SECURITIES 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, 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 1-5354
SWANK, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-1886990
(State or other jurisdiction (IRS employer identification
of incorporation Number)
or organization)
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 X No
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:
Title of Class Shares Outstanding on April 30, 1998
Common stock, $.10 par value 16,514,523
<TABLE>
SWANK, INC.
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements. CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands)
<CAPTION>
March 31, 1998 December 31, 1997
ASSETS
<S> <C> <C> <C> <C>
Current:
Cash and cash equivalents $ 1,057 $ 1,235
Accounts receivable, less allowances
of $8,566 and $9,706 15,165 12,173
Inventories, at the lower of cost or market
Raw materials 4,252 4,341
Work in process 7,328 6,758
Finished goods 20,878 32,458 19,868 30,967
Deferred income taxes 3,242 3,242
Prepaid and other 1,139 1,223
Total current assets 53,061 48,840
Property, plant and equipment, at cost 26,004 25,802
less accumulated depreciation and amortization 20,036 5,968 19,645 6,157
Other assets 5,331 4,952
Total assets $ 64,360 $ 59,949
LIABILITIES
Current:
Notes payable to banks $ 12,303 $ 7,517
Current portion of long-term debt 800 1,804
Term loan classified as current 1,068 1,295
Accounts payable 4,095 4,391
Accrued employee compensation 3,356 5,077
Income taxes payable 689 253
Other current liabilities 5,010 4,148
Total current liabilities 27,321 24,485
Long-term obligations 8,893 8,603
Total liabilities 36,214 33,088
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00
Authorized 1,000,000 shares
Common stock, par value $.10
Authorized 43,000,000 shares:
Issued 16,848,042 and 16,843,042 shares 1,685 1,684
Capital in excess of par value 738 570
Retained earnings 26,432 25,623
Deferred employees' benefits
0 and 514,437 shares (307)
Treasury stock 333,519 and 333,519 shares (709) (709)
Total stockholders' equity 28,146 26,861
Total liabilities and stockholders' equity $ 64,360 $ 59,949
The accompanying notes are an integral part of the condensed
consolidated financial statements.
</TABLE>
SWANK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE QUARTERS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands except per share data)
---------------------------------
1998 1997
Net Sales $33,630 $27,567
Cost of goods sold 19,485 14,729
Gross profit 14,145 12,838
Selling and administrative expenses 12,571 12,538
Income from operations 1,574 300
Interest charges, net 248 224
Income before income taxes 1,326 76
Provision for income taxes (517) (30)
Net income $809 $46
Share and per share information:
Weighted average common shares outstanding 16,511,844 16,501,921
Net income per common share $0.05 $0.00
Weighted average common shares outstanding
assuming dilution 16,748,913 16,501,921
Net income per common share assuming
dilution $0.05 $0.00
The accompanying notes are an integral part of the condensed
consolidated financial statements.
SWANK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE QUARTERS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands)
--------------
1998 1997
Cash flow from operating activities:
Net income $ 809 $ 46
Adjustments to reconcile net income
to net cash used in operations:
Depreciation and amortization 492 454
Decrease in receivable allowances (1,140) (1,657)
Increase in post retirement benefits 75 75
Changes in assets and liabilities
Increase in accounts receivable (1,852) (191)
Increase in inventory (1,491) (1,827)
Decrease in prepaid and other 23 387
Increase in other assets (379) (164)
Decrease in accounts payable, accrued and
other liabilities (444) (3,358)
Net cash used in operations (3,907) (6,235)
Cash flow from investing activities:
Capital expenditures (203) (213)
Net cash used in investing activities (203) (213)
Cash flow from financing activities:
Borrowing under revolving credit agreements 18,023 8,253
Payments of revolving credit obligations (13,237) (3,219)
Principal payments on long-term obligations (827) (705)
Payments of capital lease obligations (32) (79)
Advance to retirement plan (21)
Proceeds from exercise of employee stock options 5
Net cash provided by financing
activities 3,932 4,229
Net decrease in cash and cash equivalents (178) (2,219)
Cash and cash equivalents at beginning of period 1,235 2,871
Cash and cash equivalents at end of period $ 1,057 $ 652
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(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, 1998 and 1997. 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 financial
statements included in the Company's 1997 Annual Report to
Stockholders which was incorporated by reference in the
Company's annual report on Form 10-K for the fiscal year
ended December 31, 1997. The condensed financial data
included herein should be read in conjunction with the
information in the annual report.
(2) During the three month period ended March 31, 1998, the
Company has not incurred any material changes in commitments
and contingencies set forth in Footnote I of the 1997 annual
report.
