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 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-1282-3
Swiss Army Brands, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-2797726
(State of incorporation) (I.R.S. Employer Identification No.)
One Research Drive, Shelton, Connecticut 06484
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 929-6391
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark 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 amendments to
this Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant on March 19, 1999, was approximately $27,400,000. On such date, the
closing price of registrant's common stock was $9.50 per share. Solely for
purposes of this calculation, shares beneficially owned by directors, executive
officers and stockholders of the registrant that beneficially own more than 10%
of the registrant's common stock have been excluded, except shares with respect
to which such directors and officers disclaim beneficial ownership. Such
exclusion should not be deemed a determination or admission by the registrant
that such individuals are, in fact, affiliates of the registrant.
The number of shares of Registrant's Common Stock, $.10 par value,
outstanding on March 19, 1999, was 7,851,510 shares.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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PART I
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Item 1.Business.
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Swiss Army Brands, Inc. ("SABI" or the "Company") is the exclusive
distributor in the United States, Canada (with one minor exception for cutlery)
and the Caribbean of the Victorinox Original Swiss Army Knife, Victorinox
SwissTool , Victorinox SwissCard , Victorinox Cutlery and Victorinox Watches.
SABI also markets its own line of Swiss Army Brand Watches, Swiss Army Brand
Sunglasses and other high quality Swiss-made products under its Swiss Army Brand
worldwide. The Company has been marketing Victorinox Original Swiss Army Knives
and Victorinox Cutlery for over fifty years and has been the exclusive United
States distributor of such products since 1972, an arrangement that was
formalized in 1983. SABI added Canada and the Caribbean (including Bermuda) to
its exclusive territory for Victorinox Original Swiss Army Knives in 1992 and
1993, respectively.
The Company is engaged principally in one line of business - the
importation and distribution of cutlery, pocketknives, multi-tools, watches and
other consumer products. Sales of Victorinox Original Swiss Army Knives,
Victorinox SwissTools and Victorinox SwissCards, accounted for approximately 36%
of SABI's 1998 sales while watches and other Swiss Army Brand products accounted
for approximately 48%. Sales of professional and consumer cutlery accounted for
approximately 16% of SABI's 1998 sales. Total SABI sales for the calendar years
1998, 1997 and 1996 were $127,851,000, $118,744,000, and $130,030,000,
respectively. No customer accounted for more than 10% of net sales during any
year in the three-year period ended December 31, 1998. See Note 15 to the
Company's Financial Statements included herein for further information regarding
segment information for the Company. At December 31, 1998 SABI had an order
backlog of approximately $2,383,000, compared to $5,746,000 at December 31,
1997.
During the years ended December 31, 1997 and 1996, the Company recorded
special charges, primarily related to discontinued inventory, investment
write-downs and restructuring costs. In 1997, the Company recorded a special
charge of $1.3 million related to discontinued inventory and $0.8 million in
restructuring costs. These restructuring costs primarily consisted of severance
and related expenses. In the second quarter of 1996, as part of an extensive
analysis of the Company's operations, the Company recorded a special charge of
approximately $7.4 million. The special charge consisted of a $4.5 million
write-off of discontinued inventory and a $2.9 million write-off of obsolete
displays, goodwill, non-strategic investments and other assets. In the fourth
quarter of 1996, the Company recorded an additional special charge of
approximately $2.5 million. The special charge consisted of $1.6 million
write-down related to non-strategic investment, a $0.4 million write-off of
discontinued inventory and a $0.5 million write-off of obsolete displays and
other assets. See further discussion in Management's Discussions and Analysis of
Financial Condition and Results of Operations and the Consolidated Financial
Statements and related notes included herein.
The Company was incorporated on December 12, 1974 as a successor to a New
York corporation. SABI's principal executive offices are located at One Research
Drive, Shelton, Connecticut 06484 and its telephone number is (203) 929-6391. As
of December 31, 1998, SABI and its subsidiaries had 219 full-time employees,
including 10 in Canada and 6 in Switzerland.
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Victorinox Products and Swiss Army Brand Products
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SABI is the exclusive United States, Canadian (with one minor exception for
cutlery) and Caribbean distributor of Victorinox Original Swiss Army Knives,
Victorinox SwissTools, Victorinox cutlery, Victorinox SwissCards and Victorinox
Watches under agreements with SABI's principal supplier of pocket knives and
cutlery, Victorinox Cutlery Company ("Victorinox"), a Swiss corporation and
Europe's largest cutlery producer. SABI also sells watches and other high
quality products under the Swiss Army Brand worldwide.
Victorinox Original Swiss Army Knives are multiblade pocketknives
containing implements capable of more functions than standard pocketknives. For
example, SABI's most popular Victorinox Original Swiss Army Knife model, the
Classic, with a suggested retail price of $16, features a blade, scissors, nail
file with screwdriver tip, toothpick and tweezers. SABI markets more than 70
different models of Victorinox Original Swiss Army Knives containing up to 35
different implements (with up to 45 separate features), ranging from a basic
knife with a suggested retail price of $10 to the highest priced model at
approximately $70 as well as a SwissChamp Deluxe SOS kit with a suggested
retail price of approximately $160. SABI also sells multi-function lockblade
knives designed for the hunting and outdoor market. In 1997, the Company added
to its product line the SwissCard , a credit card shaped, ten function
instrument, and the SwissTool , a multi-tool with 23 features, including full
size pliers. The Company's line of Victorinox watches currently includes ten
models with approximately 30 SKUs, with suggested retail prices ranging from $60
to $175.
The Company sells professional cutlery products, made of stainless steel,
primarily manufactured by Victorinox. Although the majority of SABI's
professional cutlery products are marketed under the trademarks "Forschner" and
"R.H. Forschner," the Company also has a private label business. Professional
cutlery imported from Switzerland is generally more expensive than domestic
United States products. SABI believes that it has the largest market share of
imported professional cutlery products sold in the United States and that its
share of all professional cutlery, foreign and domestic, sold in this country is
second to the dominant seller of such products. SABI believes that it has
achieved and maintained its market share due to the quality of its products and
its merchandising efforts.
SABI's line of Swiss Army Brand products includes 25 models of Swiss Army
Brand Watches with over 70 SKUs ranging from the Renegade , with a suggested
retail price of $85 to the Titanium Two-Tone with a suggested retail price of
$595. In the first quarter of 1997, the Company added to its product line newly
designed Swiss Army Brand Sunglasses. The Company's sunglass line includes 22
models with over 50 SKUs with suggested retail prices ranging from $60 to $120.
In addition, SABI sells Swiss Army Brand writing instruments. Also in 1997, the
Company entered into an arrangement pursuant to which it distributes in North
America, and serves as sales and marketing agent in most of the rest of the
world, a line of watches under the Swiss Air Force trademark. SABI currently
obtains a majority of its Swiss Army Brand Watches from a single Swiss supplier,
who is responsible for the final assembly of watch components manufactured by
several manufacturers. The Company believes that alternate suppliers would be
available if necessary and that the loss of its current supplier of Swiss Army
Brand Watches would not have a material adverse effect on the Company's
business.
The Company distributes its products throughout the United States, Canada
and the Caribbean through independent sales representatives and its direct sales
force to over 3,800 wholesalers and retailers, including department stores,
high-end jewelers, sporting goods stores, specialty retailers, cutlery shops,
catalog showrooms, mass merchandisers and mail order houses, through
distributors to corporations and other organizations for promotional purposes,
premium, employee gift award programs and corporate identity catalogs. SABI
imprints its products primarily at its own facilities with the customer's
corporate name or logo. SABI's customers for professional cutlery include
distributors of hotel, restaurant, butcher, institutional, commercial fishing
and slaughterhouse supplies and retail cutlery stores located throughout the
United States and Canada.
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Sales of Victorinox Original Swiss Army Knives and Swiss Army Brand
products are seasonal with sales typically stronger during July through
December.
Although the Company is the largest United States seller of Swiss Army
Knives, it faces competition from Precise Imports Corp. ("Precise"), the United
States and Canadian distributor of Swiss Army Knives manufactured by Wenger S.A.
("Wenger"), the only company other than Victorinox supplying knives to the Swiss
armed forces. Precise imports a substantially smaller number of knives into the
United States than SABI. The Company also faces competition from the
manufacturers and importers of other multiblade knives and multi-tools including
importers which sell non Swiss-made pocket knives under the "Swiss Army Knife"
name.
SABI is unable to determine its competitive position with respect to the
estimated seven major competitors in the general United States pocket knife
market. SABI's direct competitors in the specialty advertising market are
manufacturers of name brand products of similar price and quality. SABI has many
competitors in the sale of watches and sunglasses at all price points. Many of
these competitors have market shares and resources substantially greater than
those of SABI.
License Agreement
-----------------
On May 15, 1997, SABI entered into an agreement with St. John Knits, Inc.
("St. John") providing for the grant of an exclusive license, subject to certain
terms and conditions, to SABI to market watches bearing the St. John trademark.
St. John is a leading designer, manufacturer and marketer of fine woman's
apparel. SABI introduced the St. John Timepiece Collection in November 1998.
Trademark Agreements
--------------------
In 1992, in connection with the settlement of litigation with Precise, SABI
granted Precise a perpetual worldwide royalty free license to use the trademark
Swiss Army in connection with Swiss made non-knife goods, other than timepieces,
sunglasses and compasses. Under this agreement, Precise acknowledges SABI's
exclusive rights to the Swiss Army trademark for non-knife products including
timepieces, compasses and sunglasses. See Item 3 for discussion of legal
proceedings between SABI and Precise.
The Company is the owner of United States and certain foreign trademark
registrations for "Swiss Army", as applied to watches and sunglasses and
actively defends its trademarks throughout the world. Although the Company's
registrations have been challenged, on the basis of the advice of its trademark
counsel, SABI expects to prevail in those proceedings. The Company is dedicated
to a vigorous enforcement of these exclusive trademark rights.
No U.S. trademark registrations have ever been issued for "Swiss Army" as
applied to multi-bladed knives. In 1994, in a case originally brought by SABI
against Arrow Trading Co., Inc. ("Arrow") in September 1992 in the District
Court for the Southern District of New York, the U.S. Court of Appeals for the
Second Circuit reversed a judgment originally issued in the Company's favor and
held that the use of "Swiss Army" on Chinese made knives could not be enjoined
on grounds of geographic misdescriptiveness. On remand, the District Court ruled
that Arrow had violated Section 43(a) of the Lanham Act and New York common law
in connection with its sale of Chinese-made multi-bladed pocketknives which
Arrow called "Swiss Army Knives." The court found that SABI had proved its
contention that Arrow engaged in unfair competition and held that Arrow,
although free to use the phrase "Swiss Army Knife" to designate its product,
must amply distinguish it from the SABI product and prohibited Arrow from
selling any multi-function pocketknives as "Swiss Army Knives" unless the phrase
"Swiss Army Knife" is immediately preceded or followed by Arrow's name in such a
way as to clearly designate its origin and that the size of the type designating
origin be no smaller or less prominent than the type used in the phrase "Swiss
Army Knife". The Company intends to utilize all reasonable means to safeguard
the public from being misled by inferior imitation products.
4
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On January 17, 1995, Victorinox and Wenger confirmed and memorialized in
writing the grant of separate trademark licenses of Swiss Army as applied to
multifunction pocketknives to SABI and Precise. The license to the Company is
royalty free and continues so long as SABI is a distributor of Victorinox.
Victorinox and Wenger have filed with the U.S. Patent and Trademark Office a
dual application for "Swiss Army" as applied to multi-bladed knives, which
application has been opposed by various third parties.
The Company is actively considering marketing other products under the
"Swiss Army" trademark or under other trademarks. However, no assurances can be
given that the Company will ever enter into these additional markets, or if
entered into, that such activities will be profitable.
If the Company's efforts to protect its trademarks prove to be
unsuccessful, the Company may incur increased competition from non-Swiss made
knives and other products sold under the "Swiss Army" name. No assurances can be
given that such competition from non-Swiss made products would not have a
material adverse effect on the business and prospects of the Company.
Swiss Confederation Trademarks
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On December 18, 1996, the Swiss Military Department representing the Swiss
Confederation ("Swiss Confederation") and SABI entered into a trademark
agreement (the "Trademark Agreement") pursuant to which SABI was granted certain
worldwide use and sublicensing rights in connection with trademarks containing
the words "Swiss Army" registered by the Swiss Confederation in Switzerland (the
"Swiss Confederation Trademarks"). The Swiss Confederation acknowledged SABI's
exclusive right to use SABI's trademarks in the countries of their registration
or application and agreed to assist SABI in enforcing SABI's rights with respect
to its trademarks. In addition, the Swiss Confederation stated its intention to
assist Victorinox, Wenger, SABI and Precise in safeguarding their rights with
respect to "Swiss Army" as applied to knives and in preventing the use of "Swiss
Army" with respect to multi-blade pocketknives, multi-tools and other products
which are not Swiss products.
The Trademark Agreement grants SABI the right to an exclusive royalty free
license of the Swiss Confederation Trademarks as applied to watches and
sunglasses in the United States, Canada and the Caribbean. SABI is also granted
such rights with respect to certain designated products that either it or its
licensees sell in commercial quantities in the United States, Canada and the
Caribbean within designated time periods. In the event SABI or its licensees do
not sell commercial quantities of product categories within the time periods set
by the agreement, the Swiss Confederation shall have the right, subject to
certain conditions, to license the Swiss Confederation Trademarks to a third
party and, in such event, SABI shall be obligated to offer such third party a
license of SABI's appropriate trademark.
5
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Outside of the United States, Canada and the Caribbean, the Trademark
Agreement provides for the grant to SABI of the right to an exclusive license,
subject to the existing legal rights of others, for watches and sunglasses at a
royalty equal to 3% of net sales. In addition, SABI has the right to a license
for certain designated products outside of the United States, Canada and the
Caribbean, also at a royalty equal to 3% of net sales, to use the Swiss
Confederation Trademarks provided that SABI commences the sale of commercial
quantities of such products within time periods prescribed by the Trademark
Agreement. The Trademark Agreement also provides that all products sold under
the license must be of a quality at least equal in workmanship and materials to
the products currently sold by SABI, Victorinox or Wenger and that in the event
SABI discontinues sales of goods in commercial quantities in any category of
goods for three consecutive years, the Swiss Confederation shall have the right
to terminate the license as to that category after giving SABI notice and an
opportunity to resume sales. Except for the foregoing limitation, the rights of
SABI with respect to the use of the Swiss Confederation Trademarks under the
Trademark Agreement are perpetual. It is anticipated that the right to utilize
the Swiss Confederation Trademarks on certain products other than timepieces and
sunglasses will be made available to Precise by SABI on terms yet to be
discussed.
Victorinox Agreements
---------------------
All of SABI's products are manufactured by independent suppliers. SABI's
principal supplier of pocket knives and cutlery is Victorinox, which has
manufactured the Original Swiss Army Knife for the Swiss Army for more than 100
years. The loss of this supplier would have a material adverse effect on SABI's
business. SABI, Victorinox's largest single customer, has been distributing
Victorinox's products since 1937. Distribution was on a non-exclusive basis for
more than 45 years when, as a result of understandings reached on SABI's behalf
by Mr. Louis Marx, Jr. and Mr. Stanley R. Rawn, Jr., both now SABI Directors,
and Mr. Charles Elsener, Sr., Chief Executive Officer of Victorinox, SABI became
Victorinox's exclusive United States distributor of Victorinox Original Swiss
Army Knives under an agreement dated December 12, 1983 (as subsequently amended,
the "U.S. Distribution Agreement"). In 1992 and 1993, Messrs. Marx and Rawn held
extensive conversations principally in Switzerland, with Victorinox looking to
expand the scope of SABI's exclusive territory. This resulted in SABI obtaining
exclusive distributorship rights first in Canada, and then in Bermuda and the
Caribbean areas, as well as SABI's receipt of exclusive U.S., Canadian and
Caribbean distribution rights to the Victorinox Watch, which is supplied to the
Company by Victorinox along with another Swiss manufacturer.
The U.S. Distribution Agreement, together with the Company's agreements
with respect to the rights obtained in 1992 and 1993 (together, the "Victorinox
Agreements"), provides:
SABI is the exclusive distributor in the United States, its territories and
possessions, Canada (with one minor exception), Bermuda and the Caribbean
(excluding Cuba so long as SABI is prohibited by United States law from
operating therein) (together, the "Territories"), of Victorinox Original
Swiss Army Knives and most other Victorinox cutlery products and Victorinox
Swiss-made watches (collectively, "Products").
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The U.S. Distribution Agreement was renewed in 1998 through December 12,
2003 and is subject to renewal at five year intervals at SABI's option
unless, in any two consecutive years, purchases of Products by SABI fall
below the average purchases for 1981 and 1982, which was 19,766,035 Swiss
francs. SABI's distribution rights in Canada and the Caribbean are for
initial terms of seven years (expiring in 1999 and 2000, respectively),
subject to renewal for successive five year periods. Effective April 1999,
the distribution rights for Canada will automatically renew and expire in
2004. In the event that Victorinox elects not to renew SABI's Canada
distribution rights, Victorinox will be required to pay SABI the amount of
$3,500,000.
During each calendar year SABI must purchase from Victorinox at least 85%
of the maximum quantities of each of Swiss Army Knives and cutlery
(expressed in Swiss francs) purchased in any prior year. The only remedy of
Victorinox for SABI's failure to achieve these goals would be the
termination of SABI's U.S. distribution rights. By agreement dated December
18, 1995, Victorinox and the Company agreed that for 1996 the minimum
purchase requirement for Swiss Army Knives would be reduced to 75% of the
maximum quantity purchased in any prior year. The Company met this
requirement in 1996. In 1996, Victorinox agreed to reduce the 1997 minimum
purchase requirements for Swiss Army Knives to 65% of the maximum quantity
purchased in any preceding year. The Company met this requirement in 1997.
In 1998, Victorinox agreed to reduce the minimum for 1998 to a purchase
plan of approximately $31,400,000. The Company met this requirement for
1998.
In each calendar year Victorinox must, if requested, furnish SABI with up
to 105% of each type of product purchased during the immediately preceding
year. Victorinox has historically been able to accommodate SABI's supply
requirements even when they have exceeded such amount. However,
Victorinox's plant has a finite capacity and no assurances can be given
that Victorinox will continue to meet any increased supply requirements of
SABI.
Pricing provisions assure that the prices paid by SABI for products shipped
to the United States will be as low or lower than those charged to any
other Victorinox customer. In addition, SABI is granted a 4% discount on
purchases of pocket knives and a 3% discount on purchases of cutlery. For
products shipped directly to Canada and the Caribbean (including Bermuda),
the prices paid by SABI are Victorinox's regular export prices. SABI also
pays a royalty to Victorinox of 1% of net sales of Victorinox Watches.
SABI will not sell any new cutlery items without the agreement of
Victorinox.
SABI will have complete discretion as to advertising, packaging, pricing
and other marketing matters.
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In consideration of the grant of the Canadian distribution rights in 1992,
SABI issued to Victorinox 277,066 shares of common stock, par value $.10 per
share, of SABI ("Common Stock"). In consideration for the grant of the Caribbean
distribution rights in 1993, the Victorinox watch distribution rights and the
acquisition by SABI of Victorinox's 20% interest in a subsidiary of SABI, SABI
issued to Victorinox a five-year warrant to purchase 1,000,000 shares of Common
Stock at a discount from the market price on the date of exercise. Victorinox
exercised the warrant in full in April 1994 at a price per share of $9.75, a
discount of $4.25 per share from the then current market price of SABI Common
Stock. All of the shares issued upon exercise of the warrant were subsequently
sold to Brae Group, Inc. ("Brae"), a corporate shareholder of SABI that is
controlled by Louis Marx, Jr., a Director of SABI, in exchange for shares of the
common stock of that corporation.
