Item 1. Business Item 2.
Item 2. Properties Item 3.
Item 3. Legal Proceedings Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters Item 6.
ITEM 6. SELECTED FINANCIAL DATA (Amounts in thousands except per share and ratio data)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the consolidated results of operations and financial condition should be read in conjunction with the accompanying Consolidated Financial Statements and related Notes to provide additional information concerning the Company's financial activities and condition.
Overview
On June 27, 1990, Salant and Denton Mills filed petitions for relief under chapter 11 of the Bankruptcy Code. During the pendency of the Chapter 11 Cases, the Company (i) eliminated unprofitable businesses, (ii) reduced operating expenses, (iii) refocused its resources on its core menswear businesses, with particular emphasis on higher margin, branded product lines, (iv) incurred significant legal and other professional fees related to the administration of the Chapter 11 Cases, and (v) ceased to accrue interest on substantially all of its prepetition debt. The Plan was consummated on September 20, 1993.
The Company believes that, upon completion of the claims resolution process, it will have issued, pursuant to the Plan, an aggregate of $111.9 million principal amount of new 10-1/2% Secured Notes due December 31, 1998 (the "Secured Notes") and 11.3 million new shares of common stock. For financial reporting and per share earnings purposes, the Secured Notes and common shares issued or expected to be issued were deemed to be outstanding from and after September 20, 1993. As a result of (i) the increase in interest expense due to the issuance of the Secured Notes pursuant to the Plan, (ii) the reduction in bankruptcy administration expenses following the consummation of the Plan and (iii) the increase in the number of common shares outstanding as a result of the Plan, the financial and per share results for the fiscal year ended January 1, 1994 are not indicative of the results that would have been reported had the Plan been consummated at the beginning of the 1993 fiscal year.
In March 1994, the Company determined to retain and continue to operate its Children's Apparel Group (formerly referred to as the Obion Denton Division). During 1993, the Company effected a comprehensive restructuring of the division's operations involving (i) the discontinuation of certain product lines which have historically produced inadequate gross profit margins, (ii) the elimination of the resulting excess manufacturing capacity and (iii) the reduction of the overhead costs of the restructured business. The Company's financial statements for 1993 include the operating results of the Children's Apparel Group in continuing operations. Operating results for 1992 (which had reflected the Children's Apparel Group in discontinued operations) have been adjusted accordingly.
The Company continues to explore opportunities to increase its presence in the dress shirt and sportswear categories.
Results of Operations
Fiscal 1993 Compared with Fiscal 1992
For the 1993 fiscal year, net sales were $407.2 million, a 2% decrease from net sales of $415.6 million in 1992. Excluding the net sales of product lines which ceased operations prior to 1993, net sales for fiscal 1993 increased by 1.2%. The Company's sales of dress shirts in 1993 increased over 1992. Based on industry statistics, which continue to reflect a general weakness in the U.S. dress shirt market, the Company believes that it has gained market share in this category. Management does not anticipate a significant improvement in the U.S. dress shirt market in the next six months.
The Company has announced the introduction of wrinkle free dress shirts under several of its brand names for sale to consumers prior to Father's Day 1994.
Gross profit in 1993 increased to $99.6 million, (24.5% of net sales) from $93.7 million, (22.5% of net sales) in 1992 as a result of increased gross profit margins in the men's Accessories Division (primarily neckwear), the Children's Apparel Group, the Stores division and the Thomson slacks division. These improvements more than offset reduced gross margins in the Company's dress shirt and denim based businesses.
The increased gross profit margin in the men's Accessories Division was largely a result of the outstanding consumer acceptance of the Company's novelty neckwear, produced under the PEANUTS, SAVE THE CHILDREN, BEATLES and WORLD WILDLIFE FUND labels. The Company, however, cannot predict whether the demand for such products will continue at the current rate or, if such demand does not continue, whether the Company will be able to develop other products which will offset any reduction in the gross profit of the novelty neckwear lines.
Selling, general and administrative expenses for the 1993 fiscal year amounted to $76.9 million, or 18.9% of net sales, a decrease of $1.1 million from the 1992 fiscal year, when such expenses represented 18.8% of net sales.
Earnings before interest, taxes, depreciation, amortization, bankruptcy administration expenses and restructuring charges ("EBITDA") was $37.6 million, compared to $31.1 million in 1992, an increase of 21%. The Company believes that EBITDA is helpful in understanding cash flow from operations that is available for debt service, taxes and capital expenditures. EBITDA should not be considered as an alternative to net earnings as an indicator of the Company's operating performance or to cash flow as an indicator of liquidity.
In fiscal year 1993, the Company recorded a $5.5 million provision for restructuring, which included $5.0 million related to the restructuring of the Salant Children's Apparel Group. In fiscal year 1992, the Company recorded division restructuring costs of $4.8 million, which included (i) the estimated costs to be incurred in connection with the restructuring of certain unprofitable operations, (ii) the rejection, allowable under chapter 11, of certain lease obligations and (iii) the write-off of leasehold improvements, buildings and equipment at closed locations.
Also, in fiscal year 1992, the Company wrote off the unamortized portion of the excess of cost over net assets acquired related to the Obion Denton and Vera Sportswear divisions in the amount of $6.8 million.
Bankruptcy administration expenses decreased to $8.9 million during fiscal year 1993 from $12.9 million during fiscal year 1992, primarily as a result of the consummation of the plan of reorganization on September 20, 1993.
Net interest expense (interest expense less interest income) increased to $7.6 million in fiscal year 1993 from $3.1 million in fiscal year 1992 as a result of interest incurred subsequent to September 1993 on the Secured Notes issued pursuant to the Plan. Interest expense for 1994 and subsequent years will include approximately $11.7 million per annum related to the Secured Notes.
