SECURITY AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 1-5354
SWANK, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-1886990
(State or other jurisdiction of incorporation (IRS employer
or organization) identification Number)
6 Hazel Street, Attleboro, Massachusetts 02703
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 508-222-3400
Former name, former address and former fiscal year, if changed since last
report.
Indicate by X 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 No X
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court:
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date May 20, 1996
Title of Class Shares Outstanding
$.10 par value 16,509,523
<PAGE>
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements.
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
ASSETS March 31, 1996 December 31, 1995
------------------ ------------------
<S> <C> <C> <C> <C>
Current:
Cash and temporary cash investments $ 1,786 $ 1,121
Accounts receivable, less allowances 14,012 10,704
of $7,135 and $9,097
Inventories, at the lower of cost
or market
Raw materials $ 3,985 $ 5,092
Work-in-process 5,984 6,476
Finished goods 16,050 26,019 17,602 29,170
------ ------
Recoverable income taxes 1,665 1,665
Deferred income taxes 1,890 1,890
Prepaid and other 1,195 1,218
----- -----
Total current assets 46,567 45,768
Property, plant and equipment, at cost 22,607 22,472
Obligations under capital lease 1,466 1,466
Less accumulated depreciation
and amortization 16,808 7,265 16,481 7,457
------ ------
Deferred income taxes 399 399
Other assets 3,555 3,700
----- -----
Total Assets $57,786 $57,324
======= =======
LIABILITIES
Current:
Notes payable to banks $17,800 $14,800
Current portion of long-term
obligations 235 235
Accounts payable, trade 5,104 5,870
Accrued employee compensation 1,115 1,408
Other liabilities 8,564 8,696
----- -----
Total current liabilities 32,818 31,009
Long-term obligations 5,345 5,782
----- -----
Total liabilities 38,163 36,791
------ ------
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00
Authorized 1,000,000 shares Common stock, par value $.10:
Authorized 43,000,000 shares
Issued 16,843,042 and 16,843,042 1,684 1,684
Capital in excess of par value 852 852
Retained earnings 18,584 21,120 19,477 22,013
------ ------
Deferred employees' benefits 788 771
Treasury stock at cost 333,519 shares 709 709
--- ---
Total stockholders' equity 19,623 20,533
------ ------
Total liabilities and stockholders'
equity $57,786 $57,324
======= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
SWANK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE QUARTERS ENDED MARCH 31, 1996 AND 1995
(Dollars in thousands)
----------------
1996 1995
---- ----
<S> <C> <C>
Sales $30,706 $29,966
Cost of goods sold 18,585 18,183
------ ------
Gross profit 12,121 11,783
Selling and administrative expenses 12,850 14,124
------ ------
Loss from operations (729) (2,341)
Interest charges 461 246
--- ---
Loss before income taxes (1,190) (2,587)
Benefit for income taxes (297) (1,035)
----- -------
Net loss $(893) $ (1,552)
====== ==========
</TABLE>
<TABLE>
<CAPTION>
Share and per share information:
<S> <C> <C>
Weighted average common shares outstanding 15,845,062 16,474,425
Net loss per share $(.06) $(.09)
====== ======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
SWANK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE QUARTERS ENDED MARCH 31, 1996 AND 1995
(Dollars in thousands)
----------
1996 1995
---- ----
<S> <C> <C>
Cash flow from operating activities:
Net loss $ (893) $ (1,552)
Adjustments to reconcile net loss to operating cash flows:
Increase in post-retirement benefits 93 68
Depreciation and amortization 326 266
Decrease in receivable reserves (1,962) (3,052)
Change in assets and liabilities
(Increase) decrease in accounts receivable (1,346) 396
Decrease (increase) in inventory 3,151 (860)
Decrease (increase) in prepaid and other 168 (1,575)
Decrease in accounts payable, income taxes
payable and accrued other (1,721) (4,606)
------- -------
Net cash used in operating activities (2,184) (10,915)
------- --------
Cash flow from investing activities:
Capital expenditures (134) (196)
----- -----
Net cash used in investing activities (134) (196)
----- -----
Cash flow from financing activities:
Borrowing under revolving credit agreement 3,000 16,500
Payments of revolving credit agreement - (5,000)
Principal payments of long-term debt - (1,921)
Advance to employees stock ownership trust (17) (5)
Proceeds from exercise of employees' stock
options - 15
-- --
Net cash provided by financing activities 2,983 9,589
----- -----
Net increase (decrease) in cash and equivalents 665 (1,522)
Cash and equivalents at beginning of period 1,121 2,153
----- -----
Cash and equivalents at end of period $ 1,786 $ 631
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
Notes to Unaudited Condensed Consolidated Financial Statements.