Investments
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In 1994, SABI invested a total of $7,002,990, paid in cash and in shares of
stock of a publicly traded corporation, to acquire 700,299 shares of Series A
Preferred Stock of Forschner Enterprises, Inc., a privately held corporation
which was merged into Victory Capital LLC. In 1996, Victory Capital LLC changed
its name to Hudson River Capital LLC ("Hudson River"). In 1996, SABI invested
$2,000,209, paid in cash, to acquire 190,477 Series B Preferred Units of Hudson
River. SABI's interest in Hudson River currently represents, in the aggregate,
approximately 9.1% of the equity of Hudson River. Hudson River is a private
equity firm specializing in middle market acquisitions, recapitalizations and
expansion capital investments. Hudson River currently has equity and other
interests in several private and publicly traded companies. The preferred units
of Hudson River held by SABI carry a preference on liquidation equal to their
cost and, in certain instances, are entitled to an annual preferred return.
In 1996, Hudson River distributed pro-rata to its members all of its
interest in Victory Ventures LLC, a private equity firm specializing in small
market venture capital investments ("Victory Ventures"). SABI received in the
distribution, and continues to hold, 890,776 Series A Preferred Units of Victory
Ventures valued at the time of the distribution at $1.23 per unit, currently
representing approximately 1.3% of the equity of Victory Ventures. The preferred
units of Victory Ventures held by SABI carry a preference on liquidation equal
to the value of the Series A Preferred Units on the date of the distribution
and, in certain instances, are entitled to an annual preferred return.
490,000 of Hudson River's common units and 2,327,382 of Hudson River's
Series B Preferred Units (currently representing, in the aggregate,
approximately 28.7% of Hudson River's outstanding equity) are held by Brae
Capital Corporation ("Brae Capital"), a wholly-owned subsidiary of Brae. Mr.
Marx is the owner of 700,000 plan units (representing approximately 7.1% of
Hudson River's outstanding equity) issued by Hudson River under its Equity
Incentive Plan, which entitle Mr. Marx to voting rights and to receive a portion
of the appreciation of Hudson River's assets after the date of grant of such
units under certain circumstances.
490,000 of Victory Ventures' common units and 12,440,088 of Victory
Ventures' Series A Preferred Units (currently representing in the aggregate,
approximately 18.2% of Victory Ventures' outstanding equity) are held by Brae
Capital. In addition, Brae Capital is the owner of 2,911,613 plan units
(representing approximately 4.1% of Victory Ventures' outstanding equity) issued
by Victory Ventures under its Equity Incentive Plan, which entitle Brae Capital
to voting rights and to receive a portion of the appreciation of Victory
Ventures' assets after the date of grant of such units, under certain
circumstances. Pursuant to an agreement between Hudson River and Brae, if
certain conditions are met, Brae is required to purchase from Hudson River at
Hudson River's cost 10%, and may purchase up to 20%, of the "equity portion"
(defined as the common and warrant portion, or the preferred and warrant portion
if no common is purchased provided that the preferred portion is participating)
of each investment made by Hudson River. Brae may allocate all or a portion of
the securities to be acquired pursuant to such agreement among the officers,
directors, employees, consultants and common equityholders of Hudson River and
such other persons who may be in a position to benefit Hudson River in such
proportions as Brae shall determine. Brae is party to a similar agreement with
Victory Ventures.
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Mr. Marx, a Director of SABI, is a Co-Chairman of the Board, a director and
an equity holder of each of Hudson River and Victory Ventures, and a consultant
to Victory Ventures. Mr. Clarke H. Bailey, a Director of SABI, is a Co-Chairman
of the Board, a Director and an equityholder of Hudson River. Mr. Stanley R.
Rawn, Jr., Senior Managing Director and a Director of SABI, and Mr. Herbert M.
Friedman, Vice President and General Counsel and Director of SABI, also serve as
directors and are equityholders of each of Hudson River and Victory Ventures.
Mr. Robert S. Prather, Jr., a director of SABI, also serves as a director of
Victory Ventures, LLC.
Item 2.Properties.
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The executive and administrative offices of SABI occupy approximately
42,500 square feet of leased space in an office building located in Shelton,
Connecticut. SABI moved into these premises in September, 1993. The initial term
of the lease on this space expires on September 1, 2001, subject to a renewal
option for an additional five-year term.
In addition, SABI leases approximately 7.4 acres in Shelton, Connecticut
upon which the landlord has constructed a 85,000 square foot building, increased
in January 1995 from 60,000 square feet, which SABI uses as a facility for
warehousing, distribution, imprinting and assembly. The lease commenced in June,
1991 and has a term of ten years. SABI also leases approximately 13,000 square
feet in a building in Toronto, Canada which it uses for office space and
warehousing of products. The lease commenced in December, 1992 and expired in
December, 1997. The Company has extended the term on this lease until December
31, 1999.
In 1996, SABI entered into a four-year lease for 7,000 square feet of space
in a 30,000 square foot building in Bienne, Switzerland for use as a
distribution center.
SABI believes its properties are sufficient for the current and anticipated
needs of its business.
Item 3.Legal Proceedings.
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Except as set forth or referenced below, the Company is not involved in any
material pending legal proceedings.
K-Swiss filed on December 30, 1996 petitions to cancel the Company's U.S.
Trademark Reg. No. 1,734,665 for watches and Reg. No. 1,715,093 for sunglasses
for "Swiss Army". The Company believes it has meritorious defenses to these
petitions although their outcome cannot be predicted at this time.
9
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On July 14, 1997, the Company filed with the American Arbitration
Association in New York, New York a demand for arbitration against Precise
Imports Corporation, the United States and Canadian distributor of Swiss Army
Knives manufactured by Wenger S.A., the only company other than Victorinox
supplying pocketknives to the Swiss Armed Forces. In the demand for arbitration,
the Company charged that Precise had violated the license agreement dated June
30, 1992 between Precise and the Company by utilizing the trademark Swiss Army
in ways prohibited by the agreement. In response, Precise alleged certain
counterclaims, including violations of the 1992 license agreement, anti-trust
laws, unfair competition under state and federal law, tortious interference with
prospective business relations and federal anti-trust violations. On September
29, 1998, Precise withdrew its counterclaim that the Company violated federal
anti-trust law. On November 7, 1998, Precise and the Company agreed to suspend
the arbitration to allow the parties 180 days to settle their dispute, subject
to reactivation of the arbitration by either company. After the expiration of
the stipulated period, if the arbitration has been neither reactivated or
voluntarily dismissed by the parties, all claims and counterclaims alleged in
the arbitration will be deemed to have been dismissed with prejudice. In the
event that the arbitration is reactivated, the Company intends to vigorously
pursue its claims and believes it has meritorious defenses to Precise's
counterclaims. However, the Company cannot predict the outcome of any resumed
arbitration. In a separate document, Precise agreed tentatively to certain
limitations on the marketing of its products including discontinuation of the
use of "S.A.K." and "The Genuine Swiss Army Knife Company" in connection with
certain products, and changing the name of its internet site, all of which were
sought by the Company in the arbitration.
The Company is also a plaintiff in several proceedings to enforce its
intellectual property rights. In addition, see "Business - Swiss Army Knives and
Swiss Army Brand Products".
Item 4.Submission of Matters to a Vote of Security Holders.
- -----------------------------------------------------------
Not Applicable.
10
<PAGE>
PART II
-------
Item 5.Market for Registrant's Common Equity and Related Stockholder Matters.
- -----------------------------------------------------------------------------
A. Market Information.
-------------------
Shares of SABI's Common Stock are traded on The NASDAQ Stock Market under
the symbol SABI. The range of high and low transactions for shares of Common
Stock, which is the only class of capital stock of SABI outstanding, as reported
by Nasdaq since the first quarter of 1997 were as follows:
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1998 Fiscal 1999*
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
First Quarter $14 1/8 $11 3/4 $12 1/16 $9 3/16 $10 $8 5/8
Second Quarter 13 11 1/8 12 1/2 10 1/4
Third Quarter 13 1/2 9 1/8 11 1/4 8 3/4
Fourth Quarter 11 1/2 9 5/8 10 3/8 8 7/8
</TABLE>
*Through March 19, 1999.
The public market for Common Stock is limited and the foregoing quotations
should not be taken as necessarily reflective of prices which might be obtained
in actual market transactions or in transactions involving substantial numbers
of shares.
B. Holders.
On March 19, 1999, shares of Common Stock were held by 315 persons, based
on the number of record holders, including several holders who are nominees for
an undetermined number of beneficial owners.
C. Dividends.
The Company has not paid a cash dividend since its inception, and its
present policy is to retain earnings for use in its business. Payment of
dividends is dependent upon the earnings and financial condition of SABI and
other factors which its Board of Directors may deem appropriate. Under SABI's
bank loan agreement, as amended, which expires on June 30, 1999, SABI agreed not
to declare or pay any dividends unless immediately following such payment SABI's
ratio of indebtedness to tangible net worth, calculated as set forth in the
agreement, does not exceed 0.75 to one, and SABI's ratio of current assets to
current liabilities is in excess of 2.5 to one.
11
<PAGE>
Item 6.Selected Financial Data
- ------------------------------
The following selected financial data for the five years ended December 31,
1998, was derived from the consolidated financial statements of the Company.
This data should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and the Consolidated
Financial Statements, related notes and other financial information included
herein.
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Year Ended December 31,
-----------------------
<S> <C> <C> <C> <C> <C>
1998 1997(1) 1996(2) 1995 1994
---- ------- ------- ---- ----
Net sales $127,851 $118,744 $130,030 $126,695 $144,437
Gross profit 49,982 42,724 40,836 44,264 55,804
Selling, general and administrative expenses 49,005 49,639 46,241 40,265 40,293
Operating income (loss) 977 (6,915) (5,405) 3,999 15,511
Gain (loss) on sale (write-down) of investments 1,651 398 (2,382) 1,771 37
Other income (expense), net 55 116 179 (134) 445
Income (loss) before income taxes 2,683 (6,401) (7,608) 5,636 15,993
Income tax provision (benefit) 1,220 (2,376) (2,343) 2,523 6,633
-------- -------- -------- --------- --------
Net income (loss) $1,463 ($4,025) ($5,265) $3,113 $ 9,360
-------- -------- -------- --------- --------
Earnings per share:
Basic $ 0.18 ($0.49) ($0.64) $0.38 $1.20
Diluted $ 0.18 ($0.49) ($0.64) $0.38 $1.16
Other Financial Data:
Current assets $ 70,383 $64,144 $70,933 $74,355 $78,641
Total assets 100,404 94,051 98,643 101,230 105,708
Current liabilities 25,806 18,343 18,787 16,291 23,932
Long-term debt - - - - -
Stockholders' equity 74,598 75,708 79,856 84,939 81,775
Cash dividends per common share $ - $ - - $ - $ -
Weighted average number of shares outstanding:
Basic 8,138 8,209 8,202 8,185 7,832
Diluted 8,236 8,209 8,202 8,236 8,062
</TABLE>
(1) The financial results for 1997 include a $1.3 million write-off of
discontinued inventory (included in cost of sales) and $0.8 million of
restructuring costs (included in selling, general and administrative expenses).
See Note 3 to the Company's Consolidated Financial Statements.
(2) The financial results for 1996 include special charges of approximately
$9.9 million. The special charges consisted of a $4.9 million write-off of
discontinued inventory (included in cost of sales), a $2.6 million write-off of
obsolete displays, goodwill and other assets (included in selling, general and
administrative expenses) and a $2.4 million write-down of non-strategic
investments. See Note 3 to the Company's Consolidated Financial Statements.
12
<PAGE>
Item 7.Management's Discussion and Analysis of Financial Condition and Results
- ------------------------------------------------------------------------------
of Operations
-------------
FORWARD LOOKING STATEMENTS
--------------------------
The following discussion, as well as other portions of this Annual Report
on Form 10-K, contains, in addition to historical information, forward looking
statements. The forward looking statements were prepared on the basis of certain
assumptions which relate, among other things, to the demand for and cost of
purchasing and marketing the Company's products; the prices at which such
products may be sold; new product development; seasonal selling trends; the
Swiss franc-U.S. dollar exchange rates; the extent to which the Company is able
to successfully hedge against foreign currency fluctuations; the Company's
anticipated credit needs and ability to obtain such credit; and the Company's
review of its computer systems and operations as it relates to the "Year 2000"
issue. Even if the assumptions upon which the projections are based prove
accurate and appropriate, the actual results of the Company's operations in the
future may vary widely from financial projections due to increased competition,
changes in consumer tastes and other factors not yet known or anticipated.
Accordingly, the actual results of the Company's operations in the future may
vary widely from the forward looking statements included herein.
Results of Operations
- ---------------------
In 1998, net sales totaled $127.9 million, a 7.7% increase from 1997. The
financial results for 1997 and 1996 were negatively impacted by inventory
write-offs and restructuring costs. The 1997 financial results include a $1.3
million inventory write-off of discontinued inventory (included in cost of
sales) and $0.8 million of restructuring costs (included in selling, general and
administrative expenses). These restructuring costs primarily consisted of
severance and related expenses. The 1996 financial results include special
charges of approximately $9.9 million, which resulted from an extensive analysis
of the Company's operations. The special charges in 1996 consisted of a $4.9
million write-off of discontinued inventory (included in cost of sales), a $2.6
million write-off of obsolete displays, goodwill and other assets (included in
total selling, general and administrative expenses), and a $2.4 million
write-down of non-strategic investments.
13
<PAGE>
The following table shows, as a percentage of net sales, the Company's
Consolidated Statements of Operations for each of the three years in the period
ended December 31, 1998:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 60.9 64.0 68.6
------- ------- -------
Gross profit 39.1 36.0 31.4
Selling, general and administrative
expenses before special charges 38.3 41.8 33.6
Special charges - - 2.0
------- ------- ------
Total selling, general and
administrative expenses 38.3 41.8 35.6
Operating income (loss) 0.8 (5.8) (4.2)
Interest expense - - (.1)
Interest income - .1 .1
Gain (loss) on sale (write-down) of
investments 1.3 .3 (1.8)
Other income, net - - .2
------- ------- --------
Income (loss) before income taxes 2.1 (5.4) (5.8)
Income tax provision (benefit) 1.0 (2.0) (1.8)
------- ------- --------
Net income (loss) 1.1% (3.4)% (4.0)%
======= ======= ========
</TABLE>
Comparison of the Years Ended December 31, 1998 and December 31, 1997
- ---------------------------------------------------------------------
Net sales for the year ended December 31, 1998 were $127.9 million compared
with $118.7 million for the same period in 1997, representing an increase of
$9.1 million or 7.7%. The sales increase was due primarily to a 14.2% increase
in sales of Victorinox products, primarily the Victorinox SwissTool and
SwissCard , and an increase in sales of Swiss Army Brand Sunglasses and the
introduction of watches marketed under the St. John Timepiece Collection.
Gross profit for the year ended December 31, 1998 was $50.0 million, 17.0%
higher than in 1997. The increase in gross profit was primarily due to the
increase in the value of the U.S. dollar versus the Swiss franc and a $1.3
million inventory write-off in 1997. The Company's gross profit margin is a
function of both product mix and Swiss franc exchange rates. Since the Company
imports virtually all of its products from Switzerland, its costs are affected
by both the spot rate of exchange and by its foreign currency-hedging program.
Increases in the value of the Swiss franc versus the dollar may effectively
increase the cost of these products to the Company. The increase in the cost of
products to the Company may result in either higher prices charged to customers
or reductions in gross profit, both of which may have an adverse effect on the
Company's results of operations. The Company enters into foreign currency
contracts and options to hedge the exposure associated with foreign currency
fluctuations. Based upon current estimated Swiss franc requirements, the Company
believes it is hedged through the third quarter of 1999. However, such hedging
activity cannot eliminate the long-term adverse impact on the Company's
competitive position and results of operations that would result from a
sustained decrease in the value of the dollar versus the Swiss franc. These
hedging transactions, which are meant to reduce foreign currency risk, also
reduce the beneficial effects to the Company of any increase in the dollar
relative to the Swiss franc. The Company plans to continue to engage in hedging
transactions; however, the extent to which such hedging transactions will reduce
the effect of adverse currency fluctuations is uncertain.
14
<PAGE>
Selling, general and administrative expenses for the year ended December
31, 1998 were $49.0 million, $0.6 million or 1.3% lower than in 1997. The
expense decrease resulted primarily from decreased advertising expense offset by
increased expenditures in the areas of product development and merchandising and
promotion. As a percentage of net sales, selling, general and administrative
expenses decreased from 41.8% in 1997 to 38.3% in 1998.
As a result of the above, the Company recorded operating income of $1.0
million for the year ended December 31, 1998, as compared to an operating loss
of $6.9 million in 1997.
Interest expense of $133,000 for the year ended December 31, 1998 was
$93,000 higher than interest expense in 1997, due to the higher borrowings in
1998 related to the Company's repurchase of $3.1 million of its common stock.
Interest income of $188,000 for the year ended December 31, 1998 was
$33,000 higher than interest income in 1997, due to increased invested cash
balances during the first half of 1998 as compared to 1997.
The gain on the sale of investments for the year ended December 31, 1998
was $1.7 million, as compared to $398,000 in 1997. In 1998, the Company recorded
a $1.5 million gain due to a cash and stock distribution from the Company's
investment in Hudson River Capital LLC. In addition, the Company received
distributions from Victory Ventures LLC consisting of common stock in two
publicly traded entities, which were sold by the Company resulting in a $57,000
gain, and sold its investment in SWWT, Inc. and realized a gain of $94,000. The
gain in 1997 was due to a distribution from the Company's investment in Victory
Ventures LLC, which resulted in a gain of $286,000 and a $112,000 recovery of a
privately held startup entity that was written-off in 1996.
As a result of the above, the income before income taxes for the year ended
December 31, 1998 was $2.7 million compared to $6.4 million loss in 1997.
Income tax expense (benefit) was provided at an effective rate of 45.5% for
the year ended December 31, 1998 as compared to 37.1% for the year ended
December 31, 1997. The change in the effective tax rate was due to foreign and
state income taxes.
As a result of the above, the net income for the year ended December 31,
1998 was $1.5 million ($0.18 per share) as compared to $4.0 million loss ($0.49
per share) in 1997.
Comparison of the Years Ended December 31, 1997 and December 31, 1996
- ---------------------------------------------------------------------
Net sales for the year ended December 31, 1997 were $118.7 million compared
with $130.0 million for the same period in 1996, representing a decrease of
$11.3 million or 8.7% lower. Approximately $3.6 million of the decrease was due
to the sale of substantially all the assets of Cuisine de France Limited ("CDF")
in January 1997, with the remaining sales decrease due primarily to a 17%
decrease in sales of Victorinox Original Swiss Army Knive sales, a 6% decrease
in watch sales, a 6% decrease in cutlery sales offset in part by an increase in
sales of Swiss Army Brand Sunglasses, Victorinox SwissCards and Victorinox
SwissTools.
15
<PAGE>
Gross profit for the year ended December 31, 1997 was $42.7 million, 4.6%
higher than in 1996. This is due primarily to an inventory write-off of $4.9
million in 1996, and the increase in the value of the U.S. dollar versus the
Swiss franc, offset in part by lower net sales and a $1.3 million inventory
write-off in 1997.
