2.08 $ (0.22) $ 1.28
Income per share from discontinued operations .00 0.03 .06
Basic income/(loss) per share $ 2.08 $ (0.19) $ 1.34
Weighted average common stock outstanding - Basic 9,388 9,901 9,901
Diluted income/(loss) per share:
Income/(loss) per share from continuing
operations before discontinued operations $ 2.06 $ (0.22) $ 1.28
Income per share from discontinued operations .00 0.03 .06
Diluted income/(loss) per share $ 2.06 $ (0.19) $ 1.34
Weighted average common stock outstanding - Diluted 9,468 9,901 9,901
See Notes to Consolidated Financial Statements
Salant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Amounts in thousands)
December 28, December 29, December 30,
2002 2001 2000
Net income/(loss) $ 19,553 $ (1,876) $ 13,280
Other comprehensive (loss)/income, net of tax:
Foreign currency translation adjustments (4) 5 25
Minimum pension liability adjustments (10,770) (419) (1,533)
Comprehensive income/(loss) $ 8,779 $ (2,290) $ 11,772
See Notes to Consolidated Financial Statements
Salant Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
December 28, December 29,
2002 2001
ASSETS
Current assets:
Cash and cash equivalents $ 21,226 $ 19,820
Accounts receivable - net of allowance for doubtful accounts
of $3,580 in 2002 and $2,942 in 2001 36,718 28,544
Inventories (Notes 5 and 9) 39,972 34,735
Prepaid expenses and other current assets 1,581 3,658
Deferred tax asset (Note 12) 5,000 --
Total current assets 104,497 86,757
Property, plant and equipment, net (Notes 6 and 9) 11,528 12,179
License agreements - net of accumulated amortization
of $5,476 in 2002 and $5,039 in 2001 5,685 6,122
Goodwill (Note 4) 2,318 --
Trademarks - net of accumulated amortization of $1,896
in 2002 and $1,680 in 2001 14,579 5,095
Other assets (Notes 7, 12 and 13) 3,913 7,579
Total assets $ 142,520 $ 117,732
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,605 $ 10,576
Reserve for business restructuring (Note 3) 561 584
Accrued salaries, wages and other liabilities (Note 8) 11,738 6,619
Net liabilities of discontinued operations (Note 17) 446 493
Total current liabilities 31,350 18,272
Deferred liabilities (Note 15) 10,105 4,377
Commitments and contingencies (Notes 9, 13, 14, 16, 20 and 21)
Shareholders' equity (Note 14): Preferred stock, par value $2 per share:
Authorized 5,000 shares; none issued -- --
Common stock, par value $1 per share:
Authorized 45,000 shares;
Issued - 10,000 in 2002 and 2001 10,000 10,000
Additional paid-in capital 206,040 206,040
Deficit (96,340) (115,893)
Accumulated other comprehensive loss (Note 18) (15,640) (4,866)
Less - treasury stock, at cost - 1,218 shares in 2002 and
99 shares in 2001 (2,995) (198)
Total shareholders' equity 101,065 95,083
Total liabilities and shareholders' equity $ 142,520 $ 117,732
See Notes to Consolidated Financial Statements
Salant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands)
Accum-
ulated
Other
Compre- Total
Common Stock Add'l hensive Treasury Stock Share-
Number Paid-In Income/ Number holders'
of Shares Amount Capital Deficit (Loss) of Shares Amount Equity
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
Net Loss (1,876) (1,876)
Other Comprehensive Loss (414) (414)
Balance at December 29, 2001 10,000 $10,000 $206,040 $(115,893)$(4,866) 99 $(198) $95,083
Net Income 19,553 19,553
Other Comprehensive Loss (10,774) (10,774)
Purchase of Treasury Stock 1,119 (2,797) (2,797)
Balance at December 28, 2002 10,000 $10,000 $206,040 $(96,340)$(15,640) 1,218 $(2,995) $101,065
See Notes to Consolidated Financial Statements
Salant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended
December 28, December 29, December 30,
2002 2001 2000
Cash Flows from Operating Activities
Income/(loss) from continuing operations before discontinued
operations $ 19,553 $ (2,149) $ 12,711
Adjustments to reconcile income/(loss) from continuing operations
before discontinued operations to net cash provided by/(used in)
operating activities:
Depreciation 4,811 4,632 4,101
Amortization of intangibles 953 627 519
Deferred tax benefit (5,000) -- --
953 627 519
Changes in operating assets and liabilities:
Accounts receivable (8,174) (11,956) (632)
Inventories (4,676) 12,495 (3,614)
Prepaid expenses and other current assets 1,753 (2,370) (815)
Assets held for sale -- -- 100
Other assets (97) (27) (14)
Accounts payable 8,043 (4,222) 2,701
Accrued salaries, wages and other liabilities 4,470 (2,941) (2,441)
Liabilities subject to compromise -- (1,611) (2,993)
Reserve for business restructuring (23) (486) (1,238)
Deferred liabilities (608) 171 (24)