For the 1993 fiscal year, the Company reported income from continuing operations before extraordinary gain of $7.2 million, or $1.02 per share (based on a weighted average of 7,104,000 common shares outstanding), compared to a loss from continuing operations of $6.0 million, or $1.73 per share, (based on a weighted average of 3,460,000 common shares outstanding) for the 1992 fiscal year.
For the 1993 fiscal year, net income was $43.7 million, or $6.15 per share, compared to a net loss of $17.8 million, or $5.13 per share, in 1992. Net income for 1993 included (i) a credit of $11.8 million, or $1.65 per share, resulting from the reversal of a reserve which had been recorded in 1992, for the estimated loss on the previously planned disposal of the Children's Apparel Group, and (ii) an extraordinary gain of $24.7 million, or $3.48 per share, resulting from the cancellation of indebtedness pursuant to the Plan. The net loss for 1992 included the provision for the reserve of $11.8 million, or $3.40 per share, related to the estimated loss on the previously planned disposal of the Children's Apparel Group.
In connection with the Company's reorganization, as of January 1, 1994, 9,612,000 shares of its common stock had been issued to creditors, resulting in approximately 13,100,000 shares outstanding as of that date. Upon completion of the claims resolution process, approximately 1,681,000 additional shares are expected to have been issued to creditors and are included in the weighted average used for purposes of the earnings per share calculations. The weighted average number of shares outstanding during the 1993 fiscal year (based upon the total number of common shares outstanding, including those which the Company estimates will ultimately be issued pursuant to the Plan) was 7,104,000, which (i) treats as issued on September 20, 1993 all common shares (11,300,000 shares) expected to be issued pursuant to the Plan, and (ii) gives effect to 465,000 common share equivalents relating to outstanding stock options.
Inflation and Recent Legislation
Management believes that the rate of inflation over the past three years has not had a material impact on Salant's operating results.
The adoption of the North American Free Trade Agreement (NAFTA) is expected to benefit the Company's business by (i) reducing and/or eliminating United States Customs duties on merchandise manufactured in Company-owned facilities in Mexico, (ii) eliminating quota levels on this merchandise, and (iii) eliminating restrictions on exporting merchandise from the United States for sale in both Mexico and Canada.
Fiscal 1992 Compared with Fiscal 1991
The financial statements for all periods presented have been reclassified to present the Salant Children's Apparel Group as a part of continuing operations.
For the 1992 fiscal year (ended January 2, 1993), Salant recorded net sales of $415.6 million, an increase of 4.3% from net sales of $398.5 million for the 1991 fiscal year. Excluding the net sales of product lines which ceased operations prior to 1992, the net sales increase from 1991 to 1992 was 13.6%. The increase in net sales was attributable to significant sales increases achieved by the Company's Perry Ellis menswear, Manhattan Shirt, Texas Apparel men's and boys' jeans, Thomson slacks and Made in the Shade women's junior sportswear divisions, partially offset by reductions in sales at the Obion Denton, Stores and Vera Scarves divisions.
Gross profit increased to $93.7 million (22.5% of net sales) in fiscal year 1992 from $92.5 million (23.2% of net sales) in fiscal year 1991. The reduction in gross profit as a percentage of net sales was primarily the result of increased costs to the Company of imported merchandise, particularly men's dress shirts, which could not be recovered through increases in the Company's selling prices. The Company believes that during 1992, reductions in gross profit as a percentage of net sales were experienced by a significant number of companies in the apparel industry.
Selling, general and administrative expenses for the 1992 fiscal year amounted $78.1 million, or 18.8% of net sales, a decrease of $9.2 million (10.5%) from the 1991 fiscal year, when such expenses represented 21.9% of net sales. The reduction in selling, general and administrative expenses for the 1992 fiscal year is primarily attributable to (i) cost savings achieved through the consolidation and restructuring of certain operations, (ii) reduced rent expense as a result of the rejection, allowable under chapter 11 of the Bankruptcy Code, of certain leases which were replaced by new leases with more favorable terms, and (iii) continued reductions in overhead costs at all divisions and all levels of management.
Royalty income (net of related expenses) in fiscal year 1992 was $6.4 million. During fiscal year 1991, royalty income (net of related expenses) was $7.7 million, which included approximately $2.0 million of royalty income earned in prior years but received during 1991 upon the settlement of certain litigation with Perry Ellis International Inc., the Perry Ellis licensor.
In fiscal year 1992, the Company recorded, in its results from continuing operations, division restructuring costs of $4.8 million as described above in the comparison of 1993 and 1992 operating results. In fiscal year 1991, the Company recorded, in its results from continuing operations, division restructuring costs of $13.0 million, which included (i) the estimated costs (including inventory markdowns) of the closure of substantially all of the operations the MI Group women's wear business, (ii) the estimated costs (including inventory markdowns) of the closure of certain unprofitable retail outlet stores, (iii) a provision for estimated claims arising from the rejection of certain leases and (iv) an accrual for payments pursuant to a severance agreement with the previous chief executive officer of the Company.
In fiscal year 1992, the Company wrote off the unamortized portion of the excess of cost over net assets acquired related to the Obion Denton and Vera Sportswear divisions in the amount of $6.8 million. In fiscal year 1991, the Company wrote off other assets of $6.6 million, which included (i) unamortized deferred debt expense of $3.6 million related to the financing arrangements entered into in connection with the acquisition of Manhattan Industries, Inc. and (ii) unamortized leasehold interests at a closed facility.
