10-Q 1 a10q2001.txt 10-Q FOR 2ND QUARTER FOR SWISS ARMY BRANDS, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2001 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 NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report.) 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 --- --- The number of shares of Issuer's Common Stock, $.10 par value, outstanding on May 14, 2001, was 8,171,458 shares.
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES INDEX PART I: FINANCIAL INFORMATION Page No. ------------------------------ -------- Item 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of March 31, 2001 (unaudited) and December 31, 2000. 3 - 4 Consolidated Statements of Operations for the Three Months Ended March 31, 2001 and 2000 (unaudited). 5 Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the Three Months Ended March 31, 2001 and 2000 (unaudited). 6 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2000 (unaudited). 7 Notes to Consolidated Financial Statements 8 -9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 - 11 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 12 Part II: OTHER INFORMATION --------------------------- Item 6. EXHIBITS AND REPORTS ON FORM 8-K 12 Signatures 13 The Exhibit Index Appears on Page 12.
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) Assets March 31, December 31, 2001 2000 ----------- ------------- (unaudited) Current assets: Cash and cash equivalents $ 2,036 $ 5,002 Accounts receivable, less allowance for doubtful accounts of $1,260 for both periods 19,521 34,173 Inventories 41,570 33,461 Deferred income taxes 3,259 1,887 Prepaid and other 4,379 4,089 ---------- ---------- Total current assets 70,765 78,612 ---------- ---------- Deferred income taxes 710 675 Property, plant and equipment, net 7,032 7,506 Investments 8,357 8,274 Intangible assets, net 12,170 12,595 Other assets 16,891 16,787 ---------- ---------- Total Assets $115,925 $124,449 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) Liabilities and Stockholders' Equity March 31, December 31, 2001 2000 ----------- ------------ (unaudited) Current liabilities: Current portion of long-term debt $ 1,475 $1,493 Accounts payable 11,148 11,057 Accrued liabilities 8,880 8,452 --------- -------- 21,503 21,002 Long-term liabilities: Long-term debt 11,632 16,038 Other 675 675 --------- -------- Total Liabilities 33,810 37,715 --------- -------- Minority interest 5,359 6,050 Commitments and contingencies 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 - 8,971,080 for both periods 897 897 Additional paid-in capital 49,005 49,005 Accumulated other comprehensive income (loss) (453) 1,234 Retained earnings 35,330 37,589 ---------- --------- 84,779 88,725 Less: Treasury stock; 905,734 shares for both periods (8,003) (8,003) Deferred compensation (20) (38) --------- --------- Total stockholders' equity 76,756 80,684 --------- --------- Total Liabilities and Stockholders' Equity $115,925 $124,449 ========= ========= The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) Three Months Ended March 31, 2001 2000 ---- ---- Net revenues $21,273 $25,540 Cost of sales 13,287 15,816 --------- --------- Gross profit 7,986 9,724 Selling, general and administrative expenses 11,660 10,442 --------- --------- Operating loss (3,674) (718) Investment gain (loss), net - 1,419 Interest income (expense) and other, net (218) (214) --------- -------- Total other income (expense), net (218) 1,205 --------- -------- Income (loss) before income taxes (3,892) 487 Income tax provision (benefit) (1,585) 211 Minority interest (48) - --------- -------- Net income (loss) ($2,259) $276 ========= ======== Earnings per share: Basic ($0.27) $0.03 ========= ======== Diluted ($0.27) $0.03 ========= ======== Weighted average number of shares outstanding: Basic 8,278 8,169 ========= ======== Diluted 8,278 8,217 ========= ======== The accompanying notes to consolidated financial statements are an integral part of these statements.
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (in thousands, except share data) (unaudited) Accumulated Common Stock Additional Other Par Value $.10 Paid-In Comprehensive Retained Treasury Comprehensive Shares Amount Capital Income (Loss) Earnings Stock Income (Loss) ------ ------ ---------- -------------- --------- --------- ------------- BALANCE December 31, 1999 8,866,218 $886 $49,137 ($401) $35,576 ($8,711) Net income for the three months ended March 31, 2000 - - - - 276 - $276 Change in unrealized gain on marketable securities - - - 101 - - 101 Reclassification adjustment for loss included in net income - - - 208 - - 208 Foreign currency translation adjustment - - - 7 - - 7 ----- Comprehensive income $592 ====== Cancellation of stock grant (1,250) - (11) - - - ----------- -------- --------- ------- ---------- -------- BALANCE March 31, 2000 8,864,968 $886 $49,126 ($85) $35,852 ($8,711) =========== ======== ========= ======= ========== ======== BALANCE December 31, 2000 8,971,080 $897 $49,005 $1,234 $37,589 ($8,003) Net loss for the three months ended March 31, 2001 - - - - (2,259) - ($2,259) Fair value adjustment for derivatives for the three months ended March 31, 2001, net of tax - - - (1,315) - - (1,315) Change in unrealized gain on marketable securities - - - 83 - - 83 Foreign currency translation adjustment - - - (40) - - (40) Cumulative effect transition adjustment for derivatives, net of tax - - - (415) - - (415) --------- Comprehensive loss ($3,946) ========= ---------- ------- ---------- -------- ---------- --------- BALANCE March 31, 2001 8,971,080 $897 $49,005 ($453) $35,330 ($8,003) ========= ======= ========== ======== ========== ========= The accompanying notes to consolidated financial statements are an integral part of these statements.