(3) The following table sets forth the computation of net income
per share for the quarters ending March 31, 1998 and March
31, 1997 (in thousands, except for share and per share
data):
Quarter Ended Quarter Ended
3/31/98 3/31/97
Numerator:
Net income $ 809 $ 46
Denominators:
Weighted average common shares outstanding 16,511,844 16,501,921
used in computing net income per common share
Effect of dilutive options 237,069 0
Shares used in computing net income per common
share assuming dilution 16,748,913 16,501,921
Net income per common share $0.05 $0.00
Net income per common share assuming dilution $0.05 $0.00
(4) During the quarter ended March 31, 1998, the Company
fulfilled its previously recorded commitment to allocate
514,437 shares to the individual accounts of participants in
the stock ownership component of the Company's retirement
plan. As a result of the allocation, deferred employee
benefits was reduced by $307,000, accrued employee
compensation was reduced by $470,000 and capital in excess
of par value was increased by $163,000. Income before
taxes for the quarter ending March 31, 1998 includes
$300,000 in net non-recurring income.
(5) In April 1998, the Company prepaid, in full, the remaining
principal balance outstanding on the Term Loan and
applicable fees utilizing borrowings under the Company's
existing revolving credit facility.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
(6) Change in Accounting Principle. Effective January 1, 1998,
the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This
Statement requires that all items recognized under
accounting standards as components of comprehensive income
be reported in an annual financial statement that is
displayed with the same prominence as the other annual
financial statements. This statement also requires that an
entity classify items of other comprehensive income by their
nature in an annual financial statement. Annual financial
statements for prior periods will be reclassified, as
required. The Company's total comprehensive income
consisting of unrealized gains and losses on marketable
securities, net of income tax, was:
Quarter Ended Quarter Ended
3/31/98 3/31/97
(In thousands)
Net income $ 809 $ 46
Other comprehensive income (loss) 20 (2)
Total comprehensive income $ 829 $ 44
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 and Fall seasons. The Company believes that results of
operations are more meaningful on a seasonal basis than on a
quarterly basis as the timing of sales 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. Due to seasonality and
other factors, the results of the quarter are not necessarily
indicative of the results to be expected for the full year.
Net Sales
Net sales for the quarter ended March 31, 1998 were
$33,630,000, an increase of $6,063,000 or 22% compared to the
quarter ended March 31, 1997.
Men's and Women's Jewelry net sales increased $2,626,000 or
20% for the quarter and Men's Leather Accessories sales rose
$3,454,000 or 25%. The improvement in Men's and Women's
Jewelry net sales was principally due to increased domestic
shipments of Women's Guess? jewelry and to increased sales to
both new and existing mass merchandising customers. Sales of
Men's Leather Accessories in 1998 reflect increased spring
shipments of certain new Men's designer lines of merchandise
which were introduced in 1997 and increased disposition of
excess and out of line merchandise relative to the same period
last year. The Company has obtained a license to market a line
of men's accessories under the "Claiborne" name. Shipments of
merchandise under this line are anticipated to begin with the
fall 1998 season. In addition, sales of Men's Leather
Accessories during the quarter ended March 31, 1997 may have
been adversely affected by a reduction in orders of
established products by certain retailers pending the
availability of the new Men's designer lines. Factory outlet
sales constituted less than 5% of consolidated net sales in the
quarters ended March 31, 1998 and 1997. Management believes
that factory outlets remain a valuable distribution channel for
the disposition of excess inventory and/or discontinued
inventory.
Gross Profit
Gross profit for the quarter ended March 31, 1998
increased $1,307,000 or 10%. Gross profit for Men's and Women's
Jewelry and Men's Leather Accessories increased $648,000 (9%)
and $646,000 (11%), respectively, during the quarter,
reflecting higher sales volume in both categories.
Gross profit expressed as a percentage of net sales
decreased to 42.1% from 46.6% for the quarter. Gross profit
for Men's and Women's Jewelry decreased to 47.7% from 52.2% and
declined to 36.6% from 41.1% for Men's Leather Accessories.
The decrease in gross profit during the quarter is due
principally to higher product costs resulting from a less
favorable product mix, including disposition of excess and out
of line merchandise, increased royalty expenses, certain non-
recurring costs and a reduction in favorable overhead variances
incurred in connection with jewelry manufacturing compared to
the quarter ended March 31, 1997. The Company temporarily
increased jewelry production levels during 1997's first quarter
in order to improve delivery positions on certain merchandise
programs, primarily for shipment during that quarter.