The inventory write-off in 1997, was primarily the result of discontinuing
certain watch styles. The inventory write-off in 1996, was the result of the
Company discontinuing certain products, including certain cutlery products sold
by CDF. Excluding the inventory write-offs in 1997 and 1996, the gross profit
margin percentage increased from 35.2% in 1996 to 37.1% in 1997. The Company's
gross profit margin is a function of both product mix and Swiss franc exchange
rates. Since the Company imports virtually all of its products from Switzerland,
its costs are affected by both the spot rate of exchange and by its foreign
currency-hedging program. Increases in the value of the Swiss franc versus the
dollar may effectively increase the cost of these products to the Company. The
increase in the cost of products to the Company may result in either higher
prices charged to customers or reductions in gross profit, both of which may
have an adverse effect on the Company's results of operations. The Company
enters into foreign currency contracts and options to hedge the exposure
associated with foreign currency fluctuations. However, such hedging activity
cannot eliminate the long-term adverse impact on the Company's competitive
position and results of operations that would result from a sustained decrease
in the value of the dollar versus the Swiss franc. These hedging transactions,
which are meant to reduce foreign currency risk, also reduce the beneficial
effects to the Company of any increase in the dollar relative to the Swiss
franc. The Company plans to continue to engage in hedging transactions; however,
the extent to which such hedging transactions will reduce the effect of adverse
currency fluctuations is uncertain.
Selling, general and administrative expenses (excluding the special charges
described below) for the year ended December 31, 1997 were $49.6 million, $6.0
million or 13.6% higher than in 1996. The expense increase resulted primarily
from increased selling expenses and increased expenditures in the areas of
merchandising and promotion and approximately $0.8 million related to continued
restructuring costs. As a percentage of net sales, selling, general and
administrative expenses (excluding the special charges described below)
increased from 33.6% in 1996 to 41.8% in 1997.
Special selling, general and administrative expenses of $2.6 million in
1996 consisted of the write-off of obsolete displays, goodwill and other assets.
The goodwill write-off related to CDF, and was taken due to the lack of
recoverability of the asset. Substantially all the assets of CDF were sold by
the Company in 1997 with no significant gain or loss.
As a result of the above, the Company recorded an operating loss of $6.9
million for the year ended December 31, 1997 as compared to an operating loss of
$5.4 million in 1996. Excluding the effects of the inventory write-offs,
restructuring costs and the special charges, the Company recorded an operating
loss of $4.8 million in 1997, as compared to operating income of $2.1 million in
1996.
Interest expense of $40,000 for the year ended December 31, 1997 was
$107,000 lower than interest expense in 1996, due to lower borrowings in 1997 as
compared to 1996.
Interest income of $155,000 for the year ended December 31, 1997 was
$35,000 higher than interest income in 1996, due to increased invested cash
balances during 1997 as compared to 1996.
The gain on the sale of investments for the year ended December 31, 1997
was $398,000, as compared to a loss of $2.4 million in 1996. The gain in 1997
was due to a distribution from the Company's investment in Victory Ventures LLC,
which resulted in a gain of $286,000 and a $112,000 recovery of a privately held
startup entity that was written-off in 1996. The loss in 1996 was primarily due
to the $1.6 million write-down of the Company's investment in the common stock
of SWWT, Inc., a publicly traded entity, and an $800,000 write-down of the
Company's investment in the aforementioned privately held start-up entity.
16
<PAGE>
As a result of the above, the loss before income taxes for the year ended
December 31, 1997 was $6.4 million compared to $7.6 million in 1996.
Income tax expense (benefit) was provided at an effective rate of 37.1% for
the year ended December 31, 1997 as compared to 30.8% for the year ended
December 31, 1996. The change in the effective tax rate was due to foreign and
state income taxes.
As a result of the above, the net loss for the year ended December 31, 1997
was $4.0 million ($0.49 per share) as compared to $5.3 million ($0.64 per share)
in 1996.
Liquidity and Capital Resources
- -------------------------------
As of December 31, 1998, the Company had working capital of $44.6 million
compared with $45.8 million as of December 31, 1997, a decrease of $1.2 million.
Significant uses of working capital consisted of additions to other assets of
$2.7 million, capital expenditures of $1.3 million and repurchases of common
stock of $3.1 million. Significant sources of working capital included sales of
long term investments of $1.9 million. The Company currently has no material
commitments for capital expenditures.
Cash provided from operating activities was approximately $0.2 million in
the year ended December 31, 1998 compared with cash provided from operating
activities of $2.7 million in the year ended December 31, 1997. The change
primarily resulted from an increase in inventory in 1998 as compared to a
decrease in 1997, an increase in accounts receivable in 1998 as compared to a
decrease in 1997, a decrease in accrued liabilities in 1998 compared to a
decrease in 1997 offset in part by an increase in accounts payable in 1998
versus a decrease in 1997.
The Company meets its short-term liquidity needs with cash generated from
operations, and, when necessary, bank borrowings under its bank agreements. As
of December 31, 1998, the Company had $5,140,000 of outstanding borrowings under
its bank agreement. The Company currently has a $10.0 million revolving credit
agreement, which expires in June 1999. The Company is currently reviewing its
options to establish a new credit agreement, and believes it can establish a new
credit agreement at the appropriate date. The Company's short-term liquidity is
affected by seasonal changes in inventory levels, payment terms and seasonality
of sales. The Company believes its current liquidity levels and financial
resources continue to be sufficient to meet its operating needs.
Year 2000
- ---------
The Company has been conducting a review of its computer systems and
operations to identify those areas that could be affected by the "Year 2000"
issue and has developed an implementation plan to minimize disruption. The
Company has completed the assessment phase of its internal information computer
systems. Based upon the assessment, certain computer systems were vulnerable to
the Year 2000 issues. The Company presently believes that, with modifications to
existing software and hardware, and investment in new software and hardware, the
Year 2000 problem as it relates to its own computer systems will not pose
significant operational concerns. The Company has made significant progress in
completing its Year 2000 projects. The costs associated with the Year 2000
compliance for the Company's computer systems primarily include costs to upgrade
computer systems not currently compliant. The majority of these costs have and
will be incurred in the normal course of business as the Company has continually
upgraded its hardware and software to keep pace with technological advances.
Based upon the Company's assessments to date, the costs of the Year 2000
initiative are estimated to be no more than $200,000, of which $50,000 has been
spent to date. The Company expects that all of the material internal information
computer systems to be Year 2000 compliant by June 30, 1999.
17
<PAGE>
The Company is working with its significant suppliers and service providers
to ensure that those parties have appropriate plans to manage the Year 2000
issue as it relates to the Company's operations. The Company has commenced the
communication process with its significant suppliers and service providers and
expects this process to be complete by April 30, 1999.
The Company's Year 2000 initiative is well under way, and based on the
results of its assessment to date, is expected to be complete by June 30, 1999.
While the Company believes its planning efforts are adequate to address its Year
2000 concerns, there can be no assurance that the systems of other companies on
which the Company's systems and operations rely upon will be converted on a
timely basis and will not have a material adverse effect on the Company.
However, based on the progress the Company has made on its internal initiative
and the information available from third parties, the Company has not identified
a need to develop an extensive contingency plan for non-compliance issues at
this time. The need for such plan is evaluated on an ongoing basis as part of
the Company's overall Year 2000 initiative.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
Foreign Exchange Risk
- ---------------------
The Company is exposed to market risk from changes in foreign exchange
rates as the Company imports virtually all its products from Switzerland. To
minimize the risks associated with fluctuations in the value of the Swiss franc
versus the U.S. dollar, the Company enters into foreign currency contracts and
options. Pursuant to guidelines approved by its Board of Directors, the Company
is to engage in these activities only as a hedging mechanism against foreign
exchange rate fluctuations associated with specific inventory purchase
commitments to protect gross margin and is not to engage in speculative trading.
Gains or losses on these contracts and options are deferred and recognized in
cost of sales when the related inventory is sold. At December 31, 1998, the
Company entered into foreign currency contracts and options to purchase
approximately 55,000,000 Swiss francs in 1999 at a weighted average rate $1.414
Swiss franc/dollar. At December 31, 1998, the unrealized gain on these contracts
and options was approximately $1.0 million. The Company's ultimate unrealized
gain or loss on these contracts and options will primarily depend on the
currency exchange rates in effect at the time the contracts and options mature.
As of December 31, 1998, the Company has reviewed its foreign exchange risks and
based upon its foreign currency hedging program and review of its outstanding
foreign exchange contracts, it believes that a near-term increase in the value
of the Swiss franc versus the U.S. dollar would not have a material effect on
the Company's results of operations or financial condition. See Notes to
Consolidated Financial Statements for further discussion of the Company's
accounting policies and other information related to its foreign exchange
instruments.
Item 8.Financial Statements and Supplementary Data
- --------------------------------------------------
The financial information required by Item 8 is included elsewhere in this
report. See Part IV, Item 14.
Item 9.Disagreements on Accounting and Financial Disclosure
- -----------------------------------------------------------
None.
18
<PAGE>
PART III
--------
Item 10.Directors and Executive Officers of the Registrant
- ----------------------------------------------------------
The Directors and Executive Officers of SABI are as follows:
<TABLE>
<CAPTION>
Director
and/or
Name Age Position(s) Officer Since
- ---- --- ----------- -------------
<S> <C> <C> <C>
J. Merrick Taggart 48 President, Chief Executive Officer and
Director1 1995
Peter W. Gilson 59 Chairman of the Board, Chairman
of the Executive Committee and
Director2 1994
Louis Marx, Jr. 67 Chairman of the Management
Committee and Director3 1990
Stanley R. Rawn, Jr. 71 Senior Managing Director
and Director4 1990
Herbert M. Friedman 67 Vice President and General Counsel
and Director5 1981
Harry R. Thompson 69 Managing Director 1994
Thomas M. Lupinski 46 Senior Vice President, Chief
Financial Officer, Secretary
and Treasurer 1986
Michael J. Belleveau 42 Senior Vice President and
Group Division Head 1994
A. Jeffery Turner 41 Senior Vice President - Marketing
and Product Development Nov. 1998
James R. Cary 48 Vice President - Operations Nov. 1998
Marc A. Gold 33 Vice President and Controller Nov. 1998
Jerald J. Rinder 52 Vice President and
General Manager - Retail Division 1996
Douglas M. Rumbough 42 Vice President and
General Manager - Corporate
Markets Division 1992
Robert L. Topazio 50 Vice President and General Manager -
R.H. Forschner Division 1996
A. Clinton Allen 55 Director6 1993
Clarke H. Bailey 44 Director7 1997
Thomas A. Barron 47 Director 1983
Vincent D. Farrell, Jr. 52 Director8 1992
Keith R. Lively 47 Director9 1994
Robert S. Prather, Jr. 54 Director Aug. 1998
Eric M. Reynolds 46 Director 1994
John Spencer 69 Director10 1990
John V. Tunney 64 Director11 1992
</TABLE>
19
<PAGE>
1. Mr. Taggart is a member of the Company's Executive Committee, Management
Committee and Foreign Exchange Committee.
2. Mr. Gilson is Chairman of the Board, Chairman of the Executive Committee
and a member of the Nominating Committee.
3. Mr. Marx is Chairman of the Company's Management Committee and Nominating
Committee and a member of the Company's Executive Committee and Foreign
Exchange Committee.
4. Mr. Rawn is a member of the Company's Executive Committee, Management
Committee and Nominating Committee.
5. Mr. Friedman is a member of the Company's Executive Committee, Audit
Committee and Nominating Committee.
6. Mr.Allen is Chairman of the Company's Stock Option and Compensation
Committee and a member of the Executive Committee.
7. Mr. Bailey is a member of the Company's Executive Committee.
8. Mr. Farrell is Chairman of the Company's Audit Committee and a member of
the Executive Committee and Foreign Exchange Committee.
9. Mr. Lively is a member of the Company's Stock Option and Compensation
Committee.
10. Mr. Spencer is a member of the Company's Audit Committee and Stock Option
and Compensation Committee.
11. Mr. Tunney is a member of the Company's Stock Option and Compensation
Committee.
Biographical Information
- ------------------------
J. Merrick Taggart, President, Chief Executive Officer and Director of the
Company, was elected Chief Executive Officer on February 18, 1999 and President
on December 13, 1995. From 1993 to November 1995 Mr. Taggart was President of
Duofold, Inc, a sports apparel company, and Pringle of Scotland U.S.A., an
apparel company. From 1990 to November 1992 Mr. Taggart was President of O'Brien
International, a manufacturer and marketer of water sports equipment. Prior to
that Mr. Taggart was Senior Vice President of Product Development for the
Timberland Company, a footwear and apparel company. Mr. Taggart is also a
director of SWWT, Inc.("SWWT"), a holding company formerly in the business of
manufacturing and marketing portable water filtration systems.
Peter W. Gilson, Chairman of the Board and Chairman of the Executive
Committee and a Director of the Company, also served as President and Chief
Executive Officer of Physician Support Systems, Inc., a company specializing in
the management of physicians' health care practices, from 1991 through January
1998. From 1989 to the present, Mr. Gilson has also served as President and
Chief Executive Officer of the Warrington Group, Inc., a manufacturer of safety
products which was previously a division of The Timberland Company. From 1987 to
1988, Mr. Gilson served as Chief Operating Officer of The Timberland Company, a
manufacturer of footwear and outdoor clothing. From 1978 to 1986, he served as
President of the Gortex Fabrics Division of W.L. Gore Associates. Mr. Gilson is
also Chairman of the Board and a director of SWWT and Glenayre Technologies,
Inc. ("Glenayre Technologies"), a paging and messaging infrastructure technology
firm.
20
<PAGE>
Louis Marx, Jr., Chairman of the Management Committee and a Director of the
Company, has been associated with the Company for over 20 years and has played
the key role in helping to guide its affairs during that entire period. Through
discussions with the Chief Executive Officer of Victorinox Cutlery Company
("Victorinox"), the Company's principal supplier, he and Mr. Rawn were
responsible for the Company obtaining exclusive U.S. distribution rights for
Victorinox products and later, together with Mr. Rawn, he negotiated the
expansion of the Company's distribution rights to include Canada, Bermuda and
the Caribbean and also obtained for the Company exclusive distribution rights to
the Victorinox Watch. In a prior year he and Mr. Rawn played an important part
in negotiating, on behalf of the Company, the settlement of potentially
expensive litigation, and more recently, Mr. Marx has played an active role in
the Company's investment policy and, together with the Company's advisors, has
successfully managed the Company's currency hedging program. Mr. Marx has been a
venture capital investor for more than thirty years. Mr. Marx, together with his
close business associates, have been founders or substantial investors in such
companies as Pan Ocean Oil Corporation, Donaldson, Lufkin & Jenrette, Bridger
Petroleum Corporation Ltd., Questor Corporation, Environmental Testing and
Certification Corporation, Garnet Resources Corporation, The Prospect Group,
Inc. and Noel Group, Inc. ("Noel"), a publicly held company which prior to its
adoption in 1996 of a Plan of Complete Liquidation and Dissolution, conducted
its principal operations through small and medium sized operating companies in
which it holds controlling interests. Mr. Marx served as a director of The
Prospect Group, Inc., a company which, prior to its adoption in 1990 of a Plan
of Complete Liquidation and Dissolution, conducted its major operations through
subsidiaries acquired in leveraged buyout transactions ("Prospect"), from
February 1986, and as Chairman of Prospect's Asset Committee from October 1988,
until January 1990. Mr. Marx serves as a trustee of the New York University
Medical Center and Middlebury College and as Chairman of the Madison Avenue Fund
for Children. Mr. Marx is also Co-Chairman and a director of Hudson River
Capital LLC, a private equity firm specializing in middle market acquisitions,
recapitalizations and expansion capital investments ("Hudson River"), a
Co-Chairman, director and consultant of Victory Ventures LLC, a private equity
firm specializing in small market venture capital investments ("Victory
Ventures"), and the Chairman, President and controlling stockholder of Brae
Capital Corporation, a venture capital firm. He is President and a director of
Victorinox-Swiss Army Knife Foundation, a non-profit corporation formed by the
Company for charitable purposes including the improvement of the welfare of
underprivileged children.
Stanley R. Rawn, Jr., Senior Managing Director and a Director of the
Company, actively participates with Messrs. Marx and Taggart in furthering the
relationship between the Company and Victorinox as well as in coordinating
management strategies. He has also played an important part in obtaining and
expanding the Company's exclusive distribution rights covering Victorinox
products. Mr. Rawn was Chairman and Chief Executive Officer and a director of
Adobe Resources Corporation, an oil and gas exploration and production company
from November, 1985 until the merger of that company in May, 1992. Mr. Rawn is
also the Chief Executive Officer and a director of Noel; a director of Hudson
River, Victory Ventures, Career Blazers, Inc., a temporary help corporation, and
Victorinox - Swiss Army Knife Foundation; and a Trustee of the California
Institute of Technology.
Herbert M. Friedman, has served as Vice President and General Counsel of
the Company since May 1998 and is also a Director of the Company. Mr. Friedman
was partner in the law firm of Zimet, Haines, Friedman & Kaplan until April
1998, where he had been a member since 1967. Mr. Friedman is also a director of
Noel, Hudson River, Victory Ventures, Connectivity Technologies, Victorinox -
Swiss Army Knife Foundation and Carlyle Industries, Inc.
21
<PAGE>
Harry R. Thompson, Managing Director of the Company was appointed Managing
Director in December 1994. From 1987 to 1995, Mr. Thompson was president of The
Strategy Group, a business and marketing consulting firm. Mr. Thompson had
previously served as a director of the Company from June 1987 to June 1991, and
as Chairman of the Company's Board of Directors from January 1990 to October
1990 and served in senior executive capacities with the Interpublic Group of
Companies, Inc., a leading marketing and communications organization. Mr.
Thompson currently serves as a director of Amnex, Inc., a telecommunications
company, and Schwin/GT Corp. a designer, marketer and manufacturer of bicycle
equipment.
Thomas M. Lupinski, Senior Vice President, Chief Financial Officer,
Secretary and Treasurer of the Company, has been a Senior Vice President of the
Company for more than five years. Prior to joining the Company, Mr. Lupinski was
Finance Manager for the Revlon Health Care Group from 1982 to 1986 and was with
Arthur Andersen & Co., from 1976 through 1982.
Michael J. Belleveau, Senior Vice President and Group Division Head, has
been a Vice President of for more than five years and was promoted to Senior
Vice President and Group Division Head in 1998. Mr. Belleveau has served the
Company in various positions since 1991. Prior to that Mr. Belleveau was a
regional sales manager for Cartier, Inc., a manufacturer and marketer of watches
and luxury goods.
A. Jeffrey Turner, Senior Vice President- Marketing and Product Development
was elected to the office of Senior Vice President - Marketing and Product
Development in November 1998. Mr. Turner had served as Vice President of
Marketing for the company from March 1997. From 1995 through 1997, Mr. Turner
was Executive Vice President of Silhouette Optical Limited and from 1991 through
1995 he was General Manager/Eyewear Division of Nikon, Inc.
James R. Cary, Vice President - Operations, was elected to the office of
Vice President of Operations in November 1998. Mr. Cary had served as Director
of Sales Administration for the Company from May 1996 through November 1998.
From 1994 through 1996, Mr. Cary served as Vice President of Sales
Administration for Duofold, Inc. From May 1994 through September 1994, Mr. Cary
was an independent consultant and from 1991 through 1994 he was a General
Manager with Johnson Camping.