Bankruptcy administration expenses increased to $12.9 million during fiscal year 1992 from $6.9 million during fiscal year 1991, primarily as a result of a significant increase in activity relating to the Company's emergence from chapter 11. These expenses consisted primarily of outside legal counsel, consulting and other similar expenses.
Net interest expense (interest expense less interest income) declined to $3.1 million in fiscal year 1992 from $5.3 million in fiscal year 1991. The decline resulted from a reduction in average borrowing levels and a lower average Prime Rate. Subsequent to the Filing Date, the Company ceased accruing interest on pre-Filing Date obligations, with immaterial exceptions.
For the 1992 fiscal year, the Company incurred a loss from continuing operations of $6.0 million, or $1.73 per share, compared to a loss of $19.1 million, or $5.52 per share, for the 1991 fiscal year.
For the fiscal year 1992, the Company incurred a net loss of $17.8 million, or $5.13 per share, compared to a net loss of $19.1 million, or $5.52 per share, in fiscal year 1991. The net loss in 1992 reflected an estimated loss of $11.8 million on the planned disposal of the Obion Denton division.
Liquidity and Capital Resources
Upon consummation of the Plan, the Company issued $111.9 million principal amount of Secured Notes, made cash payments of approximately $7.1 million and issued approximately 9.6 million shares of common stock in settlement of claims arising from the Chapter 11 Cases. The Company estimates that an additional $9.4 million in cash and an additional 1.7 million shares of common stock will have been distributed upon the complete resolution of all remaining claims arising from the Chapter 11 Cases. Provisions for such distributions have been made in the consolidated financial statements for the period ended January 1, 1994.
On September 20, 1993, concurrent with the consummation of the Plan, the Company entered into a two year revolving credit, factoring and security agreement (the "Credit Agreement") with The CIT Group/Commercial Services, Inc. ("CIT") to provide seasonal working capital financing, including direct borrowings and letters of credit, up to an aggregate of $120 million (subject to an asset based borrowing formula). Interest on direct borrowings is charged monthly at an annual rate of one-half of one percent in excess of the prime rate of Chemical Bank (6% at January 1, 1994). As collateral for borrowings under the Credit Agreement, Salant has granted to CIT a security interest in substantially all of the assets of the Company. As of January 1, 1994, the Company had fully repaid its direct borrowings from CIT and held cash and marketable securities of approximately $2.2 million. On that date the Company had approximately $37.3 million of letters of credit outstanding and $31.1 million in unused availability under the Credit Agreement.
The increase of one quarter of one percent in the prime rate at Chemical Bank, announced in March 1994, is estimated (assuming no further change) to raise interest expense for the Company during 1994 by approximately $100 thousand.
The Credit Agreement contains numerous financial and operating covenants, including restrictions on incurring indebtedness and liens, making investments in or purchasing the stock of all or a substantial part of the assets of another person, selling property, making capital expenditures, and paying cash dividends. In addition, the Company is required to maintain minimum levels of working capital and stockholders' equity and to satisfy a ratio of total liabilities to stockholders equity, a fixed charge coverage ratio, and a maximum cumulative net loss test. At January 1, 1994, the Company was in compliance with all financial covenants as indicated below:
The Company is also required to reduce its indebtedness (excluding outstanding letters of credit) to $20 million or less for fifteen consecutive days during each twelve month period commencing February 1, 1994.The Company has already complied with this covenant for the period February 1, 1994 through January 31, 1995.
Pursuant to the Plan, the Company emerged from chapter 11 with long-term debt consisting of $111.9 million of Secured Notes that mature on December 31, 1998. The Secured Notes require no mandatory prepayments but are subject to redemption, at any time, in whole, or from time to time, in part, at the Company's option, at a premium to the principal amount thereof. The premium on redemption declines annually from 8.4% in 1994 to 2.1% in 1997.
The indenture governing the Secured Notes contains covenants restricting, among other things, the incurrence of indebtedness and the payment of dividends, which covenants are less restrictive than similar covenants in the Credit Agreement.
The net decrease in cash during the year amounted to $500 thousand as compared to a $10 million net decrease in cash in the prior year. Net cash provided by operating activities increased to $22.9 million in 1993 from $5.4 million in 1992, principally as a result of increased income from continuing operations and a decrease in inventories as compared to a significant increase in inventories in 1992. Capital expenditures amounted to $8.2 million, which included expenditures relating to new offices and showrooms for the Perry Ellis Division, the acquisition of a dress shirt manufacturing facility in Andalusia, Alabama and the opening of 20 new factory outlet stores, as compared to $3.9 million in 1992. Capital expenditures for 1994 are anticipated to be less than the amount expended in 1993. Also during 1993, $15.9 million of prepetition secured debt was repaid as compared to $12.5 million in 1992.
The Company's business is seasonal in nature. As a result, the Company's working capital requirements increase significantly during the first three quarters of each year. Salant's principal sources of liquidity, both on a short-term and a long-term basis, are cash flow provided by operations and borrowings under the Credit Agreement. Based upon its analysis of its consolidated financial position, its cash flow during the past twelve months, and its cash flow anticipated from future operations, Salant believes that its future cash flow, together with the funds available under the Credit Agreement, will be adequate to meet its seasonal working capital and capital requirements for the next twelve months. There can be no assurance, however, that future developments and general economic trends will not adversely affect the Company's operations and, hence, its anticipated cash flow.
ITEM 8.