Net cash provided by/(used in) continuing operations 21,005 (7,837) 8,361
Cash (used in)/provided by discontinued operations (47) 22 4
Net cash provided by/(used in) operating activities 20,958 (7,815) 8,365
Cash Flows from Investing Activities
Capital expenditures, net of disposals (2,705) (2,292) (1,959)
Store fixture expenditures (877) (722) (1,864)
Purchase of a business (13,169) (4,039) -
Net cash used in investing activities (16,751) (7,053) (3,823)
Cash Flows from Financing Activities
Treasury stock purchase (2,797) -- --
Other, net (4) 5 25
Net cash (used in)/provided by financing activities (2,801) 5 25
Net increase/(decrease) in cash and cash equivalents 1,406 (14,863) 4,567
Cash and cash equivalents - beginning of year 19,820 34,683 30,116
Cash and cash equivalents - end of year $ 21,226 $ 19,820 $ 34,683
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 56 $ 23 $ 93
Income taxes $ 13 $ 64 $ 179
Supplemental investing and financing non-cash transactions:
Change in minimum pension liability $ (10,770) $ (419) $ (1,533)
Guaranteed future purchase price payments $ -- $ 250 $ --
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 voluntary
petition under chapter 11 of title 11 of the United States 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 confirming the Plan. The effective date of the
Plan occurred on May 11, 1999. On November 30, 2001, the Bankruptcy Court
approved the closing of the Company's 1998 Case.
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 its 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, pajamas, sleepwear and
underwear primarily using a number of well-known licensed characters and
trademarks. As further described in Note 17, the consolidated financial
statements and the notes thereto reflect the Children's Group as a discontinued
operation. Intercompany balances and transactions are eliminated in
consolidation.
During the first quarter of 2001, the Company purchased certain assets of
Tricots St. Raphael, Inc.. The purchase price, including inventory, was
approximately $4.3 million, with additional contingent payments due upon
achieving future defined benchmarks. The acquisition was accounted for using the
purchase method. The pro forma effect of the asset purchase on the results of
operations is not presented, as it is not material. In addition, on January 4,
2002, the Company through its wholly owned subsidiary, Salant Holding
Corporation ("SHC"), acquired from Axis Clothing Corporation ("Axis") certain of
Axis' assets. See Note 4 for additional information related to such acquisition,
including pro forma financial information.
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 2002,
2001 and 2000 fiscal years were comprised of 52 weeks.
Reclassifications
Certain reclassifications were made to the 2000 and 2001 consolidated financial
statements to conform to the 2002 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) or market for wholesale apparel operations. Reserves
for slow moving and aged merchandise are provided based on historical experience
and current product demand. The Company evaluates the adequacy of the reserves
quarterly.
Effective December 31, 2000, due to a change in systems, the Company changed its
method of valuing its retail inventories from the retail method to the lower of
cost or market for outlet store operations. There was no impact resulting from
this change in the accompanying consolidated financial statements.
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 range of annual depreciation rates used for financial reporting 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
Identified intangibles relating to licensed Perry Ellis brands are being
amortized on a straight-line basis over the license period of 25 years. Goodwill
and trademarks relating to owned brands have been determined to have indefinite
lives and are not being amortized and 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. Goodwill with a value of $2,318
is not amortized and tested for impairment on at least an annual basis or when
certain conditions indicate that impairment may be likely.
Valuation of Long-Lived Assets
The Company periodically reviews the carrying value of the Company's long-lived
assets for recoverability. The review is based upon the Company's projections of
anticipated future cash flows. While the Company believes that the estimates of
future cash flows are reasonable, different assumptions regarding such cash
flows could materially affect the Company's valuations.