Marc A. Gold, Vice President and Controller, was elected to the office of
Vice President and Controller in November 1998. Mr. Gold has served the Company
as Controller from February 1997. Prior to that Mr. Gold was with Arthur
Andersen LLP from 1987 to January 1997 and served as an Audit Manager.
Jerald J. Rinder, Vice President and General Manager - Retail Division, was
elected to the office of Vice President in February, 1996. From 1994 through
1995 Mr. Rinder was Executive Vice President of Pringle of Scotland USA, an
apparel company. From 1993 to 1994 Mr. Rinder was Vice President -
Sales/Marketing of Walkover Shoe Co. and from 1991 through 1993 was Vice
President - Sales of Stride Rite Corp.
Douglas M. Rumbough, Vice President and General Manager - Corporate Markets
Division, was elected to the office of Vice President in 1992. Mr. Rumbough has
served the Company in various positions since 1981.
22
<PAGE>
Robert L. Topazio, Vice President and General Manager - R.H. Forschner
Division, was elected to the office of Vice President in February 1996. Mr.
Topazio has served the Company in various positions since September 1992. From
1991 to 1993 Mr. Topazio was Vice President of Cuisine de France, Ltd., a
marketer of consumer cutlery which was purchased by the Company in 1992. Prior
to that Mr. Topazio was National Sales Manager for J.A. Henckels.
A. Clinton Allen, a Director of the Company, is Chairman of A. C. Allen &
Co., a Massachusetts based consulting firm. Mr. Allen also serves as Vice
Chairman and a director of Psychemedics Corporation, a company that provides
testing services for the detection of abused substances through an analysis of
hair samples, Dewolfe Companies, Inc., a real estate company, Response U.S.A., a
company in the home alarm business, DCRI, a temporary staffing company, Image
Guided Technologies, a manufacturer of surgical equipment, and The Legal Club of
America, a company which provides legal services.
Clarke H. Bailey was elected a director of the Company in January 1997. He
served as Chief Executive Officer and a director of Glenayre Technologies from
December 1990 until March 1994 and as its Vice Chairman of the Board from
November 1992 to July 1996. In March 1994, Mr. Bailey was named Chairman of the
Executive Committee of the Board of Glenayre Technologies, and he relinquished
the title of Chief Executive Officer and served as Chairman of the Executive
Committee until September 1998. Since February 1995, Mr. Bailey has served as
Co-Chairman of the Board and a director of Hudson River. He is also currently
Chairman, Chief Executive Officer and Director of National Fulfillment, Inc., a
provider of integrated marketing services, Chairman of the Executive Committee
and a director of Connectivity Technologies, Inc., an acquisition company with
interests in the wire and cable industry, a director of Iron Mountain
Incorporated, and as a director of SWWT. He served as Chairman, Chief Executive
Officer and a director of Arcus Group Inc., the leading national provider of
secure off-site computer data storage and related disaster recovery services as
well as information technology staffing solutions, from February 1995 to January
1998.
Thomas A. Barron, a Director of the Company, is an author and has been
Chairman of Evergreen Management Corp., a private investment firm since January,
1990. From November, 1983 through November 1989, Mr. Barron was President and
Chief Operating Officer and a director of Prospect. From 1988 through January,
1990, Mr. Barron served as Chairman of the Board of the Company. Mr. Barron also
serves as a director of SWWT. Mr. Barron has served as a Trustee of Princeton
University.
Vincent D. Farrell, Jr., a Director of the Company, has been a Managing
Director of the investment management firm of Spears, Benzak, Salomon & Farrell,
Inc., ("Spears, Benzak") since 1982. Mr. Farrell is also a director of
HealthPlan Services Corporation, a provider of marketing and administrative
services for health and benefit programs.
Keith R. Lively, a Director of the Company is a private investor. From
January 1995 through December, 1995, he was a consultant to the Company. From
1988 through September 1994, Mr. Lively was the President, Chief Executive
Officer and a Director of The Famous Amos Chocolate Chip Cookie Corporation.
From September 1992 through September 1994, Mr. Lively was also Senior Vice
President, a member of the Executive Committee and a Director of President
Baking Company, which purchased The Famous Amos Chocolate Cookie Corporation in
September 1992.
Robert S. Prather, Jr., a Director of the Company, has served as President
and Chief Executive Officer of Bull Run Corporation, since 1990. Mr. Prather
also serves as a director of Gray Communications, Inc., a company in the
television broadcasting business, Host Communications, Inc., a company in the
collegiate marketing and publishing ventures, Morgan Group, Inc., and Victory
Ventures, LLC.
23
<PAGE>
Eric M. Reynolds, a Director of the Company, is a private investor and was
President, Chief Executive Officer and a director of SWWT, from January 1993 to
February 1998. Previously, from 1987 through 1990, Mr. Reynolds served as a
marketing consultant to various companies including W.L. Gore & Associates and
Marmot Mountain Works, Ltd., a company founded by Mr. Reynolds in 1974 that is
in the business of designing, manufacturing and marketing mountaineering,
backpacking and ski outerwear products.
John Spencer, a Director of the Company, held the African Studies
Professorship at Middlebury College where was a member of the faculty from 1974
to 1998. He also served as Dean of Middlebury College and Chairman of its
History Department. Dr. Spencer is co-Vice-Chairman of the Africa American
Institute, and a Trustee of the Cape of Good Hope Foundation, the Institute of
Current World Affairs and Middlebury College and a director of Victorinox -
Swiss Army Knife Foundation.
John V. Tunney, a Director of the Company, is currently Chairman of the
Board of Cloverleaf Group, Inc., a general partner of Sun Valley Ventures, a
partnership engaged in venture capital and leveraged buyout activities and a
consultant to Trace International, Inc. an investment firm. From 1971 to 1977
Mr. Tunney served as a United States Senator from the state of California and as
a Member of the United States House of Representatives from 1965 to 1971. Mr.
Tunney is also a director of Illinois Central Corporation, Illinois Central
Railroad Company, and Foamex International, Inc., a foam manufacturer.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
- --------------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten-percent shareholders are required by
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that Forms 5 were
required for those persons, the Company believes that, except for a purchase
transaction effected by Mr. A. Clinton Allen in 1998 and a purchase transaction
effected by Mr. John V. Tunney in 1998, neither of which have been reported to
date, all filing requirements applicable to the Company's officers, directors,
and greater than ten-percent beneficial owners were compiled with during the
year ended December 31, 1998.
24
<PAGE>
Item 11.Executive Compensation
- ------------------------------
Summary Compensation Table
--------------------------
The Summary Compensation Table below sets forth individual compensation
information of the President and the four other most highly paid executive
officers of the Company for services rendered in all capacities during the
fiscal years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other
Annual Restricted All Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Position Year Salary Bonus sation Award SARS Payouts sation
- ------------------ ---- -------- ------ -------- ---------- --------- ------- ---------
J. Merrick Taggart 1998 $300,000 $30,000 - 26,250(1 70,000 - $5,000(2
President and Chief 1997 $300,000 - - - - - $4,750(3
Executive Officer 1996 $250,000 $40,000 $50,809(4 - 40,000 - $3,353(5
Peter W. Gilson 1998 $210,000 - - - 25,000 - -
Chairman of the Board 1997 $210,000 - - - - - -
1996 $200,000 - - - 20,000 - -
Harry R. Thompson 1998 $210,000 $8,000 - - - - $4,200(6
Managing Director 1997 $210,000 - - - - - $2,410(7
1996 $200,000 $20,000 - - 25,000 - $2,392(8
Michael J. Belleveau 1998 $176,667 $12,000 - 21,875(9 30,000 - $3,600(10
Senior Vice President and 1997 $160,000 - - - - - $3,145(11
Group Division Head 1996 $150,000 $17,500 - - 10,000 - $2,740(12
Jerald J. Rinder 1998 $170,000 $27,000 - 21,875(13 30,000 - $3,400(14
Vice President - Retail 1997 $170,000 $15,000 $103,737(15 - - - $2,779(16
Division 1996 $153,546 $25,000 $44,797(17 - 10,000 - -
</TABLE>
1 Consists of the dollar value of a restricted stock grant of 3,000 shares
to Mr. Taggart. The dollar value of the award was calculated based upon the
value of the stock on the date (September 16, 1998) of the grant. The restricted
stock vests in four equal installments over three years starting with the grant
date.
2 Consists of $5,000 contributed by the Company to Mr. Taggart's account
under the Company's 401K savings plan.
3 Consists of $4,750 contributed by the Company to Mr. Taggart's account
under the Company's 401K savings plan.
4 Includes relocation benefits of $45,109.
5 Consists of $3,353 contributed by the Company to Mr. Taggart's account
under the Company's 401K savings plan.
25
<PAGE>
6 Consists of $4,200 contributed by the Company to Mr. Thompson's account
under the Company's 401K savings plan.
7 Consists of $2,410 contributed by the Company to Mr. Thompson's account
under the Company's 401K savings plan.
8 Consists of $2,392 contributed by the Company to Mr. Thompson's account
under the Company's 401K savings plan.
9 Consists of the dollar value of a restricted stock grant of 2,500 shares
to Mr. Belleveau. The dollar value of the award was calculated based upon the
value of the stock on the date (September 16, 1998) of the grant. The restricted
stock vests in four equal installments over three years starting with the grant
date.
10 Consists of $3,600 contributed by the Company to Mr. Belleveau's account
under the Company's 401K savings plan.
11 Consists of $3,145 contributed by the Company to Mr. Belleveau's account
under the Company's 401K savings plan.
12 Consists of $2,740 contributed by the Company to Mr. Belleveau's account
under the Company's 401K savings plan.
13 Consists of the dollar value of a restricted stock grant of 2,500 shares
to Mr. Rinder. The dollar value of the award was calculated based upon the value
of the stock on the date (September 16, 1998) of the grant. The restricted
stock vests in four equal installments over three years starting with the grant
date.
14 Consists of $3,400 contributed by the Company to Mr. Rinder's account
under the Company's 401K savings.
15 Includes relocation benefits of $102,297.
16 Consists of $2,779 contributed by the Company to Mr. Rinder's account
under the Company's 401K savings.
17 Includes relocation benefits of $40,693.
26
<PAGE>
Option Grants in Last Fiscal Year
---------------------------------
The following table sets forth, for each of the executive officers named in
the Summary Compensation Table information regarding individual grants of
options made in the last fiscal year, and their potential realizable values.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term
----------------- ------------------------
(a) (b) (c) (d) (e) (f) (g)
% of Total
Options Granted Exercise or
Options To Employees in Base Price Expiration
Name Granted Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ---- ------- --------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
J. Merrick Taggart 70,000 12.6% $8.75 9/16/2008 $385,198 $976,167
Peter W. Gilson 25,000 4.5% 10.125 11/12/2008 N/A N/A
Harry R. Thompson N/A N/A N/A N/A $159,185 $403,416
Michael J. Belleveau 30,000 5.4% 8.75 9/16/2008 $165,085 $418,357
Jerald J. Rinder 30,000 5.4% 8.75 9/16/2008 $165,085 $418,357
</TABLE>
Option Exercises and Year-End Value Table
-----------------------------------------
The following table sets forth option exercise activity in the last fiscal
year and fiscal year-end option values with respect to each of the executive
officers named in the summary Compensation Table.
Aggregated Options Exercises in Last Fiscal year, and FY End Option/SAR Value
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs at
at FY-End # FY-End($)
Shares Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- ------------------ ------------ -------------- -------------
<S> <C> <C> <C> <C>
J. Merrick Taggart - - 144,500/62,500 $15,313/$45,938
Peter W. Gilson - - 170,250/23,750 -/-
Harry R. Thompson 8,250 $42,281 43,750/6,250 -/-
Michael J. Belleveau 1,250 $ 4,844 35,000/25,000 6,563/19,688
Jerald J. Rinder - - 15,000/62,500 6,563/19,688
</TABLE>
27
<PAGE>
Compensation of Directors
-------------------------
The Company compensates those of its directors who are not employees of the
Company in the amount of $10,000 annually plus $1,000 for attendance at each
meeting of the Board of Directors. The Chairmen of the Audit Committee and the
Stock Option and Compensation Committee of the Board of Directors are each paid
an additional annual fee of $10,000 in recognition of the additional
responsibilities and time commitments associated with such positions.
In addition, the Company has purchased split dollar life insurance policies
in respect of each of Messrs. Louis Marx, Jr. and Stanley R. Rawn, Jr. See
"Certain Transactions".
Pension Plan
------------
Each employee of the Company at least twenty years of age becomes eligible
to participate in the Company's Pension Trust (the "Pension Trust") after
completing two Years of Credited Service (as defined in the Pension Trust).
Monthly benefits at Normal Retirement Age, age sixty-five, are computed as
follows: Average Monthly Compensation (as defined below) multiplied by 0.65%
plus Average Monthly Compensation in excess of Social Security Covered
Compensation (as defined below) multiplied by 0.65%, such sum multiplied by
Years of Credited Service, not to exceed 35 years. Accrued benefits under the
prior formula used by the Company's Pension Trust are grandfathered as of
December 31, 1993 for Non-Highly Compensated Employees and as of December 31,
1988 for Highly Compensated Employees.
"Average Monthly Compensation" is defined as one-twelfth of the highest
five consecutive years of total compensation. Social Security Covered
Compensation is defined as the average of the Taxable Wage Base over the 35-year
period ending with the year of the Social Security Normal Retirement (ages 65 -
67, depending on year of birth).
Participants will receive reduced benefits on a life annuity basis with
continuation of benefits to their spouses after death unless an optional form of
benefit is selected. Pre-retirement death benefit coverage is also provided. A
participant is 100% vested in his accrued benefits, as defined in the Pension
Trust, upon such accrual. The Years of Credited Service as of December 31, 1998
of each of the individuals named in the Cash Compensation table herein are as
follows:
<TABLE>
<CAPTION>
<S> <C>
J. Merrick Taggart 3 years
Peter W. Gilson 3 years
Harry R. Thompson 3 years
Michael J. Belleveau 7 years
Jerald J. Rinder 3 years
</TABLE>
The following table shows annual pension benefits under the Pension Trust
assuming retirement at age sixty-five in 1998, payable as a life annuity, in
various remuneration and years of employment classifications. Note that the
maximum allowable compensation for years beginning in 1994 is $150,000, so
remuneration in excess of that amount is not shown. Some grandfathering of
benefits earned at higher compensation levels is provided.
28
<PAGE>
Pension Benefits for 1998 Retirees at Age 65
--------------------------------------------
Years of Service
----------------
<TABLE>
<CAPTION>
Remuneration 15 20 25 30 35
- ------------ -- -- -- -- --
<S> <C> <C> <C> <C> <C>
$50,000 $ 6,529 $ 8,705 $10,881 $13,057 $15,233
75,000 11,404 15,205 19,006 22,807 26,608
100,000 16,279 21,705 27,131 32,557 37,983
125,000 21,154 28,205 35,256 42,307 49,358
150,000 26,029 34,705 43,381 52,057 60,733
</TABLE>
Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------
In 1998, the Compensation Committee was comprised of A. Clinton Allen,
Keith R. Lively, John V. Tunney and John Spencer. None of these individuals is
an officer or employee of the Company or any of its subsidiaries.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------------------------
The following table sets forth information regarding beneficial ownership
of the Common Stock on March 19, 1999, by each person or group known by the
Company to own beneficially 5% or more of the outstanding Common Stock. Except
as otherwise noted, each person listed below has sole voting and investment
power with respect to the shares listed next to his or its name.
<TABLE>
<CAPTION>
Number of
Name of Beneficial Owner Shares Percent owned(1
- ------------------------ --------- ---------------
<S> <C> <C>
Louis Marx, Jr.
667 Madison Avenue
New York, NY 10021 3,141,922(2 37.6%
Brae Group, Inc.
15710 John F. Kennedy Blvd.
Houston, TX 77032 3,117,900(3 37.3%
Victorinox A.G.
CH-6438
Ibach-Schwyz
Switzerland 2,152,700 27.4%
David L. Babson & Co., Inc.
One Memorial Drive
Cambridge, MA 02142 538,100(4 6.9%
Dimensional Fund Advisors, Inc.
1299 Ocean Avenue
Santa Monica, CA 90401 480,724(5 6.1%
</TABLE>
29
<PAGE>
1Based on 7,851,510, shares of Common Stock outstanding, not including
1,006,708, shares held as Treasury stock. Treated as outstanding for the
purposes of computing percentage ownership of each holder are 1,272,250 shares
issuable to such holder upon exercise of options and warrants.
2Consists of 19,730 shares held directly by Mr. Marx, 4,292 shares held by
a trust for the benefit of Mr. Marx, 2,617,900 shares held by Brae Group, Inc.,
which corporation Mr. Marx may be deemed to control, and 500,000 shares issuable
upon the exercise of a stock option held by Brae Group, Inc.
3Includes 500,000 shares issuable upon the exercise of a stock option held
by Brae Group, Inc.
4According to a Schedule 13G dated February 1, 1999, consists of shares
which David L. Babson & Co., Inc. beneficially owns by virtue of serving as
investment advisor.
5According to a Schedule 13G dated February 12, 1999, consists of shares as
to which Dimensional Fund Advisors, Inc. shares power of disposition by virtue
of serving as investment advisor to its clients.
The following table sets forth certain information concerning the
beneficial ownership of Common Stock on March 19, 1999, by each Director, each
officer named in the Summary Compensation Table herein and by all Directors and
officers of the Company as a group.
<TABLE>
<CAPTION>
Number of
Name Shares Percent of Class 1
- ---- --------- ------------------
<S> <C> <C>
J. Merrick Taggart 148,250 2 1.9%
Harry R. Thompson 43,750 3 *
Michael J. Belleveau 35,725 4 *
Jerald J. Rinder 15,625 5 *
A. Clinton Allen 36,000 6 *
Clarke H. Bailey 9,250 7 *
Thomas A. Barron 85,000 8 1.1%
Vincent D. Farrell, Jr. 40,000 9 *
Herbert M. Friedman 15,868 10 *
Peter W. Gilson 171,250 11 2.1%
Keith R. Lively 1,000 *
Louis Marx, Jr. 3,141,922 12 37.6%
Robert S. Prather 45,823 *
Stanley R. Rawn, Jr. 142,711 13 1.8
Eric M. Reynolds 26,000 14 *
John Spencer 1,000 *
John V. Tunney 1,000 *
All officers and directors 4,085,511 15 44.8%
as a group (23 persons)
*Less than 1% of the Class.
</TABLE>
1Based on 7,851,510 shares of Common Stock outstanding, not including
1,006,708 shares held as Treasury Stock. Treated as outstanding for the purpose
of computing the percentage ownership of each director and of all directors and
officers as a group are 1,272,250 shares issuable to such individuals upon
exercise of options and warrants.
30
<PAGE>
2Includes 97,000 shares of Common Stock issuable upon exercise of warrants
held by Mr. Taggart and 47,500 shares of Common Stock issuable upon exercise of
Options held by Mr. Taggart.
3Consists of 43,750 shares of Common Stock issuable upon exercise of
Options held by Mr. Thompson.
4Consists of 35,000 shares of Common Stock issuable upon exercise of
Options held by Mr. Belleveau.
5Consists of 15,000 shares of Common Stock issuable upon exercise of
Options held by Mr. Rinder.
6Includes 35,000 shares of Common Stock issuable upon exercise of Options
held by Mr. Allen.
7Includes 6,250 shares of Common Stock issuable upon exercise of Options
held by Mr. Bailey.