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 as of January 1, 1994 and January 2, 1993, and the related consolidated statements of operations, shareholders' equity/deficiency and cash flows for the years ended January 1, 1994, January 2, 1993 and December 28, 1991. Our audits also included the financial statement schedules listed in the index at Item 14(a)(2). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Salant Corporation and subsidiaries as of January 1, 1994 and January 2, 1993, and the results of their operations and their cash flows for the years ended January 1, 1994, January 2, 1993 and December 28, 1991 in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 2 to the financial statements, on July 30, 1993 the Bankruptcy Court entered an order confirming the plan of reorganization which became effective on September 20, 1993. Under the plan of reorganization, the Company is required to comply with certain terms and conditions as more fully described in Note 2.
As discussed in Note 13 to the financial statements, the Company changed its method of accounting for income taxes effective January 3, 1993 to conform with Statement of Financial Accounting Standards No. 109.
/s/ Deloitte & Touche
New York, New York March 11, 1994
Salant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data)
See Notes to Consolidated Financial Statements
Salant Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS (Amounts in thousands)
See Notes to Consolidated Financial Statements
Salant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIENCY) (Amounts in thousands, except number of shares)
See Notes to Consolidated Financial Statements
Salant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
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. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The Consolidated Financial Statements include the accounts of Salant Corporation ("Salant") and subsidiaries (collectively, the "Company"). Significant intercompany balances and transactions are eliminated in consolidation.
On June 27, 1990 (the "Filing Date"), Salant and one of its subsidiaries, Denton Mills, Inc. ("Denton Mills"), filed separate voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). On July 30, 1993, the Bankruptcy Court issued an order confirming the Third Amended Joint Plan of Reorganization of Salant and Denton Mills (the "Plan"). The Plan was consummated on September 20, 1993 (the "Consummation Date"), as further described in Note 2.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to December 31. The 1993 and 1991 fiscal years were comprised of 52 weeks, while the 1992 fiscal year was comprised of 53 weeks.
Reclassifications
Certain reclassifications were made to the 1992 and 1991 financials statements to conform with the 1993 presentation.
Cash and Cash Equivalents
The Company considers cash on hand, deposits in banks and short-term investments as cash and cash equivalents for the purposes of the statements of cash flows. Short-term investments consist of certificates of deposit maturing within three months of issuance. These investments are readily convertible to cash and are stated at cost, which approximates market.
Inventories
Inventories are stated at the lower of cost (principally determined on a first-in, first-out basis for apparel operations and the retail inventory method on a first-in, first-out basis for outlet store operations) or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated or amortized over their estimated useful lives, or for leasehold improvements, the lease term, if shorter. Depreciation and amortization are computed principally by the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes.
The annual depreciation rates used are as follows:
Other Assets
The excess of cost over net assets acquired, trademarks and license agreements are being amortized over periods from 25 to 40 years. Leasehold interests are being amortized over the remaining lives of the leases, principally 18 years.
Fair Value of Financial Instruments
For financial instruments including cash and cash equivalents, accounts receivables and payable, and accruals, it was assumed that the carrying amount approximated fair value because of their short maturity. Long-term debt, which was recently issued at the market rate of interest, also approximates the fair value.
Earnings/(Loss) Per Share
Income/(loss) per share is based on the weighted average number of common shares (based upon the Company's estimate of the number of shares which will have been issued under the Plan by the final resolution of all claims - see Note 2) and common stock equivalents outstanding. Loss per share for 1992 and 1991 did not include common stock equivalents, as their effect would have been anti-dilutive.
Revenue Recognition
Revenue is recognized at the time the merchandise is shipped. Retail factory outlet store revenues are recognized at the time of sale.
Note 2. Consummation of the Plan of Reorganization
From the Consummation Date through January 1, 1994, pursuant to the Plan, the Company made cash payments of $7,128, issued $111,851 of new 10-1/2% senior secured notes and issued 9.6 million shares of common stock to creditors in settlement of certain claims in the chapter 11 proceedings. Salant anticipates that an additional $9,425 in cash and an additional 1.7 million shares of common stock ultimately will have been distributed to creditors by the time all remaining claims have been resolved. Provisions for such distributions have been made in the consolidated financial statements for the year ended January 1, 1994. As further described in Note 5, upon consummation of the Plan, the Company recorded an extraordinary gain of $24,707 relating to the settlement of indebtedness pursuant to the Plan.
Note 3. Discontinued Operations Subsequently Retained
In March 1993, the Company adopted a formal plan to restructure and sell the Salant Children's Apparel Group (formerly the Obion Denton division) which manufactures children's sleepwear. As a consequence, the division was accounted for as a discontinued operation for fiscal 1992 and the first three quarters of fiscal 1993. In March 1994, the Company concluded that the value of the division would be maximized by retaining the Salant Children's Apparel Group as part of its continuing operations. As a result, the Salant Children's Apparel Group's net assets and results of operations for all periods presented have been reclassified from discontinued operations to continuing operations.
In the fourth quarter of 1992, the Company recorded an $11,772 provision for the estimated costs to restructure the division and to accrue for expected operating losses during the phase-out period through December 1993. In the fourth quarter of 1993, the 1992 charge was reversed and the Company recorded a provision of $5,000 for restructuring costs, including (i) the costs of closure of certain unprofitable product lines, (ii) inventory markdowns associated with those product lines, and (iii) fixed asset write-downs at closed locations.
The following is a summary of certain selected financial data for the Salant Children's Apparel Group during the period in which it was reported as a discontinued operation.
Note 4. Restructuring Costs
In the fourth quarter of fiscal 1993, the Company recorded a $5,500 restructuring reserve, of which $5,000 related to the restructuring of the Salant Children's Apparel Group, as more fully described in Note 3.
