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 June 30, 1999
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
of incorporation 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 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 July 31, 1999
Common stock, $.10 par value 16,569,423
<PAGE>
SWANK, INC.
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements. CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands)
June 30, 1999 December 31, 1998
ASSETS
Current:
Cash and cash equivalents $ 239 $ 757
Accounts receivable, less
allowances of $6,486 and $9,041 15,434 14,756
Inventories
Raw materials $8,680 $7,028
Work in process 7,405 7,337
Finished goods 25,889 41,974 26,819 41,184
Deferred income taxes 4,069 4,069
Prepaid income taxes 1,599 -
Prepaid and other 1,285 967
Total current assets 64,600 61,733
Property, plant and equipment, at 28,151 26,932
cost
less accumulated depreciation 22,064 6,087 21,358 5,574
and amortization
Other assets 6,214 5,662
Total assets $ 76,901 $ 72,969
LIABILITIES
Current:
Notes payable to banks $ 22,206 $ 15,321
Current portion of long-term 243 242
debt
Accounts payable 6,585 5,770
Accrued employee compensation 2,974 4,775
Income taxes payable - 1,888
Other current liabilities 4,244 4,232
Total current 36,252 32,228
liabilities
Long-term obligations 9,516 9,563
Total liabilities 45,768 41,791
Minority Interest in consolidated 565 -
subsidiary
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00
Authorized 1,000,000 shares
Common stock, par value $.10
Authorized 43,000,000 shares:
Issued 16,902,942 and 1,690 1,689
16,887,942 shares
Capital in excess of par value 926 913
Retained earnings 28,654 29,285
Accumulated other comprehensive 7 -
income
31,277 31,887
Treasury stock , at cost, (709) (709)
333,519 shares
Total stockholders' 30,568 31,178
equity
Total liabilities and $ 76,901 $ 72,969
stockholders' equity
The accompanying notes are an integral part of the condensed
consolidated financial statements.
<PAGE>
SWANK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE QUARTERS ENDED JUNE 30, 1999 AND 1998
(Dollars in thousands except per share data)
---------------------------------
1999 1998
Net Sales $ 32,725 $ 32,177
Cost of goods sold 21,170 18,918
Gross profit 11,555 13,259
Selling and administrative expenses 12,715 13,661
Loss from operations (1,160) (402)
Interest expense, net 391 423
Loss before income taxes and minority (1,551) (825)
interest
Benefit for income taxes 762 322
Minority interest in loss of consolidated 43 0
subsidiary
Net (loss) $(746) $(503)
Share and per share information:
Weighted average common shares outstanding 16,569,423 16,525,677
Net loss per common share $ (.05) $ (.03)
Weighted average common shares outstanding 16,569,423 16,525,677
assuming dilution
Net loss per common share assuming dilution $ (.05) $ (.03)
The accompanying notes are an integral part of the condensed
consolidated financial statements.
<PAGE>
SWANK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Dollars in thousands)
----------------
1999 1998
Net Sales $ 69,924 $ 65,806
Cost of goods sold 44,313 38,403
Gross profit 25,611 27,403
Selling and administrative expenses 26,399 26,232
Income (loss) from operations (788) 1,171
Interest charges, net 739 670
Income (loss) before income taxes and (1,527) 501
minority interest
Benefit (provision) for income taxes 672 (195)
Minority interest in loss of consolidated 224 0
subsidiary
Net income (loss) $(631) $306
Share and per share information:
Weighted average common shares outstanding 16,568,025 16,518,761
Net income (loss) per common share $ (.04) $ .02
Weighted average common shares outstanding 16,729,320 16,637,295
assuming dilution
Net income (loss) per share assuming $ (.04) $ .02
dilution
The accompanying notes are an integral part of the condensed
consolidated financial statements.