8Includes 50,000 shares of Common Stock issuable upon exercise of Options
held by Mr. Barron.
9Includes 35,000 shares of Common Stock issuable upon exercise of Options
held by Mr. Farrell. Excludes shares beneficially owned by Spears, Benzak, a
general partnership in which Mr. Farrell has a 22% interest.
10Includes 12,500 shares of Common Stock issuable upon exercise of Options
held by Mr. Friedman.
11Includes 170,250 shares of Common Stock issuable upon exercise of options
held by Mr. Gilson.
12Consists of 19,730 shares of Common Stock held directly by Mr. Marx,
4,292 shares held by a trust for the benefit of Mr. Marx, 2,617,900 shares held
by Brae Group, Inc., which corporation Mr. Marx may be deemed to control, and
500,000 shares issuable upon exercise of options held by Brae Group, Inc.
13Includes 100,000 shares of Common Stock issuable upon exercise of Options
held by Mr. Rawn.
14Includes 25,000 shares of Common Stock issuable upon exercise of Options
held by Mr. Reynolds.
15Includes 1,175,250 shares of Common Stock issuable to directors and
officers upon exercise of Options and 97,000 shares of Common Stock issuable
upon exercise of warrants.
31
<PAGE>
Item 13.Certain Relationships and Related Transactions
- ------------------------------------------------------
Messrs. Louis Marx, Jr., Chairman of the Company's Management Committee,
and a Director of the Company, and Stanley R. Rawn Jr., Senior Managing Director
and a Director of the Company, devoted considerable time and attention to the
affairs of the Company during 1998. During 1998 Messrs. Marx and Rawn were
principally compensated through split dollar insurance on their lives, a method
which allows the Company to recover, without interest, all premiums paid on the
death of the insured and which has substantially lower earnings impact over the
years than would similar amounts paid as cash compensation. Specifically, the
Company has purchased split dollar life insurance payable on the death of
Mr. Marx, some of which is payable on the later to die of Mr. Marx and his wife,
and split dollar life insurance payable on the death of Mr. Rawn. Under these
arrangements the Company will pay approximately $3,200,000 over the course of
the next 15 years as premiums under the policies for Mr. Marx and approximately
$2,400,000 over the course of the next 11 years under the policy for Mr. Rawn
(in each case including any amounts paid in the first fiscal quarter of 1999),
and will be reimbursed, without interest, for all of the premiums that it has
paid upon the death of the respective insured. The actual premiums to be paid
may be higher than estimated depending upon the performance of the insurance
company's investments and other factors. Pursuant to the terms of life insurance
agreements entered into with each of Messrs. Marx and Rawn, the Company shall
continue to be obligated to pay these premiums during the insured's employment
with the Company and in the event of the termination of such employment for any
reason, unless the insured willfully and materially breaches the terms of a
consulting agreement between him and the Company and such breach continues for
30 days after written notice. Under the terms of such consulting agreements,
each of Messrs. Marx and Rawn is to be engaged as a consultant immediately
following the termination of his employment with the Company and, in such event,
shall receive such compensation as shall be fair under the circumstances. Mr.
Marx has been so engaged as a consultant to the Company since February 15, 1995,
the date on which he ceased to serve as Chairman of the Company's Executive
Committee. The consulting agreements may be terminated by the Company upon
thirty days notice. In 1998, the Company paid an aggregate of $567,139 in
premiums on the policies pertaining to Mr. Marx and $315,150 in premiums on the
policy pertaining to Mr. Rawn. There will be an insignificant earnings impact in
1999 of the policies on Messrs. Marx's and Rawn's lives, and an increasingly
positive impact on earnings in the later years.
In July 1994, the Company entered into a Services Agreement with Brae
Group, Inc. ("Brae") which beneficially owns 37.6% of the outstanding Common
Stock and in which Louis Marx, Jr., a Director of the Company, has a controlling
interest, and in which Victorinox Cutlery Company ("Victorinox"), a key supplier
and beneficial owner of approximately 27.4% of the outstanding Common Stock, has
a non-controlling stock interest. Under the Services Agreement, Brae is to
provide various services to the Company for a period of four years relating to
maintaining, enhancing and expanding the Company's relationship with Victorinox.
In exchange for these services, Brae received an option to purchase 500,000
shares of the Company's Common Stock at the then current market price of $10.75
per share. The option is fully vested and can be exercised for ten years from
the date of the Services Agreement.
In 1998, the Company paid $234,000 for legal services rendered by the law
firm of Zimet, Haines, Friedman & Kaplan, of which Mr. Herbert M. Friedman, Vice
President-General Counsel and a Director of the Company, was a partner until
April 30, 1998.
32
<PAGE>
Effective May 1, 1999, the Company entered into an agreement with Brae
Capital Corporation ("Brae Capital"), an affiliate of Brae, whereby Brae Capital
would supply the Company with legal services. The fees for these services are
expected to be approximately $12,500 per month. The fees incurred for 1998 were
approximately $103,000. This agreement can be terminated by either party upon
thirty days written notice.
Victorinox Cutlery Company owns approximately 27.4% of the outstanding
Common Stock and is the supplier to the Company of Swiss Army Knives,
SwissCards, SwissTools, the majority of its professional cutlery products and
certain Victorinox watches. During the year ended December 31, 1998, the Company
purchased Victorinox products in aggregate amount of approximately $31,400,000.
Swiss Army Brands, Inc. Charitable Insurance Program
----------------------------------------------------
The Company recognizes its responsibility to the communities in which its
products are sold and the importance of charitable organizations to the country
at large. The Company is also aware of the benefits to commercial good will
resulting from the proper discharge of its responsibilities. In order to further
these objectives, the Company instituted its Charitable Insurance Program. This
program allows the Company to provide the maximum assistance to numerous
charities by utilizing tax provisions intended to encourage such activities, and
to eventually recover, without interest, all amounts expended. Under the
Company's Charitable Insurance Program (the "Program"), adopted by the Company's
Board of Directors in 1993, the Company will utilize insurance on the lives of
each of its directors and other designated persons (the "Insured Directors") to
fulfill charitable pledges to the Victorinox-Swiss Army Knife Foundation (the
"Foundation") and to charities recommended by the Insured Directors. The Company
previously purchased life insurance on one of the Company's then Co-Chairmen and
designated the Foundation as a beneficiary of a portion of the proceeds, subject
to the Company's right to revoke such designation.
The Program enables the Company to make a meaningful commitment to the
Victorinox-Swiss Army Knife Foundation, as well as a broad range of charities
benefiting our communities. The Company anticipates that it will be able to make
substantial contributions in the future to these charities at a minimal cost to
the Company.
The Victorinox-Swiss Army Knife Foundation is a tax-exempt private
foundation, funded primarily by contributions from the Company and Victorinox.
It was organized in December, 1992 for general charitable purposes, including
the improvement of the welfare of underprivileged children (and others) through
the encouragement of organized athletic activities, including those sports in
which an underprivileged child would not ordinarily participate. Louis Marx,
Jr., a director of the Company, is President and a director of the Foundation.
Stanley R. Rawn, Jr., Senior Managing Director and a director of the Company,
and Herbert M. Friedman and John Spencer, directors of the Company, are
directors of the Foundation.
The Company is the owner and beneficiary of the policies, with the right to
borrow against them, and will receive the proceeds upon the death of each
Insured. The proceeds will not be legally segregated from the Company's general
funds and will remain subject to claims of the Company's creditors. Upon the
death of an Insured Director, the Company will retain a share of the insurance
proceeds equal to the cumulative premiums paid by the Company for the policy on
that Insured Director's life. One half of the remaining amount will be used to
fulfill a pledge to the Foundation and the other half will be used to fulfill
pledges to tax-exempt charities recommended by Insured Directors and approved by
the Board. Generally, the Company will be bound to continue to pay all premiums
on the policy for the life of the Insured or, in the case of Mr. Marx, as long
as he is an officer or Board member or agrees to serve as a consultant to the
Company.
33
<PAGE>
Generally, there will be a small, negative impact on earnings in 1999, and
an increasingly positive impact on earnings after 1999 as the cash surrender
value of the insurance increases.
If a director were to leave the Company prior to the time when the cash
surrender value of the policy exceeds the aggregate premiums, and the Company
received no further substantial benefit from his or her services, the obligation
to pay future premiums would result in a charge to earnings at the time he or
she left. The charge to earnings for 1998 with respect to directors who resigned
from the Company in 1999 was insignificant.
The Company would not be entitled to a tax deduction, nor would the Company
realize income for regular income tax purposes, at the time the policy is
obtained nor as premiums are paid. Upon the death of the director (when the
policy matures and the insurance proceeds are paid) the Company would not
realize income for "regular" income tax purposes, but the Company might be
subject to alternative minimum tax ("AMT") on a portion of the receipts from the
policy. Upon the making of the cash contribution following the death of the
insured director, the Company would be entitled to a deduction. Since the
Company is entitled to claim as charitable deductions only 10% of its taxable
income in any year, the extent of the utilization of this deduction would depend
upon income. These deductions may be carried forward for a period of five years.
34
<PAGE>
PART IV
-------
Item 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
(a) Documents filed as part of this report:
Page(s)
(1)
Financial Statements:
Report of Independent Public Accountants F-1
Consolidated Balance Sheets - December 31, 1998 and 1997 F-2 to F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years Ended December 31, 1998,
1997 and 1996 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7 to F-26
(2)
Schedule --
Schedule II -- Valuation and Qualifying Accounts for the
Years Ended December 31, 1998, 1997 and 1996 F-27
</TABLE>
All other schedules called for under Regulation S-X are not submitted because
they are not applicable or not required, or because the required information is
included in the financial statements or notes thereto.
35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Swiss Army Brands, Inc.:
We have audited the accompanying consolidated balance sheets of Swiss Army
Brands, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity and comprehensive income, and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Swiss Army Brands, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a)(2) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedure applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
February 10, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
December 31,
1998 1997
<S> <C> <C>
Current assets
Cash and cash equivalents $1,309 $1,078
Accounts receivable, less
allowance for doubtful accounts
of $975 for both periods 31,321 28,224
Inventories 28,890 27,438
Deferred income taxes 2,205 3,519
Prepaid and other 6,658 3,885
------- -------
Total current assets 70,383 64,144
Deferred income taxes 1,069 2,407
Property, plant and equipment, net 3,735 3,751
Investments in preferred units 7,164 8,793
Investments in common stock 2,303 369
Foreign distribution rights, net 2,875 3,551
Other assets, net 12,875 11,036
------- ------
Total assets $100,404 $94,051
========= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
F-2
<PAGE>
<TABLE>
<CAPTION>
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
1998 1997
<S> <C> <C>
Current liabilities
Short-term debt $5,140 $ -
Accounts payable 12,439 8,478
Accrued liabilities 8,227 9,865
------- ------
Total current liabilities 25,806 18,343
------- -------
Commitments and contingencies (Note 14)
Stockholders' equity
Preferred stock, par value $.10 per
share: shares authorized -
2,000,000; no shares issued - -
Common stock, par value $.10 per
share: shares authorized -
18,000,000; shares issued - 8,858,218
and 8,823,718, respectively 885 882
Additional paid-in capital 46,472 46,186
Accumulated other comprehensive income (loss) 177 (240)
Retained earnings 35,456 33,993
------- ------
82,990 80,821
Less: Treasury stock; 958,108 and 614,108 shares, (8,194) (5,113)
respectively
Deferred compensation (198) -
-------- -------
Total stockholders' equity 74,598 75,708
-------- -------
Total liabilities and stockholders' equity $100,404 $94,051
========= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
F-3
<PAGE>
<TABLE>
<CAPTION>
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $127,851 $118,744 $130,030
Cost of sales 77,869 76,020 89,194
-------- -------- --------
Gross profit 49,982 42,724 40,836
Selling, general, administrative
expenses before special charges 49,005 49,639 43,679
Special charges - - 2,562
-------- -------- --------
Total selling, general and
administrative expenses 49,005 49,639 46,241
-------- -------- --------
Operating income (loss) 977 (6,915) (5,405)
Interest expense (133) (40) (147)
Interest income 188 155 120
Gain (loss) on sale (write-down)
of investments 1,651 398 (2,382)
Other income, net - 1 206
-------- -------- --------
Total interest and other income
(expense), net 1,706 514 (2,203)
-------- -------- --------
Income (loss) before income taxes 2,683 (6,401) (7,608)
Income tax provision (benefit) 1,220 (2,376) (2,343)
-------- -------- --------
Net income (loss) $1,463 ($4,025) ($5,265)
======== ======== ========
Earnings per share:
Basic $0.18 ($0.49) ($0.64)
======== ======== ========
Diluted $0.18 ($0.49) ($0.64)
======== ======== ========
Weighted average number of shares
outstanding:
Basic 8,138 8,209 8,202
======== ======== ========
Diluted 8,236 8,209 8,202
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands, except share data)
Accumulated
Common Stock Additional Other
Par Value $.10 Paid-In Comprehensive Retained Treasury Comprehensive
Shares Amount Capital Income (Loss) Earnings Stock Income(Loss)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE
December 31, 1995 8,800,718 $880 $45,898 ($9) $43,283 ($5,113)
Comprehensive Loss:
Net loss - - - - (5,265) - ($5,265)
Foreign currency
translation adjustment - - - (104) - - (104)
-------
Comprehensive Loss ($5,369)
=======
Stock options and
warrants exercised 22,250 2 284 - - -
--------- ----- -------- ------ ------- -------
BALANCE
December 31, 1996 8,822,968 882 46,182 (113) 38,018 (5,113)
Comprehensive Loss:
Net loss - - - - (4,025) - (4,025)
Foreign currency
translation adjustment - - - (127) - - (127)
---------
Comprehensive Loss
Stock options exercised 750 - 4 - - - (4,152)
--------- ----- -------- ------ ------- ------- =========
BALANCE
December 31, 1997 8,823,718 882 46,186 (240) 33,993 (5,113)
Comprehensive Income:
Net income - - - - 1,463 - 1,463
Unrealized gain on
marketable securities - - - 603 - - 603
Foreign currency
translation adjustment - - - (186) - - (186)
------
Comprehensive Income 1,880
======
Stock options exercised 9,500 - 70 - - -
Stock grant 25,000 3 216 - - -
Repurchase of common
stock - - - - - (3,081)
---------- ------ -------- ------ -------- --------
BALANCE
December 31, 1998 8,858,218 $ 885 $46,472 $ 177 $35,456 ($8,194)
========== ====== ======== ====== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $1,463 ($4,025) ($5,265)
Adjustments to reconcile net income
(loss) to cash provided from
operating activities:
Depreciation and amortization 2,834 2,709 4,035
Stock compensation expense 21 - -
Deferred income taxes 2,652 (1,034) (1,725)
(Gain) loss on (sale) write-down of
investments (1,651) (398) 2,382
------- ------ -------
5,319 (2,748) (573)
Changes in other current assets and liabilities:
Accounts receivable (3,167) 4,745 (1,091)
Inventories (1,433) 2,204 6,966
Prepaid and other (2,814) (967) (270)
Accounts payable 3,937 (2,462) 4,509
Accrued liabilities (1,661) 1,880 (1,937)
------- ------ ------
Net cash provided from operating activities 181 2,652 7,604
Cash flows from investing activities:
Capital expenditures (1,302) (1,056) (1,462)
Additions to other assets (2,701) (3,070) (3,021)
Investment in preferred units - - (2,000)
Proceeds from sales of investments 1,949 550 60
------- ------ -------
Net cash used for investing activities (2,054) (3,576) (6,423)
------- ------ -------
Cash flows from financing activities:
Borrowings under bank agreements 32,914 1,930 10,246
Repayments under bank agreements (27,774) (1,930) (10,246)
Repurchase of common stock (3,081) - -
Proceeds from exercise of stock options
and warrants 70 4 286
------- ------ --------
Net cash provided from financing activities 2,129 4 286
------- ------ --------
Effect of exchange rate changes on cash (25) (69) (9)
Net increase (decrease) in cash and cash
equivalents 231 (989) 1,458
Cash and cash equivalents, beginning
of period 1,078 2,067 609
------- ------- --------
Cash and cash equivalents, end of period $ 1,309 $ 1,078 2,067
======= ======= ========
Cash paid during the period:
Interest $ 102 $ 34 $ 147
======= ======= ========
Income taxes $ 1,752 $ 321 $ 233
======= ======= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
<PAGE>
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS
Swiss Army Brands, Inc. ("Swiss Army" or the "Company") is the exclusive
distributor in the United States, Canada (with one minor exception for
cutlery) and the Caribbean of the Victorinox Original Swiss Army Knife,
Victorinox SwissTool, Victorinox SwissCard, Victorinox Cutlery and
Victorinox Watches. Swiss Army also markets its own line of Swiss Army
Brand Watches, Sunglasses and other high quality Swiss made products under
its Swiss Army Brand worldwide. Swiss Army has only one business segment -
the importation and distribution of cutlery, knives, multi-tools, watches
and other consumer products. No customer accounted for greater than 10% of
net sales in the three years ended December 31,1998.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant inter-company
transactions have been eliminated.
Revenue recognition
-------------------
The Company recognizes revenue upon shipment of product. Net sales is
comprised of gross revenues less expected returns, trade discounts and
customer allowances.
Use of estimates
----------------
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 and
disclosures 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.
Foreign currency translation and transactions
---------------------------------------------
Assets and liabilities of the Company's foreign operations are translated
into U.S. dollars using the exchange rate in effect at the balance sheet
date. Results of operations are translated using the average exchange rate
prevailing throughout the period. The effects of exchange rate fluctuations
on translating foreign currency assets and liabilities into U.S. dollars
are included in the foreign currency translation adjustment component of
stockholders' equity, while gains and losses resulting from foreign
currency transactions are included in net income (loss).
The vast majority of the Company's products are imported from Switzerland
and are paid for in Swiss francs. Increases in the value of the Swiss franc
versus the dollar may effectively increase the cost of these products to
the Company. The increase in the cost of products to the Company may result
in either higher prices charged to customers or reductions in gross margin,
both of which may have an adverse effect on the Company's results of
operations. The Company enters into foreign currency contracts and options
to hedge the exposure associated with foreign currency fluctuations.
However, such hedging activity cannot eliminate the long-term adverse
F-7
<PAGE>
impact on the Company's competitive position and results of operations that
would result from a sustained decrease in the value of the dollar versus
the Swiss franc. Gains and losses on these contracts are deferred and
recognized in cost of sales when the related inventory is sold. These
hedging transactions, which are meant to reduce foreign currency risk, also
reduce the beneficial effects to the Company of any increase in the dollar
relative to the Swiss franc. The Company plans to continue to engage in
hedging transactions; however, it is uncertain as to the extent to which
such hedging transactions will reduce the effect of adverse currency
fluctuations.
Cash and cash equivalents
-------------------------
Cash and cash equivalents consist of all highly liquid investments with
original maturities of three months or less. Investments with maturities
between three and twelve months are considered short-term investments.
Inventories
-----------
Domestic inventories are valued at the lower of cost determined by the
last-in, first-out (LIFO) method or market. Had the first-in, first-out
(FIFO) method been used to value domestic inventories as of December 31,
1998 and 1997, the balance at which inventories are stated would have been
$3,076,000 and $2,993,000 higher, respectively. Foreign inventories are
valued at the lower of cost or market determined by the FIFO method.
Inventories primarily consist of finished goods and packaging materials.