In the fourth quarter of fiscal 1992, the Company recorded a $4,824 restructuring reserve, which included (i) the estimated costs to be incurred in connection with the restructuring of certain unprofitable operations, (ii) the rejection, allowable under chapter 11, of certain lease obligations and (iii) the write-off of leasehold improvements, buildings and equipment at closed locations.
In fiscal 1991, the Company recorded division restructuring costs of $12,984, which included (i) the estimated costs of the closure of substantially all of the operations of the MI Group women's wear business, (ii) the estimated costs of the closure of certain unprofitable retail factory outlet stores, (iii) a provision for estimated claims arising from the rejection of certain leases and (iv) an accrual for payments pursuant to a severance agreement with the previous chief executive officer of the Company.
Note 5. Extraordinary Gain
In September 1993, the Company recorded an extraordinary gain of $24,707 consisting of (i) an extraordinary gain of $45,974 from the settlement and anticipated settlement of claims arising from the chapter 11 proceeding for less than their full amount and (ii) an extraordinary loss of $21,267 arising from the settlement in lieu of accrued interest and fees in respect of the Company's bank debt during the pendency of the Company's chapter 11 cases.
Note 6. Inventories
Note 7. Property, Plant and Equipment
Note 8. Other Assets
In the fourth quarter of 1992, the Company wrote off other assets of $6,759, which consisted of the unamortized portion of the excess cost over net assets acquired related to the Salant Children's Apparel Group and Vera Sportswear division.
In the fourth quarter of 1991, the Company wrote off other assets of $6,587, which included the write-off of (i) unamortized deferred debt expense of $3,590 related to fees and expenses incurred in connection with the acquisition of Manhattan Industries, Inc. ("Manhattan") in 1988, (ii) unamortized trademarks of $2,612 resulting from an inactive licensing program, and (iii) unamortized leasehold interests of $385 resulting from the closure of a facility.
Note 9. Accrued Salaries, Wages and Other Liabilities
Note 10. Post-Consummation Financing and Factoring Agreements
On September 20, 1993, the Company entered into a two year revolving credit, factoring and security agreement (the "Credit Agreement") with The CIT Group/Commercial Services, Inc. ("CIT") to provide seasonal working capital financing, including direct borrowings and letters of credit, of up to $120,000 (subject to an asset based borrowing formula). As of January 1, 1994, $31,100 was available under this facility. Interest on direct borrowings is charged monthly at an annual rate of one-half of one percent in excess of the prime rate of Chemical Bank (6% at January 1, 1994). As collateral for borrowings under the Credit Agreement, the Company granted to CIT a security interest in substantially all of the assets of the Company. As of January 1, 1994 and January 2, 1993, there were no direct borrowings. As of January 1, 1994, letters of credit outstanding under the Credit Agreement were $37,256. As of January 2, 1993, letters of credit outstanding under the previously existing financing agreement were $39,678. The weighted average interest rate on borrowings under these financing agreements for the years ended January 1, 1994 and January 2, 1993 was 6.8% and 7.5%, respectively.
The Credit Agreement contains numerous financial and operating covenants, including restrictions on incurring indebtedness and liens, making investments in or purchasing the stock of all or a substantial part of the assets of another person, selling property, incurring capital expenditures, and paying cash dividends. In addition, the Company is required to maintain minimum levels of working capital and stockholders' equity and to satisfy a ratio of total liabilities to stockholders' equity, a fixed charge coverage ratio and a maximum cumulative net loss test. At January 1, 1994, Salant was in compliance with all financial covenants.
Note 11. Long-Term Debt
On September 20, 1993, Salant issued $111,851 principal amount of 10 1/2% Senior Secured Notes (the "Secured Notes") due December 31, 1998. The Secured Notes bear interest from September 1, 1993 and may be redeemed at any time prior to maturity, in whole or in part, at the option of the Company, at a premium to the principal amount thereof plus accrued interest. The premium on redemption declines annually from 8.4% in 1994 to 2.1% in 1997. The Secured Notes are secured by a first lien (subordinated to the Credit Agreement to the extent of $15,000) on certain accounts receivable, certain intangible assets, the capital stock of Salant's subsidiaries and certain real property of the Company, and by a second lien on substantially all of the other assets of the Company.
The Secured Notes contain various restrictions pertaining to future indebtedness, the purchase of capital stock and the payment of dividends. Under the most restrictive of these provisions, the Company currently may not purchase or redeem any shares of its capital stock, or declare or pay cash dividends.
Note 12. Segment Information
The Company operates within one industry segment, the business of manufacturing and marketing apparel. The Company sells its products to retailers, including department stores, specialty stores, national chain stores and mass volume retailers, throughout the United States. As an adjunct to its apparel manufacturing operations, the Company operates 57 factory outlet stores and 1 retail store in various parts of the United States. Foreign operations are not significant.
Note 13. Income Taxes
The provision for income taxes consists of the following:
The effective tax rate differed from the statutory rate for the year ended January 1, 1994 due to differences in tax treatment relating to the bankruptcy and other items. The effective tax rate differed from the statutory rate in the years ended January 2, 1993 and December 28, 1991 because no tax benefit was available with respect to losses incurred in those years.
The following is a reconciliation of the tax provision/(benefit) at the statutory Federal income tax rate to the actual income tax provision:
Effective January 3, 1993, the Company adopted Financial Accounting Standards Board Statement No. 109 ("SFAS No. 109"), "Accounting for Income Taxes". This statement supersedes SFAS No. 96 "Accounting for Income Taxes" which was adopted by the Company in 1988. Under SFAS No. 109, the Company is required to recognize the amount of taxes payable or refundable for the current year and to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Adoption of SFAS No. 109 had no cumulative effect on earnings or effect on income tax expense for the year ended January 1, 1994, as the Company recognized a net deferred tax asset of $64,364, offset in full by a valuation allowance as of the date of adoption.