<PAGE>
SWANK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Dollars in thousands)
--------------
1999 1998
Cash flow from operating activities:
Net income (loss) $ (631) $ 306
Adjustments to reconcile net income
to net cash used in operations:
Depreciation and amortization 742 956
Gain on sale of fixed assets - (3)
Recoveries of bad debts (30) (358)
Minority interest in net loss of (224) -
consolidated subsidiary
Changes in assets and liabilities
Increase in accounts receivable (786) (64)
Increase in inventory (393) (7,935)
(Increase) decrease in prepaid and (354) 178
other
(Increase) decrease in other assets (43) 50
(Increase) in prepaid income taxes (1,599) (960)
Increase (decrease) in accounts (911) 1,725
payable and accrued liabilities
Decrease in income taxes payable (1,888) (253)
Increase in long-term obligations 65 4
Net cash used in (6,052) ( 6,354)
operations
Cash flow from investing activities:
Capital expenditures (788) (494)
Premiums on life insurance (409) (483)
Net cash used in (1,197) (977)
investing activities
Cash flow from financing activities:
Borrowing under revolving credit 38,520 35,921
agreements
Payments of revolving credit (31,635) (26,782)
obligations
Principal payments on long-term debt (168) (2,820)
Proceeds from exercise of employee 14 33
stock options
Net cash provided by 6,731 6,352
financing activities
Net decrease in cash and cash $ (518) (979)
equivalents
Cash and cash equivalents at 757 1,235
beginning of period
Cash and cash equivalents at end of $ 239 $256
period
The accompanying notes are an integral part of the condensed
consolidated financial statements.
<PAGE>
SWANK, INC.
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 June 30, 1999
and 1998. 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. Certain amounts from previous periods have
been reclassified to conform with the current presentation.
Footnote information was included in financial statements
included in the Company's 1998 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, 1998.
The condensed financial data included herein should be read in
conjunction with the information in the annual report.
(2) Effective January 8, 1999, the Company acquired 65% of
the shares of Joyas y Cueros S.A. de Costa Rica ("Joyas"), a
newly formed corporation located in Cartago, Costa Rica in
exchange for approximately $1.7 million in cash, equipment and
inventory. The minority shareholder contributed approximately $.9
million in equipment and inventory. Joyas presently manufactures
women's jewelry and men's belts. Substantially all of Joyas'
revenue is derived from products manufactured for the Company and
the results of Joyas' operations have been included in the
Company's condensed consolidated financial statements from the
transaction's effective date. The Condensed Consolidated
Financial Statements include the accounts of Swank, Joyas, and a
wholly-owned foreign sales corporation. All significant
intercompany amounts have been eliminated. Accumulated other
comprehensive income arises from the effects of currency
translation.
(3) During the six month period ended June 30, 1999, the Company
has not incurred any material changes in commitments and
contingencies set forth in Footnote I of the 1998 Annual
Report to Stockholders.
(4) The following table sets forth the computation of net income
(loss) per share for the quarters ending June 30, 1999 and
June 30, 1998 (in thousands, except for share and per share
data):
<TABLE>
Quarter Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ (746) $ (503) $ (631) $ 306
Denominators:
Shares used in computing net income per
common share 16,569,423 16,525,677 16,568,025 16,518,761
Effect of dilutive options 0 0 161,295 118,534
Shares used in computing net income per 16,569,423 16,525,677 16,729,320 16,637,295
common per share assuming dilution
Net income (loss) per common share $ (.05) $ (.03) $ (.04) $.02
Net income (loss) per common share $ (.05) $ (.03) $ (.04) $.02
assuming dilution
</TABLE>
<PAGE>
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
(5) Segment Information (in thousands):
Men's Women's Other Consolidated
3 months ending June 30
1999
Revenue from external customers $20,503 $10,988 $1,234 $32,725
Segment profit (loss) before tax (647) (810) (51) (1,508)
1998
Revenue from external customers $21,823 $9,059 $1,295 $32,177
Segment profit (loss) before tax 8 (799) (34) (825)
6 months ending June 30
1999
Revenue from external customers $42,503 $25,152 $2,269 $69,924
Segment profit (loss) before tax (833) (273) (197) (1,303)
1998
Revenue from external customers $41,026 $22,432 $2,348 $65,806
Segment profit (loss) before tax 633 53 (185) 501
(6) Effective January 1, 1999 the Company adopted the provisions
of Statement of Position 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use"
("SOP 98-1") which establishes criteria for capitalizing
internal and external costs associated with software
development. SOP 98-1 requires that the new accounting
treatment be applied prospectively from the date of adoption.