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 SFAS 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 approximate
fair value because of their short maturity.
Retirement-Related Benefits
The Company accounts for its defined benefit pension plans and its nonpension
post retirement benefit plans using actuarial models required by SFAS No. 87,
"Employers' Accounting for Pensions," and SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," respectively. These models use
an attribution approach that generally spreads individual events over the
service lives of the employees in the plan. The principle underlying the
required attribution approach is that employees render service over their
service lives on a relatively smooth basis and, therefore, the income statement
effects of pensions or nonpension postretirement benefit plans are earned in,
and should follow, the same pattern.
The principal components of the net periodic pension calculation are the
expected long-term rate of return on plan assets, discount rate and the rate of
compensation increases. The Company uses long-term historical actual return
information, the mix of investments that comprise plan assets, and future
estimates of long-term investment returns by reference to external sources to
develop its expected return on plan assets. The discount rate assumptions used
for pension and nonpension postretirement benefit plan accounting reflects the
rates available on high-quality fixed-income debt instruments at the Company's
fiscal year end. The rate of compensation increase is another significant
assumption used in the actuarial model for pension accounting and is determined
by the Company based upon its long-term plans for such increases.
Revenue Recognition
Revenue is recognized upon shipment of products to customers since title passes
upon shipment and, in the case of sales by the Company's retail outlet stores,
when goods are sold to consumers. Allowances for estimated uncollectible
accounts, discounts, returns and allowances are provided when sales are recorded
based upon historical experience and current trends.
Accounting for Stock Options
The Company accounts for the stock option plan in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation cost is recognized
for stock option awards. Had compensation cost been determined consistent with
SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's pro forma
net income/(loss) for 2002, 2001 and 2000 would have been $19,405, $(2,175) and
$12,338, respectively. The Company's pro forma net income/(loss) per basic share
for fiscal 2002, 2001 and 2000 would have been $2.07, $(0.22) and $1.25,
respectively.
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 for the
fiscal year ended December 29, 2001 would have decreased by $110 due to the
amount adjusted for the exclusion of goodwill amortization.
In October 2001, the Financial Accounting Standards Board ("FASB") issued 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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation", to require disclosure in both interim and annual financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. SFAS No. 148 is effective
for the year ended December 31, 2002 and for interim financial statements for
the first quarter ending after December 31, 2002. The adoption of this Statement
did not have an impact on the consolidated financial statements, as the Company
has not decided to adopt the fair value method of accounting for stock-based
compensation.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others- an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN 45"). FIN 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. However, the disclosure requirements in FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company is not a party to any agreement in which it is a
guarantor of indebtedness of others. Accordingly, this pronouncement is
currently not applicable to the Company.
In January 2003, the FASB issued FASB Interpretation No. 46, " Consolidation of
Variable Interest Entities - an Interpretation of ARB No. 51" ("FIN 46"). FIN 46
addresses consolidation by business enterprises of variable interest entities
(formerly special purpose entities or SPEs). In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. The objective of FIN 46 is
not to restrict the use of variable interest entities but to improve financial
reporting by companies involved with variable interest entities. FIN 46 requires
a variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. The consolidation requirements of FIN 46 apply to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after June
15, 2003. However, certain of the disclosure requirements apply to financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company does not have any variable interest
entities as defined in FIN 46. Accordingly, this pronouncement is currently not
applicable to the Company.