Property, plant and equipment
-----------------------------
Property, plant and equipment are stated at cost. Major improvements which
add to productive capacity or extend the life of an asset are capitalized
while repairs and maintenance are charged to expense as incurred. Property,
plant and equipment are comprised of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
(in thousands)
-------------------
<S> <C> <C>
Leasehold improvements $1,115 $1,090
Equipment 5,966 7,945
Furniture and fixtures 1,290 1,923
------ ------
8,371 10,958
Accumulated depreciation (4,636) (7,207)
------ ------
$3,735 $3,751
====== ======
</TABLE>
Depreciation is computed principally by use of the straight-line method
based on the following estimated useful lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Equipment 3 to 10
Furniture and fixtures 3 to 10
</TABLE>
The provision for amortization of leasehold improvements is provided on a
straight-line basis over the estimated useful lives of the assets or terms
of the leases, whichever is shorter. For the years ended December 31, 1998,
1997, and 1996, depreciation and amortization expense of property, plant
and equipment was approximately $1,300,000, $1,260,000 and $1,599,000,
respectively.
F-8
<PAGE>
Long-lived assets
-----------------
The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" in 1996, and this accounting standard did not
have a material effect on the Company's financial position or results of
operations. The Company continually reviews the recoverability of the
carrying value of these assets using the provisions of SFAS No. 121.
Investments
-----------
Investments in preferred units are accounted for at cost, subject to review
for impairment. Since these investments do not have a readily determinable
fair value, the valuation of these investments is subject to uncertainty.
Investments in common stock of companies in which the Company owns less
than 20% are accounted for at fair value, subject to review for permanent
impairment. Changes between cost and fair value are reflected as a
component of stockholders' equity. Any write-down of the cost due to
impairment is reflected in income.
Earnings per share
------------------
In 1997, the Company adopted SFAS No. 128, "Earnings per Share", and the
Company's reported earnings per share were restated. There was no effect on
diluted earnings per share in the two years ended December 31, 1997 and
1996.
Basic earnings per share is computed by dividing net income (loss) by the
number of weighted average number of common shares outstanding. Diluted
earnings per share is computed by dividing net income (loss) by the
weighted average number of common shares and dilutive common share
equivalents outstanding during the period. No common share equivalents have
been included in the years ended December 31, 1997 and 1996, as they would
have had an anti-dilutive effect. Common share equivalents are calculated
using the treasury stock method.
Stock-based compensation
------------------------
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation",
was issued. As permitted under the provisions of SFAS No. 123, the Company
has not changed its method of accounting for stock-based compensation;
however, SFAS No. 123 requires additional footnote disclosures relating to
the effect of using a fair value based method of accounting for stock-based
compensation cost. See Note 13 for the additional footnote disclosures
required by SFAS No. 123.
Income taxes
------------
The Company follows SFAS No. 109, "Accounting for Income Taxes". Under SFAS
No. 109, the provision for income taxes, as determined using the liability
method, includes deferred taxes resulting from temporary differences in
income for financial and tax purposes. Such temporary differences primarily
result from differences between the tax bases of assets and liabilities and
their carrying amounts for financial reporting purposes.
Recent Accounting Pronouncements
--------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities."
This statement standardizes the accounting and reporting standards for
derivatives and hedging activities. This statement is effective for fiscal
years beginning after June 15, 1999. The Company will adopt this statement
effective January 1, 2000. The Company is currently evaluating the impact
of SFAS No. 133 on the Company's financial position and results of
operations.
F-9
<PAGE>
(3) SPECIAL CHARGES
In 1997, the Company recorded $0.8 million of restructuring costs (included
in selling, general and administrative expenses) and a special charge of
$1.3 million (included in cost of sales) related to discontinued inventory.
The restructuring costs primarily consisted of severance and related
expenses.
In 1996, the Company recorded special charges of approximately $9,887,000
related to an extensive analysis of the Company's operations and
non-strategic assets. The special charges consisted of:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Write-off of inventory $4,932 (A)
Selling, general and administrative charges 2,562 (B)
Write-down of investments 2,393 (C)
------
$9,887
======
</TABLE>
(A) Represents the write-off of discontinued inventory, including certain
cutlery products sold by Cuisine de France Limited ("CDF").
(B) Consists of an $870,000 write-off of goodwill and other assets related
to CDF, a $1,151,000 write-off for obsolete displays and a $541,000
write-off of other assets.
(C) Consists of a $1,593,000 write-down of the Company's common stock
investment in SWWT, Inc., and an $800,000 write-off of the Company's
investment in a privately held affiliated start-up entity ( see Note 6).
(4) PRINCIPAL SUPPLIERS
Swiss Army imports for resale all of its Swiss Army Knives, SwissTools,
SwissCards and most of its other cutlery products from a principal
supplier, Victorinox Cutlery Company ("Victorinox"), a Swiss company.
Effective December 12, 1998, Swiss Army renewed a five-year agreement with
Victorinox which appoints Swiss Army as exclusive distributor of Victorinox
Original Swiss Army Knives, Victorinox SwissTools, Victorinox SwissCards
and Victorinox Cutlery, and which gives Swiss Army exclusive rights to use
Victorinox trademarks and trade names in the United States with respect to
those products. The agreement is subject to renewal at five year intervals
at the Company's option and remains in effect as long as Swiss Army
continues to purchase quantities of Swiss Army Knives and cutlery (based on
the Swiss franc purchase price) at least equal to 85% of the maximum amount
of purchases of each in any preceding year . In 1995, Victorinox agreed to
reduce the 1996 minimum purchase requirements on knives to 75% of the
maximum amount of purchases in any preceding year. In 1996, Victorinox
agreed to reduce the 1997 minimum purchase requirements on knives to 65% of
the maximum amount of purchases in any preceding year. The Company
purchased the required minimums in 1997 and 1996. In 1998, Victorinox
agreed to reduce the minimum for 1998 to a purchase plan of approximately
$31,400,000. The Company met this requirement in 1998. Pursuant to this
agreement, Swiss Army must obtain Victorinox's permission to sell new
cutlery items. All of the Swiss Army Knives and certain of the cutlery
items that Swiss Army sells in Canada and the Caribbean also are supplied
by Victorinox.
F-10
<PAGE>
Foreign distribution rights with Victorinox are comprised of the following:
<TABLE>
<CAPTION>
December 31, Amortization
1998 1997 Period
----------------- ------------
(in thousands)
<S> <C> <C> <C>
Canadian distribution
rights (A) $3,483 $3,483 10 years
Caribbean and Victorinox Watch
distribution rights (B) 3,261 3,261 10 years
------- -------
6,744 6,744
Accumulated amortization (3,869) (3,193)
------- -------
$2,875 $3,551
======= =======
</TABLE>
(A) In April 1992, Swiss Army entered into an agreement with Victorinox
under which it received the exclusive distribution rights for Victorinox
Original Swiss Army Knives in Canada and was appointed the principal
distributor of Victorinox professional cutlery in Canada. In exchange for
the grant of these rights, Swiss Army issued to Victorinox 277,066 shares
of its common stock from treasury. The rights received were awarded to
Swiss Army for a fixed seven-year term with a continuous five-year renewal
arrangement upon expiration of the fixed term. Victorinox has the right not
to renew the agreement; however, should Victorinox choose not to renew upon
expiration of the fixed term, Victorinox is required to pay Swiss Army
$3,500,000.
(B) On December 21, 1993, Swiss Army entered into an agreement with
Victorinox under which it received the exclusive distribution rights for
Victorinox Original Swiss Army Knives and professional cutlery in the
Caribbean. Swiss Army also received the right to distribute Victorinox
Swiss-made watches in the United States, Canada and the Caribbean and
acquired the 20% share of the Company's subsidiary, Victorinox of
Switzerland, Ltd., that Victorinox owned. In exchange for the grant of
these rights and the stock acquired, Swiss Army issued to Victorinox a
five-year warrant to purchase 1,000,000 shares of common stock at a $3.75
discount to the current market price on the date of exercise. The value of
the warrant of $3,750,000 was allocated between the purchase of the
distribution rights ($3,261,144) and the acquisition of the 20% share of
Victorinox of Switzerland, Ltd., ($488,856). In April 1994, the discount
from the current market price was modified to $4.25 in exchange for
Victorinox's agreement to pay the exercise price immediately instead of
after one year as allowed by the original agreement. All of the shares
issued upon exercise of the warrant were subsequently sold to a corporate
shareholder of Swiss Army that is controlled by a director of Swiss Army,
in exchange for shares of the common stock of that corporation. As part of
the agreement, Swiss Army pays Victorinox a royalty of 1% of net sales of
Victorinox Watches. The Caribbean distribution rights are for a fixed
seven-year term automatically renewable in successive five-year periods
unless either party notifies the other at least six months prior to
expiration of such period of its intent not to renew. The term of
Victorinox Watch distribution rights in each territory coincides with the
term for Victorinox cutlery products in that territory.
F-11
<PAGE>
The Company does not have any manufacturing facilities and imports
virtually all of its products from independent suppliers. The Company's
business is subject to certain risks related to its arrangements with its
foreign suppliers, including possible restrictions on transfer of funds,
the risk of imposition of quotas on the amount of products which may be
imported into the United States (although no quota currently exists),
maritime union strikes and political instability. Although the Company has
exclusive distributorship agreements with Victorinox, its principal
supplier, it does not have such contractual arrangements with its other
suppliers. The agreement with Victorinox provides for certain minimum
annual purchases of products by the Company, and failure to achieve these
goals would result in Victorinox having the right to terminate the
agreement. Such a termination would have a material adverse effect upon the
Company's operations. Although the Company has a contractual right to
receive minimum quantities of Swiss Army Knives from Victorinox, were this
source of supply to fail for any reason, the Company probably would be
unable to find an alternative source. Any substantial disruption of the
Company's relationships with Victorinox would have a material adverse
effect on its operation and results. Virtually all of the Company's
imported products are subject to United States custom duties.
Although approximately 68%, or $16,800,000, of total payments for watches
and watch parts in 1998 were made to a single watch supplier, which is
responsible for the final assembly of watch components manufactured by
several manufacturers, the Company believes that alternate watch suppliers
would be available, if necessary. Furthermore, the Company believes that
the loss of this supplier of Swiss Army Brand Watches would not have a
material adverse effect on the Company's business.
(5) RELATED PARTY TRANSACTIONS
One of Swiss Army's directors was a partner in a law firm, which provided
legal services to the Company. For the years ended December 31, 1998, 1997
and 1996, Swiss Army incurred fees of $174,000, $629,000 and $598,000,
respectively, relating to these services.
Four of Swiss Army's directors serve as directors of Hudson River Capital
LLC, including two who serve as Co-Chairman. Four of Swiss Army's directors
serve as directors of Victory Ventures LLC, including one who serves as
Co-Chairman. Five of Swiss Army's directors serve as directors of SWWT,
Inc. See Note 6 for further discussion.
In July 1994, Swiss Army entered into a Services Agreement with Brae Group,
Inc. ("Brae"), a company which is a stockholder of Swiss Army and in which
a Swiss Army director and a principal supplier have a controlling and
non-controlling stock interest, respectively. Under the Services Agreement,
Brae agreed to provide various services to Swiss Army for a period of four
years relating to maintaining, enhancing and expanding Swiss Army's
relationship with the Company's principal supplier. In exchange for these
services, Brae received an option to purchase 500,000 shares of Swiss
Army's common stock at the then current market price of $10.75 per share.
The option vested immediately and can be exercised for 10 years from the
date of the Services Agreement.
On May 1, 1998, the Company entered into an agreement with an affiliated
company whereby this company would supply Swiss Army with legal services.
The fees for these services are expected to be approximately $12,500 per
month. The fees incurred for 1998 were approximately $103,000. This
agreement can be terminated by either party upon thirty days written
notice.
F-13
<PAGE>
(6) INVESTMENTS
<TABLE>
<CAPTION>
Investments consist of the following:
1998 1997
(in thousands)
<S> <C> <C>
Preferred units of Hudson
River Capital LLC (A) $6,313 $7,907
Preferred units of
Victory Ventures LLC (B) 851 886
----- -----
Total investments in preferred units $7,164 $8,793
===== =====
Common stock of Iron Mountain, Inc. (C) $2,273 $ -
Common stock of Chaparral Resources, Inc. (D) 30 219
Common stock of SWWT, Inc. (E) - 150
----- -----
Total investments in common stock $2,303 369
===== =====
</TABLE>
(A) Hudson River Capital LLC ("Hudson River"), formerly known as Victory
Capital LLC ("Victory"), is a private equity firm specializing in middle
market acquisitions, re-capitalization and expansion capital investments.
Hudson River currently has equity and other interests in several private
and publicly traded companies. In 1994, Swiss Army invested a total of
$7,002,990 paid in cash and in shares of stock of a publicly traded
corporation, to acquire 700,299 shares of preferred stock of Forschner
Enterprises, Inc. ("FEI"), the predecessor company to Victory. On March 1,
1996, FEI merged into Victory and the preferred stock of FEI was converted
to preferred units of Victory. In May 1996, Swiss Army invested a total of
$2,000,009 in Victory, acquiring 190,477 preferred units. In October 1996,
Victory Capital LLC changed its name to Hudson River Capital LLC. In
November 1996, Hudson River distributed to its members its ownership
interest in Victory Ventures LLC ("Victory Ventures"). This event was
non-taxable and resulted in no gain or loss to the Company. See (B) for
further discussion of Victory Ventures. In January 1998, Hudson River
distributed to the Company $1,613,000 in cash and authorized the
distribution of 63,019 shares of common stock (as adjusted for a three to
two stock split which occurred in July 1998), valued at $1,481,000, of Iron
Mountain Incorporated ("Iron Mountain"). The Company received the common
stock in June 1998. In the first quarter of 1998, the Company recognized a
$1.5 million gain on the cash and common stock distribution which is
included in gain on sale of investments in the accompanying financial
statements. See (C) for further discussion. At December 31, 1998 and 1997,
the Company owns 890,776 preferred units of Hudson River, which represents
approximately 9.1% of the outstanding equity of Hudson River, respectively.
The preferred units in Hudson River owned by the Company carry a preference
on liquidation equal to their per unit cost as well as, in certain
instances, an annual preferred return. The Company is accounting for this
investment on the cost basis, subject to review for permanent impairment.
Since these investments do not have a readily determinable fair value, the
valuation of these investments is subject to uncertainty.
F-14
<PAGE>
(B) Victory Ventures is a private equity firm specializing in small market
venture capital investments. As a result of the distribution from Hudson
River, the Company received 890,776 preferred units of Victory Ventures
valued at $1.23 per unit. The Company owns 890,776 preferred units as of
December 31, 1998 and 1997, which represent approximately 1.3% of the
outstanding equity of Victory Ventures, respectively. In the third quarter
of 1997, the Company received a cash distribution from Victory Ventures of
$438,000, of which $286,000 was recorded as a gain and has been included in
gain (loss) on sale (write-down) of investments. On December 3, 1997,
Victory Ventures distributed to its members its investment in Chaparral
Resources, Inc. ("Chaparral"). See (D) for further discussion. In November
1998, Victory distributed 3,053 shares of common stock of Micromuse, a
publicly traded entity, and 4,178 shares of common stock of FaxSav, a
publicly traded entity. The Company liquidated these investments in
November 1998 and realized a gain of approximately $57,000 on these
investments. The preferred units in Victory Ventures owned by the Company
carry a preference on liquidation equal to their per unit cost as well as,
in certain instances, an annual preferred return. The Company is accounting
for this investment on the cost basis, subject to review for permanent
impairment. Since these investments do not have a readily determinable fair
value, the valuation of these investments is subject to uncertainty.
(C) Iron Mountain, a publicly traded company, is a full service provider of
records management and related services. At December 31, 1998, the Company
owns 63,019 shares of Iron Mountain stock valued at $30 per share. The
Company accounts for this investment at fair value, with changes between
cost and fair value reflected as a component of stockholders' equity. In
January 1999, the Company sold its entire investment in Iron Mountain and
recorded a gain of approximately $400,000.
(D) Chaparral, a publicly traded company, is an independent oil and gas
exploration and production company. As a result of the distribution from
Victory Ventures, at December 31, 1998, the Company owns 87,634 shares of
common stock of Chaparral valued at $0.34 per share.
(E) SWWT, Inc. ("SWWT") is a holding company formerly in the business of
manufacturing and marketing portable water purification and filtration
systems to the sporting goods, recreational, travel and tourist, emergency
preparedness and military markets. In December 1996, the investment in SWWT
was written down to $150,000, its estimated fair value, due to impairment
in the value of the investment. This write-down of approximately $1,593,000
has been included in gain (loss) on sale (write-down) of investments. In
December 31, 1998, the Company sold its entire investment in SWWT for
approximately $244,000 and recorded a gain of $94,000.
In 1995, the Company purchased 5,160 shares of common stock and an 8%
convertible note in a privately held affiliated start-up entity for a total
investment of $800,000. In 1996, the investment was fully written off due
to the impairment in the value of the investment. The write-down of
$800,000 has been included in gain (loss) on sale (write-down) of
investments. During 1997, the Company recovered $112,000 related to this
investment which is included in gain (loss) on sale (write-down) of
investments.
F-15
<PAGE>
(7) OTHER ASSETS
<TABLE>
<CAPTION>
Other assets consist of the following :
Amortization
1998 1997 Period
---- ---- ------------
(in thousands)
<S> <C> <C> <C>
Cash surrender value of
life insurance (see Note 14) $12,044 $9,804 N/A
Other 2,808 2,455 1-5 years
------ -----
Accumulated amortization (1,977) (1,223)
------ -----
$12,875 $11,036
====== ======
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, amortization expense
was approximately $1,534,000, $1,449,000 and $2,436,000, respectively.
(8) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1998 1997
(in thousands)
<S> <C> <C>
Sales, marketing and promotional $3,106 $4,435
Payroll related 2,111 2,314
Other 3,010 3,116
------ ------
$8,227 $9,865
====== ======
</TABLE>
(9) DEBT AGREEMENTS
Swiss Army has a revolving credit agreement, which among other things,
states that the Company can borrow up to $10,000,000 for working capital
purposes at one of three interest rate options available; (i) LIBOR plus
1.1%; (ii) Base Rate, as defined; or (iii) Cost of Funds rate, as defined.
The line of credit is unsecured and contains certain financial covenants
including, but not limited to, minimum tangible net worth, interest rate
coverage, current ratio, and the continuation of the exclusive
distributorship arrangement with Victorinox Cutlery Company. This agreement
expires in June 1999. The Company is currently reviewing its options to
establish a new credit agreement, and believes it can establish a new
credit agreement at the appropriate date. As of December 31, 1998, the
Company had $5,140,000 outstanding under the line of credit and is in
compliance with the covenants contained in the agreement. The fair value of
the amount outstanding under the line of credit approximates book value due
to the short maturity of the debt.
F-16
<PAGE>
(10) INCOME TAXES
The income tax provision (benefit) for the years ended December 31, 1998,
1997 and 1996, consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
(in thousands)
<S> <C> <C> <C>
Current
Federal ($1,662) ($1,276) ($1,140)
Foreign - (280) 292
State 230 214 230
------ ------ -------
Total current (1,432) (1,342) (618)
Deferred
Federal 2,294 (700) (1,332)
State 358 (334) (393)
------ ------- ------
Total deferred 2,652 (1,034) (1,725)
------ ------- ------
Provision (benefit) for
income taxes $1,220 ($2,376) ($2,343)
====== ======= =======
</TABLE>
The significant components of the deferred tax asset as of December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Sales and marketing reserves $888 $1,608
Inventory related reserves 843 1,400
Depreciation and amortization 561 666
Loss carryforwards 411 1,622
Accrued employee benefits 363 471
Other, net 208 159
------ ------
$3,274 $5,926
====== ======
</TABLE>
No valuation allowance has been recorded against the Company's deferred tax
assets as the Company believes it is more likely than not that the Company
will realize the deferred tax assets.