During the quarter and six months ended June 30, 1999, the
Company capitalized software development costs pursuant to SOP
98-1 which had the effect of increasing income before income
taxes by $50,000 and $100,000, respectively, and net income by
approximately $30,500 and $66,000, respectively. Exclusive of
the effects of this change, the net loss per share and net
loss per share assuming dilution would have been $.05 and
$.05, respectively for the quarter and $.04 and $.04,
respectively for the six months ended June 30, 1999.
(7) Subsequent event. On July 20, 1999, the Company settled a
breach of contract action which had been initiated prior to June
30, 1999. As a result of the settlement, the Company recorded a
non-recurring gain of $500,000 which has been reflected in the
Company's consolidated financial statements at June 30, 1999.
<PAGE>
Item 2. Management's Discussion and Analysis of the Financial
Condition and Results of Operations (continued)
Results of Operations
As is customary in the fashion accessories industry, the
Company makes modifications to its lines coinciding with the
Spring (approximately January - June) and Fall (approximately
July - December) seasons. The Company believes that results of
operations are more meaningful on a seasonal basis than on a
quarterly basis. The timing of shipments can be affected by the
availability of materials, retail sales and fashion trends. These
factors may shift volume between quarters within a season
differently in one year than in 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 and six months ended June 30, 1999
were $32,725,000 and $69,924,000, respectively, an increase of
$548,000 or 1.7% and $4,118,000 or 6.3% compared to the quarter
and six months ended June 30, 1998, respectively.
Included in net sales for both the quarter and six month
periods ending June 30 are annual second quarter adjustments to
record the variance between customer returns of prior year
shipments actually received in the current year and the estimate
used to establish the allowance for returns at the end of the
preceding fiscal year. At December 31, 1997, the allowance for
returns anticipated during the spring 1998 season was established
in consideration of new product lines for which initial shipments
were made in 1997 and for which the Company had no direct prior
experience. These adjustments increased net sales in both 1999
and 1998 as set forth in the following table:
Increase (Decrease) in net sales
1999 1998 Change
Men's Accessories $ (488,000) $ 1,692,000 $ (2,180,000)
Women's Accessories 846,000 849,000 (3,000)
Total $ 358,000 $ 2,541,000 $ (2,183,000)
Net sales for Men's Accessories declined by $1,320,000 (6.0%)
and increased by $1,477,000 (3.6%) for the quarter and six months
ending June 30, 1999 respectively, both as compared to the
quarter and six months ending June 30, 1998. Net sales for
Women's Accessories increased by $1,929,000 (21.3%) and
$2,720,000 (12.1%) for the quarter and six months ending June 30,
1999 respectively.
The increase in net sales for Men's Accessories for six months
ending June 30, 1999 was primarily due to increased shipments of
belts during the first half of the year reflecting improved sales
to existing mass merchandising customers; increased sales of
excess and discontinued merchandise; and initial spring shipments
of the Company's Claiborne for Men line, which was introduced
last summer. In addition, the Company commenced shipments of a
new private-label personal leather goods program during the first
quarter of 1999. The decrease in net sales for Men's Accessories
for the quarter ended June 30, 1999 was primarily due to the
returns adjustment described above, partially offset by increased
shipments of personal leather goods shipped under the new private-
label program.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Women's Accessories net sales increased during both the quarter
and six months ending June 30, 1999 principally due to initial
spring shipments of the Kenneth Cole Women's jewelry line which
was first introduced to retailers last fall and higher sales of
out-of-line merchandise compared to the quarter and six months
ended June 30, 1998. The Company also shipped increased
shipments during the quarter to certain new and existing private-
label customers in response to improved performance at retail of
current merchandise lines.