Note 3. Restructuring Costs
During 2002, the Company used approximately $23 of its restructuring reserve
related to employee costs of $4 and the remaining balance for other
restructuring costs. At the end of fiscal 2002, $561 remained in the reserve of
which $471 related to severance and other employee costs, and $90 for other
restructuring items. The Company expects to utilize the remaining reserves
during fiscal 2003. Activity in the accrued reserve for business restructuring
for fiscal 2002 was as follows:
Balance Accrual/ Balance
12/29/01 Uses (Reversal) 12/28/02
Lease payments and
other property costs $ 48 $ 0 $ -- $ 48
Severance 475 (4) 0 471
Other 61 (19) 42
$ 584 $ (23) $ 0 $ 561
In the fourth quarter of fiscal 2001, the Company recorded a net reversal of
$100 due to the favorable recovery of assets and settlement of previously
recorded liabilities, partially offset by increased severance costs related to
medical benefits. During 2001, the Company used approximately $386 of its
restructuring reserve related to consulting and employee costs of $290, lease
payments and operating expenses of $52 and the remaining balance for other
restructuring costs. At the end of fiscal 2001, $584 remained in the reserve of
which $475 related to severance and other employee costs, $48 for lease buyouts
and $61 for other restructuring items. Activity in the accrued reserve for
business restructuring for fiscal 2001 was as follows:
Balance Accrual/ Balance
12/30/00 Uses (Reversal) 12/29/01
Lease payments and
other property costs $ 200 $ (52) $ (100) $ 48
Severance 550 (290) 215 475
Other 320 (44) (215) 61
$ 1,070 $ (386) $ (100) $ 584
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 reserve related to
severance and employee costs of $498, lease payments of $89 and the remaining
balance for other restructuring costs. The Company also recognized gains from
the sale of fixed assets of $299. At the end of fiscal 2000, $1,070 remained in
the reserve of which $550 related 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 was 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
Note 4. Acquisition of Axis
On January 4, 2002, Salant Corporation, through its wholly owned subsidiary,
SHC, acquired from Axis , certain of Axis' assets pursuant to an Asset Purchase
Agreement dated as of October 15, 2001 by and 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 diversified its
operations for men's designer sportswear by expanding its channels of
distribution, including better department and specialty stores. The results of
Axis's operations have been included in the statement of operations as of 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. Of the total intangibles acquired, $9,700
has been allocated to trademarks and $2,318 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 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 2,318
Total assets acquired $13,169
The aggregate purchase price for the Axis Assets was approximately $12,433, plus
direct acquisition costs of $736. Of the total purchase price, $10,633 was paid
at closing and $1,800 has been placed in escrow and is payable in two annual and
equal payments on the next 2 anniversary dates of the closing. 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.
As the acquisition was consummated as of the beginning of Fiscal 2002, pro forma
results for fiscal 2002 are not presented. The following unaudited consolidated
pro forma results of operations of the Company for the years ended December 29,
2001 and December 30, 2000 give effect to the acquisition as if it occurred on
January 2, 2000:
December 29, December 30,
2001 2000
(Unaudited) (Unaudited)
Net Sales $ 242,615 $ 237,737
Income from continuing operations $ 1,716 $ 15,187
Basic & diluted earnings per share
from continuing operations $ 0.17 $ 1.53
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 5. Inventories
December 28, December 29,
2002 2001
Finished goods $ 21,680 $ 21,378
Work-in-process 16,269 9,310
Raw materials and supplies 2,023 4,047
$ 39,972 $ 34,735
Markdown reserves were $1,751 at December 28, 2002 and $1,887 at December 29,
2001. Finished goods inventory includes in transit merchandise of $1,825 and
$356 at December 28, 2002 and December 29, 2001, respectively.
Note 6. Property, Plant and Equipment
December 28, December 29,
2002 2001
Land and buildings $ 7,792 $ 7,392
Machinery, equipment, furniture and fixtures 21,467 19,540
Leasehold improvements 5,670 5,465
34,929 32,397
Less accumulated depreciation and amortization 23,401 20,218
$ 11,528 $ 12,179
Note 7. Other Assets
December 28, December 29,
2002 2001
Prepaid pension asset $ -- $ 3,285
Other (net) 3,913 4,294
$ 3,913 $ 7,579
Note 8. Accrued Salaries, Wages and Other Liabilities
December 28, December 29,
2002 2001
Accrued salaries, wages and incentives $ 7,154 $ 1,006
Accrued pension, retirement and benefits 1,111 1,139
Accrued workers compensation 908 1,181
Other accrued liabilities 2,565 3,293
$ 11,738 $ 6,619
Note 9. Financing Agreements
On May 11, 1999, the Company entered into a three year 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 $85,000 subject to an
asset-based borrowing formula. The Credit Agreement consists of an $85,000
revolving credit facility, with a $45,000 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 at the Prime Rate or, at
the Company's request, 2.25% in excess of LIBOR (as defined in the Credit
Agreement), and (ii) CIT may, in their sole discretion, make loans to the
Company in excess of the borrowing formula but within the $85,000 limit of the
revolving credit facility. The Company is required under the agreement to comply
with certain financial covenants including, but not limited to, consolidated
tangible net worth, consolidated working capital, ca