(1) The unaudited information furnished herein reflects all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary to present a fair statement of the results for the periods
ended March 31, 1996 and 1995. The financial information contained herein
represents condensed financial data and, therefore, does not include all
footnote disclosures required to be included in financial statements prepared in
conformity with generally accepted accounting principles. Footnote information
was included in the Company's annual report on Form 10-K for the fiscal year
ended December 31, 1995; the condensed financial data included herein should be
read in conjunction with the information in the annual report.
(2) During the first quarter 1996, the Company has not incurred any material
changes in the commitments and contingencies as previously referenced in
Footnote I of the 1995 annual report.
<PAGE>
Item 2. Management's Discussion and Analysis of the Financial Condition and
Results of Operations
Results of Operations
As is customary in the fashion accessories industry, the Company makes
modifications to its lines coinciding with the Spring (January - June) and Fall
(July - December) seasons. The Company believes that results of operations are
considered to be more meaningful on a seasonal basis (six months) than on a
quarterly basis as the timing of sales (deliveries) and related income between
quarters can be affected by the availability of materials, retail sales and
fashion trends. These factors may affect the shift of volume between quarters
within a season differently in one year than another.
Quarters Ended March 31, 1996 and 1995
Net sales for the quarter ended March 31, 1996 were $30,706,000, an
increase of $740,000 or 2% from the quarter ended March 31, 1995.
Sales increased in men's leather accessories $2,104,000 or 15%, offset in
part, by decreased sales in men's and women's jewelry $1,221,000 or 8% and other
product line sales $143,000 or 17% compared to 1995. The increased sales in
men's leather accessories are attributable to the continued strength of the
Company's private label programs and its special market lines. The decreased
sales in men's and women's jewelry was primarily attributable to declines in the
"Guess?" and special markets lines. Decreased sales from other product lines
declined as a result of discontinuing the gifts lines during the fourth quarter
of 1995.
Included in the sales figures above were sales from the Company's factory
outlets which decreased 18% compared to 1995. Decreases of 5% and 13% were
attributable to same store sales and closed store sales, respectively.
Gross profit for the quarter ended March 31, 1996 increased $338,000 or 3%
from the quarter ended March 31, 1995. Gross profit expressed as a percentage of
net sales remained unchanged at 39%.
Gross profit increased in men's leather accessories $740,000 or 15% offset
by decreased gross profit for men's and women's jewelry $290,000 or 4% and other
product lines $112,000 or 31%. The increased gross profit for men's leather
accessories was attributable principally to the increased sales volume and
markups in the Leather lines offset, in part, by declining markups in the Belts
lines. The decreased gross profit in men's and women's jewelry was attributable
to decreased sales volume and an unfavorable sales mix. Decreased gross profit
from other product lines resulted from discontinuing the gifts lines during the
fourth quarter of 1995.
The Company's actual return activity is running substantially below the
first quarter of 1995 and below year end estimates. Returns through March 1996
in men's and women's jewelry are running lower than anticipated with all other
product categories running according to expectations. The reserve for returns
will be adjusted to reflect actual activity during the second quarter of 1996.
Inventory levels decreased $3,151,000 or 11% from December 31, 1995
primarily as a result of increased sales of excess inventory, reductions in the
men's accessories product line and reductions in the number of retail outlets.
The decreased inventory levels contributed to the reduction in the amount of
cash used in operations.
<PAGE>
Item 2. Management's Discussion and Analysis of the Financial Condition and
Results of Operations (continued)
Selling and administrative expenses decreased $1,274,000 or 9% primarily as
a result of decreased compensation costs and advertising and promotional costs.
Compensation costs and related fringe benefits decreased $1,139,000 or 14%
relating primarily to personnel reductions, lower commission rates and the
elimination of a bonus accrual. Advertising and promotion decreased $434,000 or
23% primarily as a result of a reduction in national advertising and
co-operative advertising. Total advertising and promotion expressed as a
percentage of net sales decreased to 5% compared to 6% in the first quarter of
1995.
Interest charges increased $215,000 or 87% as a result of higher
outstanding borrowings during the first quarter combined with higher interest
rates.
Income Taxes
The Company recognized a tax benefit at an effective tax rate of 25%, which
is below the federal statutory rate of 34%, in order to reflect the anticipated
utilization of alternative minimum tax credit carryfowards from 1995. The
Company established a valuation allowance of $4,764,000 in the fourth quarter of
1995 to reduce the deferred tax asset to a level management believes more likely
than not will be realized. The current rate reflects no change in the valuation
allowance for the year.
Liquidity and Capital Resources
The Company's working capital decreased $1,010,000 during the three months
ended March 31, 1996.
As is customary in the fashion accessories industry, substantial percentages
of the Company's sales and earnings occur in the months of September, October
and November, during which the Company makes significant shipments of its
products to retailers for sale during the holiday season. As a result,
receivables increase during the year and peak in the fourth quarter. The Company
builds its inventory during the first three quarters of the year to respond to
the holiday season. Cash required is provided by a revolving credit facility.