Gross Profit
Gross profit for the quarter and six months ended June 30, 1999
decreased by $1,704,000 or 12.9% and $1,792,000 or 6.5%
respectively, compared to the quarter and year ended June 30,
1998. Gross profit for Men's Accessories decreased by $1,678,000
for the quarter and by $1,578,000 for the six months ended June
30, 1999. Women's Accessories gross profit increased by $37,000
for the quarter and decreased by $143,000 for the six months
ended June 30, 1999, both compared to the quarter and six months
ending June 30, 1998. Gross profit as a percentage of net sales
fell to 35.3% from 41.2% for the quarter and to 36.6% from 41.6%
for the six months ending June 30, 1999, both compared to the
corresponding periods in 1998.
Included in gross profit for both the quarter and six months
ending June 30, 1999, are annual second quarter adjustments to
record the variance between customer returns of prior year
shipments actually received in the current year and the allowance
for customer returns which was established at the end of the
preceding fiscal year. At December 31, 1997, the allowance for
returns anticipated during the spring 1998 season was established
in consideration of new product lines for which initial shipments
were made in 1997 and for which the Company had no direct prior
experience. These adjustments increased gross profit in both
years as set forth in the following table:
Increase (Decrease) in gross profit
1999 1998 Change
Men's Accessories $ (305,000) $ 1,155,000 $ (1,460,000)
Women's Accessories 577,000 633,000 (56,000)
Total $ 272,000 $ 1,788,000 $ (1,516,000)
Gross profit expressed as a percentage of net sales for Men's
Accessories fell to 32.1% from 37.8% for the quarter and to 32.6%
from 37.6% for the six months ending June 30,1999, both as
compared to 1998. The decline in gross profit for both the
quarter and six months was primarily attributable to increased
inventory-related costs associated with the disposition of excess
and discontinued merchandise at reduced margins and from a less
favorable sales mix. The decrease in gross profit was also due to
unfavorable overhead variances associated with a decrease in
production levels in response to current inventory requirements
for manufactured belts and jewelry.
Gross profit expressed as a percentage of net sales fell to
39.2% for Women's Accessories from 47.1% for the quarter, and to
41.8% from 47.5% for the six months ending June 30, 1999. The
decline in gross profit in Women's Accessories during the
quarter was mainly due to higher inventory-related costs
resulting from an increase in sales of excess and discontinued
merchandise and to unfavorable manufacturing overhead variances.
The Company reduced production at its domestic jewelry
manufacturing facility during the quarter in response to ongoing
changes in product sourcing strategies. Gross profit for the six
months ending June 30, 1999 was also adversely affected by the
Company's share of the start-up losses associated with the
acquisition of Joyas y Cueros de Costa Rica, S.A.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Selling and Administrative Expenses
Selling and administrative expenses decreased by $946,000
(6.9%) for the quarter and increased by $167,000 (less than 1%)
for the six months ending June 30, 1999. The decrease in selling
expenses for the quarter is principally due to annual second
quarter adjustments associated with recording the variance
between actual prior year in-store markdown and cooperative
advertising activity processed during the spring season compared
to the amounts used to establish the respective allowances at the
end of the preceding fiscal year. Selling expenses for the
quarter were also favorably impacted by reductions in both
regional sales meeting costs and incentive compensation accruals,
both as compared to the quarter ending June 30, 1998. The
increase in selling expenses for the six months ending June 30,
1999 is primarily attributable to increases in variable costs
associated with higher sales and planned increases in advertising
expenditures, offset by the adjustments to the allowances for in-
store markdowns and cooperative advertising described above.
Advertising and promotional expenditures totaled 6.1% and 7.3% of
net sales for the quarters ended June 30, 1999 and June 30, 1998,
respectively and totaled 6.6% and 6.7% of net sales for the six
months ending June 30, 1999 and June 30, 1998, respectively. The
reduction in advertising expense expressed as a percentage of net
sales for both the quarter and six months ending June 30, 1999
primarily reflects the adjustment to the in-store markdown and
cooperative advertising allowances.