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited) Three Months Ended March 31, 2000 2001 -------------------- Cash flows from operating activities: Net income (loss) ($2,259) $ 276 Adjustments to reconcile net income (loss) to net cash provided from operating activities: Stock compensation expense 18 18 Minority interest (48) - Depreciation and amortization 1,159 896 Investment (gain) loss, net - (1,419) Deferred income taxes 10 7 --------- -------- (1,120) (222) Changes in other current assets and liabilities: Accounts receivable 16,722 8,982 Inventories (8,084) (8,456) Prepaid and other (325) (1,091) Accounts payable (1,978) 3,928 Accrued liabilities (2,623) (1,920) --------- -------- Net cash provided from operating activities 2,592 1,221 --------- -------- Cash flows from investing activities: Capital expenditures (387) (343) Additions to other assets (241) (183) --------- -------- Net cash used in investing activities (628) (526) --------- -------- Cash flows from financing activities: Borrowings under bank agreement 11,830 12,380 Repayments under bank agreement (16,058) (13,354) --------- -------- Net cash used in financing activities (4,228) (974) --------- -------- Effect of exchange rate changes on cash (702) (28) --------- -------- Net increase (decrease) in cash and cash equivalents (2,966) (307) Cash and cash equivalents, beginning of period 5,002 1,302 --------- -------- Cash and cash equivalents, end of period $2,036 $ 995 ========= ======== Cash paid during the period: Interest $ 248 $ 264 ========= ======== Income taxes $ 187 $ 869 ========= ======== The accompanying notes to consolidated financial statements are an integral part of these statements.
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 and 2000 (unaudited) CONSOLIDATED FINANCIAL STATEMENTS --------------------------------- The consolidated financial statements included in this Form 10-Q have been prepared by Swiss Army Brands, Inc. ("Swiss Army" or the "Company") without audit. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. In the opinion of management of the Company, the interim financial statements included herein reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. 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 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. Due to the seasonal nature of the Company's business, the results of operations for the interim periods presented are not necessarily indicative of the operating results for the full year. INVENTORIES ----------- Domestic inventories are stated at the lower of cost (determined by the last-in, first-out (LIFO) method) or market. Foreign inventories are valued at the lower of cost or market determined by the FIFO method. Inventories principally consist of finished goods. INVESTMENTS -----------
Investments consist of the following: March 31, 2001 December 31, 2000 -------------- ----------------- (in thousands) Preferred units of Highgate Capital LLC (A) $3,613 $3,613 Common stock of John Hancock Financial Services, Inc. (B) 3,881 3,798 Preferred units of Victory Ventures LLC (C) 851 851 Common stock of Chaparral Resources, Inc.(D) 12 12 -------- -------- Total investments $8,357 $8,274 ======== ========
(A) Highgate Capital LLC, is a private equity firm specializing in middle market acquisitions, re-capitalization and expansion capital investments. (B) John Hancock Financial Services, Inc. a publicly traded company, is a life insurance company. The Company accounts for this investment at fair value, with changes between cost and fair value reflected as a separate component of stockholders' equity. (C) Victory Ventures LLC is a private equity firm specializing in small venture capital investments. (D) Chaparral Resources, Inc., a publicly traded company, is an independent oil and gas exploration and production company. INCOME TAXES ------------ Income taxes are provided at the projected annual effective tax rate. The income tax provision (benefit) for the interim 2001 and 2000 periods exceed the federal statutory rate of 34% due primarily to state income taxes. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ------------------------------------------------------------ Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standard No. 133 ( "SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities" (as amended by SFAS No. 138). SFAS No. 133 establishes new accounting and reporting standards for derivatives and hedging activities, which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of transactions entered into for hedging purposes. The adoption of SFAS No. 133 did not result in a cumulative effect adjustment being recorded to net income for the change in accounting. However, the Company recorded a cumulative effective transition adjustment charge of approximately $415,000 (net of tax) in accumulated other comprehensive loss in the first quarter of 2001. The Company is exposed to foreign currency risks relating to purchases of inventories as part of its ongoing business operations and uses derivative financial instruments, where appropriate, to manage these risks. In general, instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the contract. At the inception of the contract, the Company has designated its use of derivatives for foreign currency forecasted