A reconciliation of the income tax provision (benefit) calculated at the
federal income tax statutory rate and the Company's effective income tax
rate for 1998, 1997 and 1996 is as follows:
F-17
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% (34.0%) (34.0%)
State income taxes, net of
federal income tax benefit 5.7 (0.8) (4.1)
Foreign taxes 2.1 (4.0) 3.8
Other 3.7 1.7 3.5
----- ----- -----
Effective income tax rate 45.5% (37.1%) (30.8%)
===== ===== =====
</TABLE>
(11) COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" which establishes standards for the reporting and
display of comprehensive income and its components.
Accumulated other comprehensive income (loss) activity for the three years
ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Foreign Unrealized Gain Accumulated Other
Currency On Marketable Comprehensive
Translation Securities Income (Loss)
----------- --------------- -----------------
(In thousands)
<S> <C> <C> <C>
January 1, 1996 ($9) $ - ($9)
1996 Activity (104) - (104)
----- ----- -----
December 31, 1996 (113) - (113)
1997 Activity (127) - (127)
----- ----- -----
December 31, 1997 (240) - (240)
1998 Activity (186) 603 417
----- ----- -----
December 31, 1998 ($426) $603 $177
===== ===== =====
</TABLE>
For comparative purposes, the financial statements for 1997 and 1996 have
been reclassified to conform to the requirements of SFAS No. 130. The
adoption of SFAS No. 130 had no impact on the Company's financial position
or cash flows.
(12) EMPLOYEE BENEFITS
Substantially all employees of the Company are covered by a noncontributory
defined benefit pension plan. Benefits are based on years of service and
the employee's compensation during the five highest consecutive
compensation years. Costs under the plan are accrued and funded on the
basis of accepted actuarial methods. Total pension expense approximated
$285,000, $336,000, and $232,000, for the years ended December 31, 1998,
1997 and 1996, respectively. The net periodic pension cost of Swiss Army's
pension plan in 1998, 1997 and 1996 includes the following components:
F-18
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Service cost - benefits
earned during the period $286 $339 $240
Interest cost on projected
benefit obligation 166 189 156
Expected return on assets (143) (171) (144)
Amortization of net
transition asset (14) (14) (14)
Amortization of unrecognized
prior service cost (13) (13) (13)
Amortization of net loss 3 6 7
----- ----- -----
Net periodic pension cost $285 $336 $232
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
1998 1997
(in thousands)
<S> <C> <C>
Change in Benefit Obligation
Benefit obligation, January 1 $3,211 $2,629
Service Cost 286 339
Interest Cost 166 189
Actuarial (gain) loss (750) 81
Benefits paid - expected (171) (27)
------- -------
Benefit obligation, December 31 $2,742 $3,211
======= =======
Change in Plan Assets
Fair value of plan assets, January 1 $1,791 $2,111
Actual return on plan assets 143 288
Company Contributions 140 165
Benefits paid - actual (339) (773)
------- -------
Fair value of plan assets, December 31 $1,735 $1,791
======= =======
Funded Status Reconcilation
Funded status, December 31 ($839) ($1,419)
Unrecognized (gains) losses, net 283 1,035
Unrecognized prior service cost (243) (256)
Unrecognized transition asset (56) (70)
------- -------
Accrued pension cost ($855) ($710)
======= =======
</TABLE>
Rates used in determining the actuarial present value of the projected
benefit obligation are as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Discount rate 6.25% 7.00%
Rate of increase in future compensation levels 4.50% 5.00%
Expected long-term rate of return on plan assets 8.00% 8.00%
</TABLE>
F-19
<PAGE>
Plan assets consist principally of investments in fixed income securities,
short-term investments and common stock.
The Company maintains a 401(k) employee benefit plan pursuant to which
participants can defer a certain percent of their annual compensation in
order to receive certain benefits upon retirement, death, disability or
termination of employment. The Company can elect to make a matching
contribution of up to 6% of annual eligible compensation per employee. The
determination to make a matching contribution is made at the beginning of
each fiscal year during 1998, 1997 and 1996, the Company incurred expenses
of approximately $161,000, $175,000, and $135,000 related to this plan.
The Company offers no other post retirement benefits.
(13) STOCKHOLDERS' EQUITY
During 1996, the stockholders approved adoption of Swiss Army Brands, Inc.
1996 Stock Option Plan providing for the grant of options to employees,
including officers of the Company, and members of the Board of Directors.
Under this plan and previous stock option plans, 578,593 shares of common
stock are reserved and available for issuance. Options expire no later than
ten years after the date of grant. Option prices equal at least 100% of the
fair market value of Swiss Army's common stock on the date of grant. The
vesting of options is determined by the Stock Option and Compensation
Committee of the Board of Directors, which administers the plan, and for
options outstanding as of December 31, 1998, vesting ranges from
immediately upon grant to three years.
The following table summarizes stock option plan and warrant activity for
the three years ended December 31, 1998:
<TABLE>
<CAPTION>
Number
of Shares Option Price
--------- ------------
<S> <C> <C>
Outstanding at December 31, 1995 2,008,125 $ 5.25 - $14.50
Granted (A) 348,750 $ 13.63
Exercised (22,250) $ 5.25 - $12.88
Canceled (22,625) $ 12.25 - $12.88
----------
Outstanding at December 31, 1996 2,312,000 $ 5.25 - $14.50
Exercised (750) $ 5.25
Canceled (70,219) $ 12.25 - $14.00
----------
Outstanding at December 31, 1997 2,241,031 $ 5.25 - $14.50
Granted (B) 555,000 $ 8.75 - $10.125
Exercised (9,500) $ 5.25 - $ 8.62
Canceled (270,780) $ 8.75 - $14.00
----------
Outstanding at December 31, 1998 2,515,751 $ 5.25 - $14.50
==========
</TABLE>
Of the options and warrants outstanding at December 31, 1998, 2,055,125 are
exercisable at a weighted average option price of $11.94 per share.
(A) In November 1996, the Company issued 348,750 options to purchase common
stock at $13.63 per share to various Company employees and officers. These
options are exercisable in four equal installments over three years
starting with the grant date.
(B) In September 1998, the Company issued 505,000 options to purchase
common stock at $8.75 per share to various employees and officers. These
options are exercisable in four equal installments over three years
starting with the grant date. In November 1998, the Company issued 50,000
options to purchase common stock at $10.125 per share to two directors.
These options are exercisable in four equal installments over three years
starting with the grant date.
F-20
<PAGE>
The weighted-average fair value of the stock options granted in 1998 and
1996 was approximately $3.51 and $5.45, respectively. The weighted-average
fair value of the options was estimated using the Black-Scholes
option-pricing model with the following assumptions: expected volatility of
30%; expected life of options and warrants of 6 years; dividend yield of
0%; and risk free interest rate of 4.91% in 1998 and 6.04% in 1996,
respectively.
The Company accounts for stock options and warrants under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", under which no compensation cost has been recognized. Had
compensation cost for the three years ending December 31, 1998, been
determined under the principles of SFAS No. 123, the Company's net income
(loss) and earnings per share would have been the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C>
Net income (loss) As reported: $1,463 ($4,025) ($5,265)
Pro forma: $ 812 ($5,320) ($6,386)
Earnings per share As reported:
Basic $0.18 ($0.49) ($0.64)
Diluted $0.18 ($0.49) ($0.64)
Pro forma:
Basic $0.10 ($0.65) ($0.78)
Diluted $0.10 ($0.65) ($0.78)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts as SFAS No. 123 does not apply to stock
options and warrants granted prior to 1995, and additional options and
warrants may be granted in future years.
In September 1998, the Company issued 25,000 shares of its common stock to
certain employees and officers. The common stock vests in four equal
installments over three years beginning with the grant date. The Company
recognized $21,000 in stock compensation expense related to this grant.
On September 16, 1998, the Company's Board of Directors authorized a
repurchase of up to 400,000 shares of its common stock. At December 31,
1998, the Company had repurchased 344,000 shares for a total purchase price
of approximately $3,081,000.
(14) COMMITMENTS AND CONTINGENCIES
The Company has minimum purchase requirements under an agreement with its
principal Swiss Army Knife and cutlery supplier (see Note 4).
F-21
<PAGE>
On December 18, 1996, the Swiss Military Department representing the Swiss
Confederation ("Swiss Confederation") and the Company entered into a
trademark agreement (the "Trademark Agreement") pursuant to which the
Company was granted certain worldwide use and sublicensing rights in
connection with trademarks containing the words "Swiss Army" registered by
the Swiss Confederation in Switzerland (the "Swiss Confederation
Trademarks"). The Swiss Confederation acknowledged the Company's exclusive
right to use the Company's trademarks in the countries of their
registration or application and agreed to assist the Company in enforcing
the Company's rights with respect to its trademarks. In addition, the Swiss
Confederation stated its intention to assist Victorinox, the Company and
two other companies in safeguarding their rights with respect to "Swiss
Army" as applied to knives and in preventing the use of "Swiss Army" with
respect to multi-blade pocketknives, multi-tools and other products which
are not Swiss products.
The Trademark Agreement grants the Company the right to an exclusive
royalty free license of the Swiss Confederation Trademarks as applied to
watches and sunglasses in the United States, Canada and the Caribbean. The
Company is also granted such rights with respect to certain designated
products that either it or its licensees sell in commercial quantities in
the United States, Canada and the Caribbean within designated time periods.
In the event the Company or its licensees do not sell commercial quantities
of product categories within the time periods set by the agreement, the
Swiss Confederation shall have the right, subject to certain conditions, to
license the Swiss Confederation Trademarks to a third party and, in such
event, the Company shall be obligated to offer such third party a license
of the Company's appropriate trademark.
Outside of the United States, Canada and the Caribbean, the Trademark
Agreement provides for the grant to the Company of the right to an
exclusive license, subject to the existing legal rights of others, for
watches and sunglasses at a royalty equal to 3% of net sales. In addition,
the Company has the right to a license for certain designated products
outside of the United States, Canada and the Caribbean also at a royalty
equal to 3% of net sales, to use the Swiss Confederation Trademarks
provided that the Company commences the sale of commercial quantities of
such products within time periods prescribed by the Trademark Agreement.
The Trademark Agreement also provides that all products sold under the
license must be of a quality at least equal in workmanship and materials to
the products currently sold by the Company, Victorinox or one other company
and that in the event the Company discontinues sales of goods in commercial
quantities in any category of goods for three consecutive years, the Swiss
Confederation shall have the right to terminate the license as to that
category after giving the Company notice and an opportunity to resume
sales. Except for the foregoing limitation, the rights of the Company with
respect to the use of the Swiss Confederation Trademarks under the
Trademark Agreement are perpetual. It is anticipated that the right to
utilize the Swiss Confederation Trademarks on certain products other than
timepieces and sunglasses will be made available to one other company by
the Company on terms yet to be discussed.
At December 31, 1998, minimum rental payment commitments for office and
warehouse space leased by Swiss Army under operating leases are, as follows
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999 $1,345
2000 1,296
2001 828
</TABLE>
During the years ended December 31, 1998, 1997 and 1996, rent expense was
approximately $1,374,000, $1,390,000 and $1,313,000, respectively.
F-22
<PAGE>
At December 31, 1998, the Company has open contracts to purchase
approximately 55 million Swiss francs in 1999 as a hedge against future
purchase of inventories. The unrealized gain on these contracts at December
31, 1998, was approximately $1,00,000.
The Company maintains split dollar life insurance agreements covering two
members of the Board of Directors. Primarily, these policies can only be
canceled upon the mutual agreement of the Company and the insured. However,
if these policies were canceled at December 31, 1998, the Company would
receive in cash an amount equal to the lesser of the cash surrender value
or cumulative premiums paid to date on these policies, which was
approximately $5,360,000. Under the terms of these life insurance policies,
the Company will make approximate future premium payments, if the policies
remain in force, as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999 $ 843
2000 858
2001 788
2002 493
2003 and thereafter 2,659
</TABLE>
In 1993, Swiss Army's Board of Directors adopted a charitable insurance
program that will enable Swiss Army to make a commitment to the
Victorinox-Swiss Army Knife Foundation (the "Foundation"), a foundation
which engages in various charitable activities including the promotion of
athletic events for underprivileged urban youth, as well as a broad range
of charities. In 1994, Swiss Army made a special $1.5 million contribution
in the form of cash and common stock to the Foundation. Under the program,
Swiss Army owns, is the beneficiary of and pays all the premiums for life
insurance policies on the lives of certain Board members. Pursuant to the
program, upon the death of each Director, the Company will retain a share
of the insurance proceeds equal to the cumulative premiums paid by the
Company for the policy on that Director's life. One half of any additional
insurance proceeds received upon the death of an insured Director will be
used to fulfill charitable pledges made to the Victorinox-Swiss Army Knife
Foundation. The remaining half of the additional proceeds will be used to
fulfill charitable pledges recommended by the individual Directors. Swiss
Army is generally bound to continue to pay all premiums on the policies for
the lives of the insured Directors or, in the case of the Chairman of the
Management Committee, as long as he is an officer or a board member or
agrees to serve as a consultant to the Company. Swiss Army will make
approximate future premium payments related to these programs as follows
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999 $1,115
2000 1,115
2001 1,102
2002 1,102
2003 and thereafter 6,000
</TABLE>
Under existing federal tax laws, the receipt by Swiss Army of the proceeds
from an insurance policy upon the death of a director would not result in
regular taxable income to the Company; however, Swiss Army may be subject
to alternative minimum tax on a portion of the receipts.
F-23
<PAGE>
When Swiss Army makes cash contributions to a designated charity, it will
be entitled to a tax deduction equivalent to the sum of those
contributions. The extent of the utilization of this deduction in that year
will depend upon Swiss Army's taxable income, since Swiss Army is entitled
to claim as charitable deductions only 10% of its taxable income in any
year. However, these deductions may be carried forward for tax purposes for
a period of five years.
Based upon estimates prepared by the Company's insurance agent, the
anticipated earnings impact related to the policies for both the Foundation
and the two members of the Board of Directors is expected to be
insignificant.
In 1994, in a case originally brought by the Company against Arrow Trading
Co., Inc. ("Arrow") in September 1992 in the District Court for the
Southern District of New York, the U.S. Court of Appeals for the Second
Circuit reversed a judgment originally issued in the Company's favor and
held that the use of "Swiss Army" on Chinese-made knives could not be
enjoined on grounds of geographic misdescriptiveness. On remand, the
District Court ruled that Arrow had violated Section 43(a) of the Lanham
Act and New York common law in connection with its sale of Chinese-made
multi-bladed pocketknives which Arrow called "Swiss Army Knives". The court
found that the Company had proved its contention that Arrow engaged in
unfair competition and held that Arrow, although free to use the phrase
"Swiss Army Knife" to designate its product, must amply distinguish it from
the Company product and prohibited Arrow from selling any multi-function
pocketknives as "Swiss Army Knives" unless the phrase "Swiss Army Knife" is
immediately preceded or followed by Arrow's name in such a way as to
clearly designate its origin and that the size of the type designating
origin be no smaller or less prominent than the type used in the phrase
"Swiss Army Knife". The Company intends to utilize all reasonable means to
safeguard the public from being misled by inferior imitation products.
Management and legal counsel are unable to predict at this time, what
impact, if any, the outcome of this litigation will have on the Company's
financial position and results of operations.
On July 14, 1997, the Company filed with the American Arbitration
Association in New York, New York a demand for arbitration against Precise
Imports Corporation, the United States and Canadian distributor of Swiss
Army Knives manufactured by Wenger S.A., the only company other than
Victorinox supplying pocketknives to the Swiss Armed Forces. In the demand
for arbitration, the Company charged that Precise had violated the license
agreement dated June 30, 1992 between Precise and the Company by utilizing
the trademark Swiss Army in ways prohibited by the agreement. In response,
Precise alleged certain counterclaims, including violations of the 1992
license agreement, anti-trust laws, unfair competition under state and
federal law, tortious interference with prospective business relations and
federal anti-trust violations. On September 29, 1998, Precise withdrew its
counterclaim that the Company violated federal anti-trust law. On November
7, 1998, Precise and the Company agreed to suspend the arbitration to allow
the parties 180 days to settle their dispute, subject to reactivation of
the arbitration by either company. After the expiration of the stipulated
period, if the arbitration has been neither reactivated or voluntarily
dismissed by the parties, all claims and counterclaims alleged in the
arbitration will be deemed to have been dismissed with prejudice. In the
event that the arbitration is reactivated, the Company intends to
vigorously pursue its claims and believes it has meritorious defenses to
Precise's counterclaims. However, the Company cannot predict the outcome of
any resumed arbitration. In a separate document, Precise agreed tentatively
to certain limitations on the marketing of its products including
discontinuation of the use of "S.A.K." and "The Genuine Swiss Army Knife
Company" in connection with certain products, and changing the name of its
internet site, all of which were sought by the Company in the arbitration.
F-24
<PAGE>
In addition, the Company is involved in certain legal matters relating to
trademark, patent, and other general business matters. Management believes
that the outcome of these legal matters will not have a material adverse
effect on the financial position and results of operations of the Company.
(15) SEGMENT REPORTING
The Company has adopted SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information." This statement establishes standards
for the reporting of information about operating segments. The information
for 1997 and 1996 has been restated from the prior year's presentation in
order to conform to the 1998 presentation.
The Company is engaged principally in one line of business - the
importation and distribution of cutlery, knives, multi-tools, watches and
other consumer products. There were no material amounts of sales or
transactions among geographic areas. Summarized financial information
concerning the Company's reportable segment and geographic areas is shown
in the following table. The "Other" column includes corporate related items
and results of insignificant operations.
<TABLE>
<CAPTION>
United
States Canada International Other Total
------ ------ ------------- ------- ------
<S> <C> <C> <C> <C> <C>
1998
- ----
Sales $111,107 $8,483 $7,811 $ 450 $127,851
Operating
Income 22,674 1,435 338 (23,470) 977
Identifiable
Assets 52,998 3,512 4,832 39,062 100,404
1997
- ----
Sales $102,413 $8,029 $8,093 $ 209 $118,744
Operating
Income 15,640 1,067 551 (24,173) (6,915)
Identifiable
Assets 49,260 3,490 3,905 37,396 94,051
1996
- ----
Sales $112,751 $7,405 $9,834 $ 40 $130,030
Operating
Income 17,374 654 1,001 (24,434) (5,405)
Identifiable
Assets 56,197 5,193 5,641 31,612 98,643
</TABLE>
F-25
<PAGE>
(16) QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
(in thousands, except per share data)
-------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1998
----
Net sales $24,610 $30,187 $31,370 $41,684
Gross profit 9,235 11,637 12,690 16,420
Income before income
taxes 480 173 806 1,224
Net income 286 103 465 609
Net income per share $0.03 $0.01 $0.06 $0.08
1997
Net sales $24,215 $28,862 $27,866 $37,801
Gross profit 9,020 10,308 10,596 12,800
Loss before income
taxes (1,762) (1,624) (1,250) (1,765)
Net loss (1,048) (966) (775) (1,236)
Net loss per share ($0.13) ($0.12) ($0.09) ($0.15)
</TABLE>
Results for the quarter ended June 30, 1997 and December 31, 1997 were
impacted by an inventory write-off and restructuring costs of $300,000 and
$1,800,000, respectively. See Note 3 for further discussion.