Administrative expenses for the quarter ended June 30, 1999
decreased for both the quarter and six months ending June 30,
1999 compared to the corresponding periods in 1998. The decrease
was primarily due to reduced expenses associated with certain
fringe benefit programs and reductions in current year accruals
for incentive compensation. During the quarter, the Company
recorded an additional expense of $550,000 for severance benefits
associated with a voluntary workforce reduction program at one of
the Company's manufacturing facilities. This expense was largely
offset by a gain of $500,000 recorded during the quarter in
connection with the settlement of litigation.
Interest Expense
Net interest expense decreased by $32,000 during the quarter
and increased by $69,000 for the six months ending June 30, 1999
compared to the quarter and six months ending June 30, 1998,
respectively. The reduction in net interest expense for the
quarter was primarily due to the effects of lower interest rates
offsetting higher average borrowing levels. The increase for the
six months ending June 30, 1999 compared to prior year is
primarily due to $78,000 in non-recurring interest income
recorded in the first quarter of 1998.
Provision for Income Taxes
The Company recorded a benefit for income taxes on the
domestic pretax loss for the quarter and six months ended June
30, 1999 at approximately the blended state and federal statutory
rates. No income tax benefit is anticipated on the losses
incurred by the Company's Costa Rican subsidiary. For the six
months ending June 30, 1998, the Company recorded a provision for
income taxes at an effective rate of 39% which approximated
blended state and federal statutory rates.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Liquidity and Capital Resources
The Company's working capital decreased by $1,158,000 during
the six months ended June 30, 1999 compared to an increase of
$525,000 for the six months ending June 30, 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 builds its
inventory during the year to meet the demand for the holiday
season. The required cash is provided by a revolving credit
facility.
Cash used in operations for the quarter totaled $6,052,000
consisting primarily of the net loss from operations, increases
in prepaid taxes, accounts receivable balances, and inventories
and decreases in accounts payable and accrued liabilities, and
income taxes payable. Accounts receivable increased $786,000
primarily due to increased sales during the quarter and to
seasonal reductions in allowances. Accounts receivable allowances
decreased due to actual charges processed for cash discounts, in-
store markdowns, cooperative advertising, and customer returns
primarily relating to 1998. These reductions are partially offset
by increases resulting from accruals associated with current
period sales activity. Income taxes payable declined by
$1,888,000 after payments made during the quarter. Inventory
levels increased by $393,000 during the six months ending June
30, 1999 compared to an increase of $7,935,000 for the six months
ending June 30, 1998 reflecting the Company's efforts to reduce
inventory levels and dispose of excess and out-of-line
merchandise.
Cash used in investing activities was $1,197,000 for capital
expenditures and insurance premiums. Cash provided by financing
activities totaled $6,731,000 consisting primarily of net
borrowings under the Company's revolving credit agreement. In
July 1999, the Company and its bank lender amended the Company's
revolving credit agreement to reflect, among other things, a
temporary increase of $3,000,000 in its revolving credit facility
for the fall 1999 season.
Year 2000
Management's present assessment is that the Company
will be able to modify its significant software systems on a
timely basis to make them Year 2000 compliant without material
effects on the Company's business or results of operations. This
assessment is unchanged from that previously reported.
Management has completed the identification of date
issues associated with key applications software and the
necessary modifications are, for the most part, complete. Most of
the Company's applications software was internally developed and
the necessary modifications have been and are being made
utilizing internal resources.
Through consultation with its vendors the Company
believes that the operating systems for key hardware components
are Year 2000 compliant. Assessment of the Company's network is
substantially complete and various components had been identified
as requiring upgrades from vendors. Certain operating system
upgrades were installed and substantially tested during the
quarter. Additional testing is ongoing and is expected to be
completed by the end of the third quarter.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
The process of identifying potential issues associated
with embedded technology or so-called non-IT systems has been
initiated. Management has considered the Company's manufacturing
processes, the age of its facilities and the associated building
systems in determining that non-IT systems represent relatively
low risk.
The Company's principal retail customers have been
extending the scope of their electronic interfaces with the
Company and management believes that this is likely to continue.