The tax effects of significant items comprising the Company's net deferred tax asset as of January 1, 1994:
At January 1, 1994, the Company had net operating loss carryforwards ("NOLs") for income tax purposes of approximately $116,000, which can be used to offset future taxable income, expiring from 1999 to the year 2007. Approximately $51,000, which arose from the acquisition of Manhattan, will offset goodwill when utilized. The implementation of the Plan, together with transactions that have occurred within the three-year period preceding the consummation of the Plan, have caused an "ownership change" for federal income tax purposes on the date the Plan was consummated. As a result of such ownership change, the use of the NOLs to offset future taxable income may be limited by the requirements of section 382 of the Internal Revenue Code of 1986, as amended. The annual limit under section 382 would be approximately $7,200 or approximately $108,000 over a fifteen year carryover period. If the Company utilizes the special bankruptcy exception of section 382(l)(5), the operating loss (which is not subject to an annual limitation) would be approximately $89,000. In addition, the Company realized cancellation of indebtedness income of approximately $917 upon consummation of the Plan and the NOLs will be reduced or limited accordingly.
In addition, at January 1, 1994, the Company had available investment tax and other credits which expire between 1994 and 1999, of which $1,986 will reduce goodwill and the balance will reduce income tax expense when utilized. The Company's utilization of these credits may be limited in the same manner as the Company's utilization of its NOLs as described above.
On June 27, 1990, the date of the filing of the Chapter 11 cases, the Internal Revenue Service (the "IRS") was in the process of examining the tax returns of Manhattan (acquired in April 1988) for the years ended January 31, 1982 through January 31, 1986 and January 31, 1988. The IRS has filed amended proofs of claim (the "IRS Claim") with the Bankruptcy Court in the aggregate amount of $5,201 which includes $2,010 of income and withholding taxes, interest and penalties thereon, and unemployment taxes (the "Income Tax Claim") through the filing date of the Chapter 11 Cases. Without prejudice to the rights, claims and defenses of the IRS and the Company, at the confirmation hearing with respect to the Plan, the Company and the IRS agreed to expunge all claims and proofs of claims asserted and/or filed by the IRS other than the portion of the IRS Claim relating to such taxes. The IRS Claim also includes $3,191 for excise taxes (the "Excise Tax Claim") arising from the failure of Salant to have met minimum funding obligations for its defined benefit pension plans and penalties associated therewith.
Pursuant to a settlement reached with the IRS (which is subject to final IRS approval), the Excise Tax Claim (plus any associated penalties) has been reduced to $100, which is payable upon the execution of the definitive settlement agreement. Provisions for such distributions to the IRS in settlement of the Income Tax Claim and the Excise Tax Claim have been made in the consolidated financial statements for the year ended January 1, 1994.
Note 14. Employee Benefit Plans
Pension and Retirement Plans
The Company has several defined benefit plans for virtually all full-time salaried employees and certain nonunion hourly employees. The Company's funding policy for its plans is to fund the minimum annual contribution required by applicable regulations.
The Company also has a nonqualified supplemental retirement and death benefit plan covering certain employees. The funding for this plan is based on premium costs of related insurance contracts.
Pension expense includes the following components:
The reconciliation of the funded status of the plans at January 1, 1994 and January 2, 1993 is as follows:
Assumptions used in accounting for defined benefit pension plans are as follows:
Assets of the Company's qualified plans are invested in directed trusts. Assets in the directed trusts are invested in common and preferred stocks, corporate bonds, money market funds and U.S. government obligations. The nonqualified supplemental plan assets consist of the cash surrender value of certain insurance contracts.
During 1992, each of the retirement plans was amended to change the plan year to the calendar year, effective January 1, 1992, resulting in each of the plans having a short plan year, ending December 31, 1991. One of the plans, the Manhattan Industries, Inc. Employees' Benefit Plan was merged into the Salant Corporation Retirement Plan, effective as of March 1, 1992.
The Company also contributes to certain union retirement and insurance funds established to provide retirement benefits and group life, health and accident insurance for eligible employees. The total cost of these contributions was $5,060, $4,769 and $5,064 in 1993, 1992 and 1991, respectively. The actuarial present value of accumulated plan benefits and net assets available for benefits for employees in the union administered plans are not determinable from information available to the Company.
Long Term Savings and Investment Plan
Salant sponsors the Long Term Savings and Investment Plan, under which eligible salaried employees may contribute up to 15% of their annual compensation, subject to certain limitations, to a money market fund, a fixed income fund and/or an equity fund. Salant contributes a minimum matching amount of 20% of the first 6% of a participant's annual compensation and may contribute an additional discretionary amount in cash or in the Company's common stock. Prior to March 1, 1992, the Company's contributions were made in the Company's common stock, and additional contributions were based on earnings per share.
In 1993, 1992 and 1991 Salant's aggregate contributions to the Plan amounted to $208, $163 and $55, respectively.
At the end of 1991, the Manhattan Salary Savings Plan was amended to change the plan year to the calendar year, effective January 1, 1992, resulting in the plan having a short plan year, ending December 31, 1991. The Manhattan Salary Savings Plan was merged into the Long Term Savings and Investment Plan, effective March 1, 1992.
Note 15. Stock Options, Warrants and Shareholder Rights
On September 20, 1993, pursuant to the Plan, the Company adopted the 1993 Stock Plan under which options or awards may be granted to directors and key employees of the Company for the purchase of an aggregate of 600,000 shares of the Company's common stock.