There was no difference between basic and fully diluted earnings per share
for the periods presented above.
F-26
<PAGE>
<TABLE>
<CAPTION>
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands)
Column A Column B Column C Column D Column E
Additions
Balance At Charged to Balance At
Beginning Costs and End of
Classification of Year Expenses Deductions Year
-------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998:
Allowance for Doubtful Accounts $ 975 $ - $ - $ 975
Inventory Reserve $ 2,852 $ - ($1,689) $ 1,163
Year Ended December 31, 1997:
Allowance for Doubtful Accounts $ 1,032 $ (57) $ - $ 975
Inventory Reserve $ 1,950 $ 1,310 (408) $2,852
Year Ended December 31, 1996:
Allowance for Doubtful Accounts $ 975 $ 57 $ - $1,032
Inventory Reserve $ 918 $ 4,932 ($3,900) $1,950
</TABLE>
F-27
<PAGE>
(3) Exhibits.
Exhibit Title Exhibit
------------- -------
No.
- ---
(2) Not Applicable
(3) (A) Articles of Incorporation, as amended, incorporated by
reference to the Exhibits to Quarterly Report on Form 10-Q for
the fiscal year ended June 30, 1997. *
(B) By-laws, as amended, incorporated by reference to
the Exhibits to Annual Report on Form 10-K for the fiscal year
ended December 31, 1995. *
(4) Instruments defining the rights of security holders,
including indentures:
(A) Excerpts from Certificate of Incorporation, as
amended, incorporated by reference to Exhibit 3(a) hereto. *
(B) Excerpts from By-Laws, as amended, incorporated
by reference to the Exhibits from Annual Report on Form 10-K
for the fiscal year ended December 31, 1992. *
(9) Not Applicable.
(10) Material Contracts
(A) Employment Agreement dated as of September 15, 1983
between SABI and Michael M. Weatherly, incorporated by
reference to the Exhibits to Registration Statement on
Form S-18, No. 2-87357-B. *
(B) 1983 Stock Option Plan, incorporated by reference
to the Exhibits to Annual Report on Form 10-K for the fiscal
year ended December 31, 1990. *
(C) Letter Agreement dated December 12, 1983 between
Victorinox Cutlery Company and The Forschner Group., Inc.,
incorporated by reference to the Exhibits to Annual Report
on Form 10-K for the fiscal year ended December 31, 1994. *
(D) Mutual Agreement dated as of October 20, 1986
between Victorinox Cutlery Company and The Forschner Group,
Inc., incorporated by reference to the Exhibits to Annual
Report on Form 10-K for the fiscal year ended December 31, 1994. *
(E) Letter Agreement dated as of October 20, 1986
between Victorinox Cutlery Company and The Forschner Group,
Inc., incorporated by reference to the Exhibits to Annual
Report on Form 10-K for the fiscal year ended December 31, 1994. *
(F) Letter Agreement dated August 24, 1988 between
The Forschner Group, Inc. and Recta S.A., incorporated
by reference to the Exhibits to Annual Report on Form 10-K for
the fiscal year ended December 31, 1994. *
35
<PAGE>
(G) Mutual Agreement dated October 25, 1988 between
Victorinox Cutlery Co. and The Forschner Group, Inc.,
incorporated by reference to the Exhibits to Annual Report
on Form 10-K for the fiscal year ended December 31, 1994. *
(H) Letter Agreement dated June 12, 1989 between
Victorinox Cutlery Co. and The Forschner Group, Inc.,
incorporated by reference to the Exhibits to Annual Report
on Form 10-K for the fiscal year ended December 31, 1989. *
(I) Agreement to Lease dated June 14, 1990 between
The Forschner Group, Inc. and Pefran Trap Falls Associates,
incorporated by reference to the Exhibits to Annual Report
on Form 10-K for the fiscal year ended December 31, 1990. *
(J) Security agreement dated January 31, 1991 between
The Forschner Group, Inc. and Connecticut National Bank,
incorporated by reference to the Exhibits to Annual Report
on Form 10-K for the fiscal year ended December 31, 1989. *
(K) Security agreement dated January 31, 1991 between
Swiss Army Brands Ltd. and Connecticut National Bank,
incorporated by reference to the Exhibits to Annual Report
on Form 10-K for the fiscal year ended December 31, 1989. *
(L) Security agreement dated January 31, 1991
between Victorinox of Switzerland, Ltd. and Connecticut
National Bank, incorporated by reference to the Exhibits
to Annual Report on Form 10-K for the fiscal year ended
December 31, 1989. *
(M) Security agreement dated January 31, 1991
between Excelsior Advertising, Inc. and Connecticut National
Bank, incorporated by reference to the Exhibits to Annual
Report on Form 10-K for the fiscal year ended December 31, 1989. *
(N) Agreement of guarantee and suretyship dated
January 31, 1991 by Swiss Army Brands Ltd. in favor of
Connecticut National Bank, incorporated by reference to the
Exhibits to Annual Report on Form 10-K for the fiscal year
ended December 31, 1989. *
(O) Agreement of guarantee and suretyship dated
January 31, 1991 by Victorinox of Switzerland, Ltd. in favor
of Connecticut National Bank, incorporated by reference to
the Exhibits to Annual Report on Form 10-K for the fiscal year
ended December 31, 1989. *
(P) Agreement of guarantee and suretyship dated
January 31, 1991 by Excelsior Advertising Inc. in favor
of Connecticut National Bank, incorporated by reference
to the Exhibits to Annual Report on Form 10-K for the fiscal
year ended December 31, 1989. *
(Q) Life insurance agreement dated as of December 7, 1991
between The Forschner Group, Inc. and Stanley R. Rawn, Jr.,
as Trustee u/a dtd. December 9, 1986 between Louis Marx, Jr.
and Stanley R. Rawn, Jr., incorporated by reference to the
Exhibits to Annual Report on Form 10-K for the fiscal year ended
December 31, 1992. *
36
<PAGE>
(R) Amended and Restated Loan Agreement dated
June 18, 1992 between The Forschner Group, Inc. and The
Connecticut National Bank (now known as Shawmut Bank Connecticut,
N.A.), incorporated by reference to the Exhibits to Annual Report
on Form 10-K for the fiscal year ended December 31, 1992. *
(S) Letter agreement dated June 18, 1992 between The
Forschner Group, Inc. and The Connecticut National Bank,
incorporated by reference to the Exhibits to Annual Report
on Form 10-K for the fiscal year ended December 31, 1992. *
(T) License Agreement dated June 30, 1992 between The
Forschner Group, Inc. and Precise Imports Corporation,
incorporated by reference to the Exhibits to Annual Report
on Form 10-K for the fiscal year ended December 31, 1992. *
(U) Letter agreement dated November 11, 1992 between
The Forschner Group, Inc. and Michael M. Weatherly,
incorporated by reference to the Exhibits to Annual Report
on Form 10-K for the fiscal year ended December 31, 1992. *
(V) Life insurance agreement dated December 24, 1992
between The Forschner Group, Inc. and Louis Marx, Jr., as
Trustee u/a dtd. as of October 24, 1988 between Stanley R.
Rawn, Jr. and Barbara Rawn and Louis Marx, Jr., incorporated
by reference to the Exhibits to Annual Report on Form 10-K for
the fiscal year ended December 31, 1992. *
(W) License Agreement dated as of January 1, 1993 between
Cuisine de France Limited and Coutel 'Innov, incorporated
by reference to the Exhibits to Annual Report on Form 10-K for
the fiscal year ended December 31, 1992. *
(X) Mutual Agreement dated April 6, 1992 between The
Forschner Group, Inc. and Victorinox Cutlery Company,
incorporated by reference to the Exhibits to Annual Report on
Form 10-K for the fiscal year ended December 31, 1992. *
(Y) 1993 Stock Option Plan, incorporated by reference to
the Exhibits to Annual Report on Form 10-K for the fiscal year
ended December 31, 1993. *
(Z) First Modification to Amended and Restated Loan Agreement
dated as of August 13, 1993 between The Forschner Group, Inc.
and Shawmut Bank Connecticut, N.A., incorporated by reference
to the Exhibits to Annual Report on Form 10-K for the fiscal year
ended December 31, 1993. *
(AA) Second Modification to Amended and Restated Loan Agreement
dated as of February 17, 1994 between The Forschner Group, Inc.
and Shawmut Bank Connecticut, N.A., incorporated by reference
to the Exhibits to Annual Report on Form 10-K for the fiscal year
ended December 31, 1993. *
(BB) Commercial Promissory Note dated February 17, 1994 of
The Forschner Group, Inc. in the principal amount of
$15,000,000, incorporated by reference to the Exhibits to Annual
Report on Form 10-K for the fiscal year ended December 31, 1993. *
37
<PAGE>
(CC) Lease dated May 3, 1993 between One Research Drive
Associates Limited Partnership and The Forschner Group, Inc.,
incorporated by reference to the Exhibits to Annual Report on
Form 10-K for the fiscal year ended December 31, 1993. *
(DD) License Agreement dated as of July 1, 1993 between
Cuisine de France Limited and Coutel 'Innov, incorporated
by reference to the Exhibits to Annual Report on Form 10-K for
the fiscal year ended December 31, 1993. *
(EE) Life insurance agreement dated as of December 24, 1992
between The Forschner Group, Inc. and Louis Marx, Jr.,
incorporated by reference to the Exhibits to Annual Report on
Form 10-K for the fiscal year ended December 31, 1993. *
(FF) Life insurance agreement dated as of September 24, 1993
between The Forschner Group, Inc. and Louis Marx, Jr.,
incorporated by reference to the Exhibits to Annual Report on
Form 10-K for the fiscal year ended December 31, 1993. *
(GG) Life insurance agreement dated as of September 24, 1993
between The Forschner Group, Inc. and James D. Rawn, as Trustee
u/a dtd. as of June 4, 1992 between Louis Marx, Jr., Grantor
and James D. Rawn, Trustee, incorporated by reference to the
Exhibits to Annual Report on Form 10-K for the fiscal year ended
December 31, 1993. *
(HH) Mutual Agreement dated December 21, 1993 between The
Forschner Group, Inc. and Victorinox Cutlery Company,
incorporated by reference to the Exhibits to Annual Report on
Form 10-K for the fiscal year ended December 31, 1993. *
(II) 1994 Stock Option Plan, incorporated by reference to
the Exhibits to Registration Statement on Form S-8, No. 33-87078
filed by The Forschner Group, Inc. *
(JJ) Services Agreement dated as of July 29, 1994 between
The Forschner Group, Inc. and Brae Group, Inc., incorporated by
reference to the Exhibits to Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1994. *
(KK)Non-Incentive Stock Option Agreement dated as of July 29,
1994 between The Forschner Group, Inc. and Brae Group, Inc.,
incorporated by reference to the Exhibits to Quarterly Report
on Form 10-Q for the fiscal quarter ended September 30, 1994. *
(LL) Consulting Agreement dated as of December 7, 1991 by
and between The Forschner Group, Inc. and Louis Marx, Jr.,
incorporated by reference to the Exhibits to Annual Report on Form
10-K for the fiscal year ended December 31, 1994. *
(MM) Third Modification to Amended and Restated Loan Agreement
dated as of September 30, 1994 between The Forschner Group, Inc.
and Shawmut Bank Connecticut, N.A., incorporated by reference
to the Exhibits to Annual Report on Form 10-K for the fiscal year
ended December 31, 1994. *
38
<PAGE>
(NN) First Amendment to Lease dated June 16, 1994 between
The Forschner Group, Inc. and Pefran Trap Falls Associates,
incorporated by reference to the Exhibits to Annual Report on
Form 10-K for the fiscal year ended December 31, 1994. *
(OO) Life insurance agreement dated as of April 15, 1994
between The Forschner Group, Inc. and Lawrence T. Warble, as
Trustee u/a dtd. as of March 21, 1994 between Stanley R. Rawn, Jr.,
Grantor and Lawrence T. Warble, Trustee, incorporated by reference
to the Exhibits to Annual Report on Form 10-K for the fiscal year
ended December 31, 1994. *
(PP) Agreement dated June 30, 1995 between The Forschner Group,
Inc. and Bill-Mar Specialty Company, Inc., incorporated by reference
to the Exhibits to Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1995. *
(QQ) Letter agreement dated February 15, 1995 between The
Forschner Group, Inc. and Harry Thompson, incorporated by reference
to the Exhibits to Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1995. *
(RR) Letter agreement dated October 25, 1995 between The
Forschner Group, Inc. and Harry Thompson, incorporated by
reference to the Exhibits to Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1995. *
(SS) Employment agreement dated as of January 2, 1996 between
The Forschner Group, Inc. and James W. Kennedy, incorporated by
reference to the Exhibits to Annual Report on Form 10-K for the
fiscal year ended December 31, 1995. *
(TT) Warrant dated as of December 13, 1995 between The
Forschner Group, Inc. and J. Merrick Taggart, incorporated
by reference to the Exhibits to Annual Report on Form 10-K for
the fiscal year ended December 31, 1995. *
(UU) Letter Agreement dated December 18, 1995 between The
Forschner Group, Inc. and Victorinox Cutlery Company,
incorporated by reference to the Exhibits toAnnual Report on
Form 10-K for the fiscal year ended December 31, 1995. *
(VV) Watch design and Consulting Agreement dated as
January 2, 1995 between The Forschner Group, Inc., Polenberg, Inc.
and Myron Polenberg Incorporated by reference to the Exhibits
to quarterly report on Form 10-Q for the fiscal quarter ended
March 31, 1996. *
(WW) 1996 Stock Option Plan incorporated by reference to the
Exhibits on Form 10-K for the fiscal year ended December 31, 1996. *
(XX) Employment and Severance Agreement dated as
November 15, 1996 between Thomas D. Cunningham and Swiss Army Brands,
Inc. incorporated by reference to the Exhibits on Form 10-K for the
fiscal year ended December 31, 1996. *
39
<PAGE>
(YY) Trademark Agreement dated as of December 18, 1996
by and between the Swiss Confederation represented by the
Federal Military Department represented by the Federal Defense
Production Group and Swiss Army Brands, Inc. (confidential
treatment has been granted for certain portions of this exhibit)
incorporated by reference to the Exhibits on Form 10-K for the
fiscal year ended December 31, 1996. *
(ZZ) Asset Purchase Agreement dated January 31, 1997 among
Cuisine de France Limited, Sabatier USA, LLC, Robert P. Wolff
and Robert Candler incorporated by reference on Form 10-K for the
fiscal year ended December 31, 1996. *
(AAA) Agreement dated July 1, 1997 by and between Swiss Army
Brands, Inc. and Stanley G. Mortimer III, incorporated by
reference to the Exhibits on Form 10-Q for the fiscal quarter
ended June 30, 1997. *
(BBB) License Agreement dated May 15, 1997 by and between
Swiss Army Brands, Inc. and St. John Knits, Inc., incorporated
by reference to the Exhibits on Form 10-Q for the fiscal quarter
ended June 30, 1997. *
(CCC) Letter Agreement dated September 27, 1996 between Swiss
Army Brands, Inc. and Victorinox Cutlery Company. *
(DDD) Agreement dated December 12,1997 by and between Swiss
Army Brands, Inc. and Leslie H. Green. *
(EEE) Commercial Promissory Note Agreement dated
December 4, 1997 between Swiss Army Brands, Inc. and Fleet
National Bank. *
(FFF) 1998 Amended and Restated Commercial Loan Agreement
dated September 30, 1998 between Fleet N.A. and Swiss Army,
incorporated by reference for the fiscal quarter ended
September 30, 1998. *
40
<PAGE>
(11) Statement re computation of per share earnings is not required because the
relevant computations can be clearly determined from the material contained in
the financial statements included herein.
(12) Not applicable.
(13) Not applicable.
(16) Not Applicable.
(18) Not Applicable.
(21) Subsidiaries of Registrant.
(22) Not Applicable.
(23) Consents of experts and counsel: Consent of Arthur Andersen LLP.
(27) Financial Data Schedule.
(28) Not Applicable.
(99) Not Applicable.
* Incorporated by reference
No Current Reports on Form 8-K were filed during the fiscal quarter ending
December 31, 1998.
41
<PAGE>
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.
SWISS ARMY BRANDS, INC.
(Registrant)
By/s/ J. Merrick Taggart
J. Merrick Taggart
President and Chief Executive Officer
By/s/ Thomas M. Lupinski
Thomas M. Lupinski
Senior Vice President, Chief Financial Officer, Secretary, and
Treasurer
By/s/ Marc A. Gold
Marc A. Gold
Vice President and Controller
42
<PAGE>
Date: March 26,1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/s/ J. Merrick Taggart March 26, 1998
J. Merrick Taggart
President, Chief Executive Officer and Director
/s/ A. Clinton Allen March 26, 1998
A. Clinton Allen
Director
/s/ Clarke H. Bailey March 26, 1998
Clarke H. Bailey
Director
/s/ Thomas A. Barron March 26, 1998
Thomas A. Barron
Director
/s/ Vincent D. Farrell, Jr. March 26, 1998
Vincent D. Farrell, Jr.
Director
/s/ Herbert M. Friedman March 26, 1998
Herbert M. Friedman
Director
/s/ Peter W. Gilson March 26, 1998
Peter W. Gilson
Director
/s/ Keith R. Lively March 26, 1998
Keith R. Lively
Director
/s/ Louis Marx, Jr. March 26, 1998
Louis Marx, Jr.
Director
/s/ Robert S. Prather, Jr. March 26, 1998
Robert S. Prather, Jr.
Director
43
<PAGE>
/s/ Stanley R. Rawn, Jr. March 26, 1998
Stanley R. Rawn, Jr.
Director
/s/ Eric M. Reynolds March 26, 1998
Eric M. Reynolds
Director
/s/ John Spencer March 26, 1998
John Spencer
Director
/s/ John V. Tunney March 26, 1998
John V. Tunney
Director
44
<PAGE>
Exhibit 21
List of Subsidiaries of Swiss Army Brands, Inc.
Excelsior Advertising
Forcan, Inc.
Swiss Army Brands (Suisse) AG
Swiss Army Brands, Ltd.
Swiss Army, Inc.
Victorinox Watch Importing Corporation
Forschner Watch Repair, Inc.
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we herby consent to the incorpation by
reference in this registration statement of our report dated February 10, 1999,
included in Swiss Army Brands, Inc. Form 10-K for the year ended December 31,
1998, and to all references to our firm in this registration statement.
ARTHUR ANDERSEN LLP
Stamford, Connecticut,
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000731947
<NAME> Swiss Army Brands, Inc.
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,309
<SECURITIES> 0
<RECEIVABLES> 32,296
<ALLOWANCES> 975
<INVENTORY> 28,890
<CURRENT-ASSETS> 70,383
<PP&E> 8,371
<DEPRECIATION> 4,636
<TOTAL-ASSETS> 100,404
<CURRENT-LIABILITIES> 25,806
<BONDS> 0
0
0
<COMMON> 885
<OTHER-SE> 73,713
<TOTAL-LIABILITY-AND-EQUITY> 100,404
<SALES> 127,851
<TOTAL-REVENUES> 127,851
<CGS> 77,869
<TOTAL-COSTS> 49,005
<OTHER-EXPENSES> 1,839
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (133)
<INCOME-PRETAX> 2,683
<INCOME-TAX> 1,220
<INCOME-CONTINUING> 1,463
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,463
<EPS-PRIMARY> .18
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</TABLE>