To date, these interfaces have consisted principally of sales
order entry transactions through Electronic Data Interchange
("EDI"). The Company has been able to respond to its customers'
Year 2000 requirements without material effects on the Company's
business or results of operations and management presently has no
reason to believe that the Company will not be able to continue
to do so. The Company has installed Year 2000 compliant EDI
software.
In September 1998, the Company implemented a program to
contact third parties with whom it has material business
relationships to obtain information and representations with
respect to the respective readiness of each for Year 2000. Third
parties contacted include major customers, determined regardless
of whether there is an existing EDI relationship, major vendors
and suppliers of key services such as utilities,
telecommunications and banking. The Company has received
responses to most of these requests.
Various third parties with whom the Company has material
business relationships have represented that they have programs
in place to attain Year 2000 compliance but with a completion
date in 1999. Since many of the Company's third party
relationships are with public companies the Company has
instituted a program to review their public filings with respect
to the Year 2000 issue. The most recent information that the
Company has reviewed is generally set forth in fiscal 1998 or
1999 year-end or first quarter fiscal 1999 or 2000 filings with
the Securities and Exchange Commission. These filings reveal
that, in general, the companies have initiated testing of most
systems and expect to achieve compliance sometime prior to the
end of the third quarter of 1999. The Company will continue to
update this process during 1999. Management has determined that
for the time being it is in the best interest of the Company to
periodically monitor the progress of key vendors and suppliers by
obtaining updated representations and/or by review of their
public disclosures, where available. The Company expects to
assess each individual case in the third quarter of 1999 in
light of the information then available.
With respect to material customers, management is relatively
less concerned about EDI transactions per se because of their
defined protocols, the utilization of generally available third
party translators and the ability to conduct mutual testing.
However, there remains the risk that EDI customers' may
experience other systems issues internal to them that disrupt the
functionality of otherwise Year 2000 compliant EDI systems. A
significant disruption in EDI processing could materially impair
the Company's shipments. Management has determined that, for the
time being, it is in the best interest of the Company to
periodically monitor the progress of key customers by obtaining
updated representations and/or by review of their public
disclosures (see above), where available. Major customers'
progress will be reassessed in the third and fourth quarters of
1999 and, if issues remain, management anticipates the ability to
ameliorate the problem, at least temporarily, through development
of mutually agreed strategies which might include some
acceleration of order placement during 1999. January and February
are typically important cash flow months as the Company's retail
customers remit payments for their seasonally high pre-holiday
purchases. Irrespective of EDI, it is possible that the ability
of one or more material customers to process payments may be
impaired. Management believes that the existing revolving line
of credit will be adequate for a number of months in the event of
unanticipated delays in customer remittances.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Presently, it is management's view that service providers
represent the greatest conceptual risk to material disruption in
the Company's operations. The Company is dependent upon utilities
and telecommunications entities for day-to-day operations as well
as upon the ability of its banks to provide cash receipts and
disbursements services as well as working capital. To the extent
that any of these entities are significantly impaired for more
than a relatively short period the corresponding impact on the
Company is likely to be material. Service providers are included
among the companies whose public filings the Company is reviewing
as described above.
The Company has not yet developed a contingency plan and has
no definitive plans in this regard other than to quarterly
reassess the need to develop a formal plan during 1999. This
assessment will be based for the most part on the results of the
periodic monitoring of material third parties as described above
and the internal testing expected to be completed during the
third quarter. Management notes that relatively modest actions
may be sufficient to significantly reduce certain risks to the
Company. For example, if it appears warranted, management has the
ability prior to year-end to accelerate procurement of
inventories that would otherwise take place in the first quarter.
In addition, management believes that alternative sources of
supply are readily available for most of its purchased materials
and finished products and that relationships with such sources
could be developed within a few months. Management believes that
the Company's seasonality with reduced activity in the first
quarter provides something of a buffer against the worst case
customer and service provider scenarios. The Company's exposure
to lost revenue and the risk of reduction in its other activities
will be significantly less in the first quarter of 2000 than in
the last quarter of 1999. January will be the first month in a
Year 2000 operating environment and January is historically a
relatively low volume month for the Company.