The 1988 and 1987 Stock Plans authorized the Company to grant stock options or stock awards aggregating 1,200,000 shares of Salant common stock to officers, key employees and, in the case of the 1988 Stock Plan, directors. The 1993, 1988 and 1987 Stock Plans authorized such grants at such prices and pursuant to such other terms and conditions as the Stock Plan Committee may determine. Options may be nonqualified stock options or incentive stock options and may include stock appreciation rights. Options expire no later than ten years from the date of grant and become exercisable in varying amounts over periods ranging from four months to five years from the date of grant.
The following table summarizes stock option transactions during 1991, 1992 and 1993:
At January 1, 1994, there were 337,141 shares of Salant common stock reserved for future grants of stock options or stock awards.
Pursuant to the Plan, the Company issued 2,371,182 Salant B Warrants (the "Warrants") to holders of the Company's common stock immediately prior to the consummation date. Each Warrant expires three years from the date of issuance and entitles the registered holder thereof to purchase one share of common stock of the Company at prices of $16 during the first year after issuance, $18 during the second year after issuance and $20 thereafter. No Warrants were exercised in 1993.
In addition, warrants outstanding which entitled the holders to purchase an aggregate of 325,000 shares of Salant common stock at prices ranging from $12 to $16.75 expired during 1993. No warrants were exercised in 1993, 1992 or 1991.
The Company has a shareholder rights plan (the "Rights Plan"), which provides for a dividend distribution of one right for each share of Salant common stock to holders of record at the close of business on December 23, 1987. The rights will expire on December 23, 1997. With certain exceptions, the rights will become exercisable only in the event that an acquiring party accumulates 20 percent or more of the Company's voting stock, or if a party announces an offer to acquire 30 percent or more of such voting stock. Each right, when exercisable, will entitle the holder to buy one one-hundredth of a share of a new series of cumulative preferred stock at a price of $30 per right or upon the occurrence of certain events, to purchase either Salant common stock or shares in an "acquiring entity" at half the market value thereof. The Company will generally be entitled to redeem the rights at three cents per right at any time until the 10th day following the acquisition of a 20 percent position in its voting stock. In July 1993, the Rights Plan was amended to provide that an acquisition or offer by Apollo Apparel Partners, L.P., or any of its subsidiaries, will not cause the rights to become exercisable.
As of January 1, 1994, there were 4,071,097 shares of Common Stock reserved for the future issuance of stock options, stock awards and warrants.
Note 16. Deferred Liabilities
Note 17. Commitments and Contingencies
(a) Lease Commitments
The Company conducts a portion of its operations in premises occupied under leases expiring at various dates through 1999. Certain of the leases contain renewal options. Rental payments under certain leases may be adjusted for increases in taxes and operating expenses above specified amounts. In addition, certain of the leases for outlet stores contain provisions for additional rent based upon sales.
In fiscal years 1993, 1992 and 1991, rental expense was $5,773, $6,686 and $8,513, respectively. As of January 1, 1994, future minimum rental payments under noncancellable operating leases (exclusive of renewal options, percentage rentals, and adjustments for property taxes and operating expenses) were as follows:
(b) Legal Contingencies/Significant Disputed Claims
(1) Chapter 11 Cases. On June 27, 1990, Salant and Denton Mills each filed with the Bankruptcy Court a separate voluntary petition for relief under chapter 11 of the Bankruptcy Code. On July 30, 1993, the Bankruptcy Court confirmed the Plan. The consummation of the Plan took place on September 20, 1993.
On August 6, 1993, the Official Committee of Equity Security Holders of Salant (the "Equity Committee") filed a notice of appeal in the United States District Court for the Southern District of New York. The Equity Committee appealed the portion of the Plan relating to the payment of certain compensation to Salant's Chief Executive Officer, Nicholas DiPaolo, which compensation became payable upon consummation of the Plan, but did not seek to overturn the confirmation of the Plan. On November 12, 1993, Salant moved to dismiss the appeal on the grounds that the Equity Committee lacks standing and mootness. Consideration of the Equity Committee's appeal is being deferred pending the resolution of Salant's motion to dismiss.
(2) SEC Inquiry. As previously disclosed, an investigation was conducted by the Staff of the Securities and Exchange Commission (the "SEC") concerning the accuracy of certain statements in Salant's Annual Report (Form 10-K) for the year ended December 30, 1989, and its Quarterly Report (Form 10-Q) for the quarter ended March 31, 1990 (collectively, the "SEC Filings"). The SEC investigation focused on management's belief, as stated in those filings in the Management's Discussion and Analysis of Financial Condition and Results of Operation ("MD&A") section in the SEC Filings, that Salant's existing credit lines should be sufficient to meet its working capital requirements. Salant cooperated with the SEC Staff in connection with its investigation and has recently engaged in discussions with the SEC Staff regarding the resolution of the matters under investigation. The resolution of the investigation is not expected to have a material adverse impact on Salant's financial condition or results of operations.
(3) Securities Litigation. On November 27, 1990, Mae Fischer ("Fischer"), an alleged purchaser of Salant's 13-1/4% Senior Subordinated Debentures due June 15, 1999 (the "Debentures"), instituted a purported class action suit in the United States District Court for the Southern District of New York, claiming that certain directors and officers of Salant violated the federal securities laws by issuing favorable public statements concerning the future profitability of Salant, which Fischer claims artificially inflated the market price of the Debentures between October 1988 and June 1990. Pursuant to Salant's bylaws, Salant is obligated to indemnify its directors and officers against expenses and any judgments or settlements entered against them in actions in which they are sued in their capacity as directors or officers. Salant was not named as a defendant in the suit, Fischer v. Tynan, et al., 90 Civ. 7587 (LBS), due to the pendency of the Chapter 11 Cases.