Item 2. Management's Discussion and Analysis of the Financial
Condition and Results of Operations (continued)
Customer returns through March 31, 1998 are within the
estimates utilized in establishing the allowance for customer
returns as of December 31, 1997. First quarter adjustments to
the allowance in 1998 and 1997 include routine accruals for
estimated returns on current period sales and charges for
actual returns received through March 31. The extent of the
variance, if any, of actual 1998 returns from the allowance
established at December 31, 1997 will be finally determined
during the second quarter and recorded at that time.
Selling and Administrative Expenses
Selling and administrative expenses increased $33,000 or
.3% for the quarter ending March 31, 1998. Increases in sales
compensation and other variable expenses related to the higher
shipments during the quarter were largely offset by non-
recurring reductions in expense. Total advertising and
promotional expenditures totaled 6.2% and 8.4% of net sales for
the quarters ending March 31, 1998 and March 31, 1997,
respectively. Selling and administrative expenses as a percent
of net sales decreased to 37.4% from 45.5% primarily due to the
increase in net sales.
Interest Expense
Net interest expense increased $24,000 or 11% for the
quarter ended March 31, 1998 reflecting higher borrowing levels
under the Company's revolving credit agreement, partially
offset by lower term loan borrowings compared to last year.
During the quarter ended March 31, 1997, the Company did not
commence substantial borrowings under its revolving credit
agreement until late February 1997. Net interest expense for
the quarter ended March 31, 1998 is net of approximately
$78,000 in non-recurring interest income .
Provision for Income Taxes
The Company recorded a provision for income taxes at an
effective rate of 39.0% for the quarters ending March 31, 1998
and March 31, 1997 which approximates blended state and federal
statutory rates.
Liquidity and Capital Resources
The Company's working capital increased $1,385,000 during
the quarter ended March 31, 1998.
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 peak in the fourth quarter. The Company generally
builds its inventory during the first three quarters of the
year to meet the demand for the holiday season. The required
cash is provided by a revolving credit facility.
Item 2. Management's Discussion and Analysis of the Financial
Condition and Results of Operations (continued)
Cash used in operations for the quarter totaled
$3,907,000, consisting primarily of increases in accounts
receivable and inventory balances and reductions in receivable
allowances. Inventory levels increased $1,491,000 or 5%
during the quarter reflecting seasonal growth and increases
associated with stocking to support the Company's new Men's
designer lines introduced in 1997. The Company's inventories
traditionally are at a seasonal low point at year end. The
Company continues to focus on asset management as part of its
overall program to enhance its competitiveness, productivity
and efficiency. Accounts receivable increased $1,852,000 or 8%
due to increased sales volume during the quarter. Accounts
receivable allowances decreased due to actual charges processed
for cash discounts, doubtful accounts, in-store markdowns,
cooperative advertising and customer returns primarily relating
to 1997. These reductions are partially offset by increases
resulting from accruals associated with current period sales
activity.
Cash used in investing activities was $203,000 for capital
expenditures. Cash provided by financing activities totaled
$3,932,000 consisting primarily of net borrowings under the
Company's revolving credit agreement offset by repayments of
bank term borrowings including a $627,000 prepayment as
required by the loan agreement. In April 1998, the Company
prepaid, in full, the remaining principal balance outstanding
on the term loan and applicable fees utilizing borrowings under
the Company's existing revolving credit facility.
"Forward Looking Statements"
Certain of the preceding paragraphs contain "forward
looking statements" under the securities laws of the United
States. Actual results may vary from anticipated results as a
result of various risks and uncertainties, including sales
patterns, overall economic conditions, competition, pricing,
consumer buying trends and other factors.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.0 Financial data schedule.
(b) Reports on Form 8-K - none
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
\S\ Christopher F. Wolf
Christopher F. Wolf
Senior Vice President, Treasurer
and Chief Financial Officer
Date: May 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000095779
<NAME> SWANK, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,057
<SECURITIES> 0
<RECEIVABLES> 23,731
<ALLOWANCES> 8,566
<INVENTORY> 32,458
<CURRENT-ASSETS> 53,061
<PP&E> 26,004
<DEPRECIATION> 20,036
<TOTAL-ASSETS> 64,360
<CURRENT-LIABILITIES> 27,321
<BONDS> 0
0
0
<COMMON> 1,685
<OTHER-SE> 26,461
<TOTAL-LIABILITY-AND-EQUITY> 64,360
<SALES> 33,630
<TOTAL-REVENUES> 33,630
<CGS> 19,485
<TOTAL-COSTS> 19,485
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (404)
<INTEREST-EXPENSE> 248
<INCOME-PRETAX> 1,326
<INCOME-TAX> 517
<INCOME-CONTINUING> 809
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 809
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