As described above, most of the Company's applications
software was internally developed and the necessary modifications
have been and are being made utilizing existing internal
personnel resources. These resources are included in the
Company's recurring IT budget. Management does not believe that
use of existing resources for Year 2000 remediation has been
materially detrimental to the completion of other significant IT
projects. The Company has had to purchase specific Year 2000
upgrades with respect to certain third party software
applications. The aggregate cost of these upgrades through June
30, 1999 was approximately $75,000. The Company' current
estimate for additional expenditures specifically required in
response to Year 2000 issues is $30,000, principally to make the
Company's network Year 2000 compliant. However, it remains
possible that the planned testing process will reveal new areas
requiring expenditures. The Company has been working toward
standard minimum personal computer (PC) specifications and
common PC operating systems. Acceleration of this program, if
any, required by Year 2000 considerations is not expected to be
significant.
"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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
During the six month period ended June 30, 1999, there were no
material changes in the information called for by this item from the
information contained in Item 7A of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998.
<PAGE>
PART II - OTHER INFORMATION
Item 4.Submission of Matters to a Vote of Security Holders
The Company's 1999 Annual Meeting of Stockholders (the "Annual
Meeting") was held on April 22, 1999. At the Annual Meeting,
stockholders:
(a) Elected the following directors to serve as Class I
directors of the Company until the Company's 2002 Annual Meeting
of Stockholders and until the election and qualification of their
respective successors, by the following votes:
Director For Withheld
Mark Abramowitz 14,017,825 438,724
James Tulin 13,956,182 500,367
(b) Approved the appointment of PricewaterhouseCoopers L.L.P. as
the independent accountants of the Company for the fiscal year
ending 1999, by the following vote:
For Against Abstain
14,209,246 65,080 182,223
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
4.0 First Amendment to Revolving Credit and Security
Agreement dated as of July 12, 1999 between the
Company and PNC Bank, National Association, as lender
and Agent.
27.0 Financial data schedule.
(b) 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
/s/ Jerold R. Kassner
_____________________
Jerold R. Kassner
Senior Vice President,
Chief Financial Officer
And Treasurer
Date: August 12, 1999
AMENDMENT TO REVOLVING CREDIT
AND SECURITY AGREEMENT
THIS AMENDMENT TO REVOLVING CREDIT AND SECURITY AGREEMENT
(this "Amendment") is made as of July 12, 1999, among SWANK,
INC., a corporation organized under the laws of the State of
Delaware (the "Borrower"), and PNC BANK, NATIONAL ASSOCIATION, a
national banking association ("PNC"), as agent for the Lenders
described below (in such capacity, the "Agent") and as a Lender.
W I T N E S S E T H:
A. Pursuant to the Revolving Credit and Security Agreement
dated as of July 27, 1998 (as amended, supplemented or modified
from time to time, the "Credit Agreement"), by and among the
Borrower, the financial institutions and insurance companies
which are now or which hereafter become a party thereto
(collectively, the "Lenders" and individually a "Lender") and the
Agent, as Agent for the Lenders, the Lenders agreed to make
revolving credit loans to, and issue letters of credit for the
account of, the Borrower upon the terms and conditions set forth
therein.
B. PNC is currently the sole Lender.
C. The Borrower, the sole Lender and the Agent have agreed
to amend the Credit Agreement upon the terms and conditions set
forth herein.
NOW, THEREFORE, in consideration of the premises and for
other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower, the
sole Lender and the Agent agree as follows:
1. Capitalized terms used in this Amendment shall have the
same meanings given them in the Credit Agreement, unless
otherwise defined herein.
2. The definition of "Maximum Revolving Advance Amount" in
Section 1.2 of the Credit Agreement is hereby amended to read in
its entirety as follows:
"Maximum Revolving Advance Amount" shall mean (a)
thirty-three million dollars ($33,000,000) during the period
commencing on August 1, 1999 and ending on October 31, 1999, and
(b) thirty million dollars ($30,000,000) at all other times."