Pursuant to the terms and conditions of the stipulation of settlement, Salant will issue and distribute a number of shares of Salant Common Stock, not to exceed 11,000 shares, to certain purchasers of the Debentures who sold at a loss during a circumscribed period. In addition, Fischer's counsel will receive $150 for their fees and expenses pursuant to the settlement. The stipulation of settlement, which is subject to a hearing and review by the Bankruptcy Court, was filed with the Bankruptcy Court on March 28, 1994. Upon final approval by the Bankruptcy Court, the Fischer appeal and the Fischer Claim will be deemed withdrawn with prejudice.
(c) Employment Agreements
The Company has employment agreements with certain executives, which provide for the payment of compensation aggregating approximately $6,274 in 1994, $1,909 in 1995 and $918 in 1996. In addition, such employment agreements provide for incentive compensation based on various performance criteria.
Note 18. Quarterly Financial Information (Unaudited)
Fiscal year ended January 2, 1993 (b)
Reference is made to Notes 3, 4 and 8 concerning fourth quarter adjustments during the fiscal years ended January 1, 1994 and January 2, 1993.
(a) Income/(loss) per share of common stock is computed separately for each period. The sum of the amounts of income/(loss) per share reported in each period differs from the total for the year due to the issuance of shares in 1993 and, when appropriate, the inclusion of common stock equivalents.
(b) Information provided for the first, second and third quarters of 1993, and the fourth quarter of 1992 has been adjusted for the reclassification and retention of the Salant Children's Apparel Group. See Note 3 for additional information.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference from the Proxy Statement of Salant Corporation.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the Proxy Statement of Salant Corporation.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the Proxy Statement of Salant Corporation.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the Proxy Statement of Salant Corporation.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements
The following financial statements are included in Item 8 of this Annual Report:
Independent Auditors' Report. . . . . . . . . . . . .
Consolidated Statements of Operations . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . .
Consolidated Statements of Shareholders' Equity/(Deficiency) . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . .
Notes to Consolidated Financial Statements. . . . . .
Financial Statement Schedules
The following Financial Statement Schedules for the fiscal years ended January 1, 1994, January 2, 1993, and December 28, 1991 and are filed as part of this Annual Report:
Schedule VIII - Valuation and Qualifying Accounts and Reserves. . . . . . . . . . . . . . . . . . . .
Schedule IX - Short-Term Borrowings . . . . . . . . .
Schedule X - Supplementary Income Statement Information . . .
All other schedules have been omitted because they are inapplicable or not required, or the information is included elsewhere in the financial statements or notes thereto.
SALANT CORPORATION AND SUBSIDIARIES
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
NOTES:
(A) Uncollectible accounts written off, less recoveries.
(B) Costs incurred in plant closings and business restructuring.
(C) Charged to discontinued operations.
(D) Reversal of estimated loss on disposal of discontinued operation.
(E) Included in reserve for restructuring on the balance sheet.
SALANT CORPORATION
AND SUBSIDIARIES
SCHEDULE IX - SHORT-TERM BORROWINGS
NOTES:
(1)Average amount outstanding during the period is computed by dividing the total of daily outstanding principal balances by 365.
(2)Average interest rate for the year is computed by dividing the actual short-term interest expense by the average short-term debt outstanding.
SALANT CORPORATION
AND SUBSIDIARIES
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
For Each Year in the Three-Year Period Ended January 1, 1994 (000's omitted)
Amounts for maintenance and repairs, preoperating costs and similar deferrals, taxes other than payroll and income taxes are not presented inasmuch as such amounts are less than 1% of net sales.
Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended January 1, 1994.
Exhibits
* denotes management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SALANT CORPORATION
Date: March 31, 1994. By /s/John S. Rodgers Executive Vice President, Senior Counsel and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
Signature Title
/s/Nicholas P. DiPaolo Chairman of the Board, Nicholas P. DiPaolo President and Chief Executive Officer (Principal Executive Officer); Director
/s/Richard P. Randall Senior Vice President, Richard P. Randall Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer)
/s/John S. Rodgers Executive Vice President, John S. Rodgers Senior Counsel and Secretary; Director /s/Craig M. Cogut Craig M. Cogut Director
/s/Ann Dibble Jordan Ann Dibble Jordan Director
/s/Stanley R. Klion Stanley R. Klion Director
/s/Harold Leppo Harold Leppo Director
/s/Bruce Roberts Bruce Roberts Director
/s/Marvin Schiller Director Marvin Schiller
/s/Edward M. Yorke Edward M. Yorke Director
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
EXHIBITS
to
FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 1, 1994
SALANT CORPORATION EXHIBIT INDEX
* denotes management contract or compensatory plan or arrangement.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Birdhill, Limited, a Hong Kong corporation
Carrizo Manufacturing Co., S.A. de C.V., a Mexican corporation
Clantexport, Inc., a New York corporation
Denton Mills, Inc., a Delaware corporation
Frost Bros. Enterprises, Inc., a Texas corporation
Manhattan Industries, Inc., a Delaware corporation
Manhattan Industries, Inc., a New York corporation
Manhattan Industries (Far East) Limited, a Hong Kong corporation
Maquiladora Sur S.A. de C.V., a Mexican corporation
Sea Isle Sportswear Inc., a New York corporation
Vera Licensing, Inc., a Nevada corporation
Vera Linen Manufacturing, Inc., a Delaware corporation