Cash used in operations for the first three months totaled $2,184,000
consisting primarily of a $893,000 net loss, increased accounts receivable and
decreased accounts payable, income taxes payable and other accrued items. These
uses of cash were offset in part by decreased inventory and prepaid expenses.
Cash used in investing activities was $134,000 for replacement of used machinery
and equipment. Cash provided by financing activities totaled $2,983,000
consisting primarily from borrowings under the revolving credit agreement.
Net accounts receivable increased primarily as a result of increased sales
and reductions in the reserves against accounts receivable. The reductions of
the reserves reflect the actual charges as processed for cash discounts,
doubtful accounts, in-store markdowns, cooperative advertising and gross profit
on returns.
The Company has implemented a plan (the "Plan") designed to enhance the
overall competitiveness, productivity and efficiency through reduction in
overhead costs and better inventory management. The results through March 1996
reflect increased cash generated from operations and reduced borrowings.
On May 24, 1996 the Company obtained new working capital financing from IBJ
Schroder Bank & Trust Company, as agent, for the lenders thereunder (the "New
Lenders"), for up to $25,000,000 with a sublimit of $3,000,000 in letters of
credit (the "New Agreement"). The proceeds of the New Agreement were used, in
part, to repay all but $4 million of the outstanding balance under the previous
facility.
<PAGE>
Item 2. Management's Discussion and Analysis of the Financial Condition and
Results of Operations (continued)
The New Agreement is available through April 1999 and is
collateralized by all of the Company's assets. The New Lenders have a senior
lien position on all assets other than real property, improvements and certain
fixtures, in which the Company's other institutional lenders maintain a senior
position to collateralize a $4,000,000 term loan, as described below, and in
which the New Lenders have a subordinate lien. The New Agreement permits the
Company to borrow against a percentage of eligible accounts receivable and
inventory and its loans bear an interest rate of 1.5% over the New Lenders'
prime lending rate. The New Agreement also contains a facility fee of 1/2% per
annum on the unused portion of the revolving credit facility.
The terms of the New Agreement include covenants requiring
the Company to maintain certain financial ratios including interest coverage,
leverage and quarterly inventory turnovers. The New Agreement also includes
covenants pertaining to profitability, limiting capital expenditures and
additional indebtedness. The Company believes the inventory turnover covenant to
be the most restrictive, requiring minimum inventory turnover, as defined, up to
2.25 times annually. The New Agreement also prohibits the payment of dividends.
Management believes this credit facility will meet its working capital needs
until April 1999.
In connection with the refinancing, The Chase Manhattan Bank,
N.A. and Fleet National Bank (the "Banks") amended and restated the existing
credit facility (the "Agreement") to provide the Company with a $4,000,000 term
loan (the "Term Loan") in lieu of a like amount of revolving debt. The Term Loan
will be repaid in $200,000 quarterly increments starting in June 1997 with a
final payment of $2,600,000 due May 1999. The Term Loan bears interest at 2.5%
over the Banks' prime lending rate and is collaterialized by a senior lien on
real property, improvements and certain fixtures, and a subordinate lien on all
other assets. The Term Loan also contains an annual facility fee of 2% of the
term loan and a maximum success fee of $450,000 payable as follows; $225,000 on
final maturity with the balance payable subsequently in six equal monthly
installments of $37,500.
The terms of the New Agreement include covenants requiring the Company
to maintain certain financial ratios including interest coverage, leverage and
quarterly inventory turnovers. The New Agreement also includes covenants
pertaining to profitability, limiting capital expenditures and additional
indebtedness. The Company believes the inventory turnover covenant to be the
most restrictive, requiring minimum inventory turnovers as high as 2.25 times
annually. The New Agreement also prohibits the payment of dividends.
Management believes this credit facility will meet its working capital needs
until May 1999.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.0 Financial data schedule.
(b) Current reports on Form 8-K - none
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act Of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SWANK, INC.
Registrant
Andrew C. Corsini
Senior Vice President, Treasurer
and Chief Financial Officer
Date: May 24, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-1-1996
<PERIOD-END> Mar-1-1996
<EXCHANGE-RATE> 1
<CASH> 1,786
<SECURITIES> 0
<RECEIVABLES> 21,147
<ALLOWANCES> 7,135
<INVENTORY> 26,019
<CURRENT-ASSETS> 46,567
<PP&E> 24,073
<DEPRECIATION> 16,808
<TOTAL-ASSETS> 57,786
<CURRENT-LIABILITIES> 32,818
<BONDS> 0
0
0
<COMMON> 1,684
<OTHER-SE> 852
<TOTAL-LIABILITY-AND-EQUITY> 57,786
<SALES> 30,706
<TOTAL-REVENUES> 30,706
<CGS> 18,585
<TOTAL-COSTS> 18,585
<OTHER-EXPENSES> 12,850
<LOSS-PROVISION> 137
<INTEREST-EXPENSE> 461
<INCOME-PRETAX> (1,190)
<INCOME-TAX> (297)
<INCOME-CONTINUING> (893)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (893)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