3. The definition of "Seasonal Advance Period" in Section
1.2 of the Credit Agreement is hereby amended to read in its
entirety as follows:
"Seasonal Advance Period" shall mean (a) the period
commencing on June 1, 1999 and ending on October 31, 1999 and (b)
with respect to each other year during the Term, the period
commencing on July 1 of such year and ending on September 30 of
such year."
4. Section 6.5 of the Credit Agreement is hereby amended to read in
its entirety as follows:
"6.5 Fixed Charge Coverage Ratio. Maintain a Fixed Charge
Coverage Ratio of not less than (a) .80 to 1.00 at the end of the
fiscal quarter of the Borrower ending on June 30, 1999 for the
period of twelve (12) consecutive calendar months then ending,
(b) .90 to 1.00 at the end of the fiscal quarter of the Borrower
ending on September 30, 1999 for the period of twelve (12)
consecutive calendar months then ending, and (c) 1.10 to 1.00 at
the end of each other fiscal quarter of the Borrower for the
period of twelve (12) consecutive calendar months then ending."
5. In order to induce the sole Lender and the Agent to enter
into this Amendment, the Borrower hereby represents and warrants
that:
(a) after giving effect to paragraph 4 of this Amendment, no
Default or Event of Default has occurred and is continuing;
(b) this Amendment has been duly authorized, executed and
delivered by the Borrower and constitutes its legal, valid and
binding obligation, enforceable in accordance with its terms;
(c) the Credit Agreement and each of the Other Documents to
which the Borrower is a party, after giving effect to this
Amendment and the transactions contemplated hereby, continue to
be in full force and effect and to constitute the legal, valid
and binding obligations of the Borrower, enforceable against the
Borrower in accordance with their respective terms; and
(d) the representations and warranties made by the Borrower
in or pursuant to the Credit Agreement or any Other Document, or
which are contained in any certificate, document or financial or
other statement furnished at any time under or in connection
herewith or therewith, are each true and correct in all material
respects on and as of the date hereof, as though made on and as
of such date.
6. This Amendment shall become effective as of the date
above upon receipt by the Agent of (a) two (2) copies of this
Amendment executed by the Borrower, and (b) a modification fee of
$7,500 in immediately available funds.
7. The Borrower hereby confirm that all liens granted on the
Collateral shall continue unimpaired and in full force and
effect.
8. This Amendment may be executed in several counterparts,
each of which, when executed and delivered, shall be deemed an
original, and all of which together shall constitute one
agreement. Any signature delivered by a party by facsimile
transmission shall be deemed to be an original signature hereto.
9. This Amendment shall be governed by and construed in
accordance with the laws of the State of New York applied to
contracts to be performed wholly within the State of New York,
without giving effect to the principles of conflicts of law. This
Amendment shall be binding upon and inure to the benefit of the
Borrower, the Lenders and the Agent, and their respective
successors and permitted assigns.
10. From and after the effectiveness hereof, all references
to the Credit Agreement in the Other Documents shall mean the
Credit Agreement as amended and modified by this Amendment.
11. Except as amended and otherwise modified by this
Amendment, the Credit Agreement and the Other Documents shall
remain in full force and effect in accordance with their
respective terms. Except as expressly provided herein, this
Amendment shall not constitute an amendment, waiver, consent or
release with respect to any provision of the Credit Agreement or
any Other Document, a waiver of any Default or Event of Default
thereunder, or a waiver or release of any of the Agent's or any
Lender's rights or remedies (all of which are hereby reserved).
The Borrower expressly ratifies and confirms the waiver of jury
trial and other provisions of Section 12.3 of the Credit
Agreement,
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their proper and
duly authorized officers as of the day and year first above
written.
ATTEST: SWANK, INC.
\s\ Laura McPherson By: \s\ Christopher F. Wolf
Name: Christopher F. Wolf
Title: SVP, CFO
PNC BANK, NATIONAL ASSOCIATION.
as Lender and as Agent
By: \s\ Arthur V. Lippens
Name: Arthur V. Lippens
Title: V.P.
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