transactions as cash flow hedges. At such time that inventory is received, the position is re-designated from a cash flow hedge to a fair value hedge. Gains and losses on derivatives qualifying as cash flow hedges are recorded in other comprehensive income to the extent that hedges are effective until the underlying transactions are recognized in earnings. Gains and losses from fair value hedges are included in earnings. It is expected that approximately $1.2 million (net of tax) of unrealized losses included in other comprehensive income at March 31, 2001, will be reclassified into earnings in the next twelve months. The Company hedges its exposure to variability in future cash flows for forcasted transactions up to a maximum of 24 months. Net losses included in comprehensive income as of March 31, 2001, including the transition adjustment, were approximately $1,730,000 (net of tax). Gains and losses related to the ineffective portion of hedging instruments, which are included in net income, and gains and losses from fair value hedges, were insignificant during the first quarter of 2001. SWISS ARMY BRANDS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (unaudited) RESULTS OF OPERATIONS --------------------- Comparison of the Three Months Ended March 31, 2001 and 2000 ------------------------------------------------------------
Net revenues consist of the following: 2001 2000 ---- ---- Product sales, net $20,716 $25,310 Royalty income 557 230 ------- -------- $21,273 $25,540 ======= ========
Product sales for the three months ended March 31, 2001 were $20.7 million compared with $25.3 million for the same period in 2000, representing a decrease of $4.6 million or 22.2%. The sales decrease was primarily due to a decrease in watch and knife sales, offset in part by an increase in sales related to Xantia, S.A. ("Xantia") of approximately $1.0 million, in which the company acquired a controlling interest in July, 2000. Royalty income relates to the licensing program of Victorinox(R) Travel Gear, which was introduced in the fourth quarter of 1999. Gross profit of $8.0 million for the three months ended March 31, 2001 decreased $1.7 million or 17.9% from 2000. The gross profit margin percentage for the 2001 period of 37.5.% was lower than the gross profit margin percentage of 38.1% reported for the same period in 2000, primarily due to a decrease in watch sales and charges related to discontinued products, offset in part by an increase in royalty income, which has a higher gross margin than product sales, and favorable exchange rates. 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. The Company enters into foreign currency contracts and options to hedge the exposure associated with foreign currency fluctuations. Based upon current Swiss franc requirements, the Company believes it is hedged through the second quarter of 2002. 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 if the dollar increases 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 for the three months ended March 31, 2001 of $11.7 million were $1.2 million or 11.7% higher than the amount for the comparable period in 2000. The increase was primarily due to special charges of $0.8 million related to personnel costs related to senior management realignments and asset write-downs, and $0.5 million of expenses related to Xantia. Investment gain (loss), net was $0 in 2001, and a gain of $1,419,000 in 2000 due to a $1,627,000 gain from the common stock received related to the demutualization of John Hancock Financial Services, Inc. offset in part by a $208,000 loss related to the write-down of the Company's common stock investment in Chaparral Resources, Inc. Interest income (expense) and other, net was expense of $218,000 for the three months ended March 31, 2001 compared to $214,000 in 2000. The change was primarily due to the interest expense incurred on the debt related to the acquisition of Xantia, offset in part by a decrease in the Company's effective interest rate and reduced borrowings under the Company's line of credit agreement. As a result of these changes, income (loss) before income taxes for the three months ended March 31, 2001 was a loss of $3,892,000 versus income of $487,000 for the same period in 2000, a change of $4,379,000. Minority interest was income of $48,000 in 2001 and $0 in 2000 and was related to the Company's acquisition of a controlling interest in Xantia in July 2000. Income tax provision (benefit) was provided at an effective rate of 40.7% in 2001 and 43.3% in 2000. As a result, net income (loss) for the three months ended March 31, 2001 was a loss of $2,259,000 ($0.27 per share - basic and diluted) versus income of $276,000 ($0.03 per share - basic and diluted) for the same period in 2000, a change of $2,535,000. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- As of March 31, 2001, the Company had working capital of $49.3 million compared with $57.6 million as of December 31, 2000, a decrease of $8.3 million. Significant uses of working capital included a $0.2 million increase in other assets, capital expenditures of $0.4 million and net repayment of debt of $4.2 million. The Company currently has no material commitments for capital expenditures. Cash provided from operating activities was approximately $2.6 million in the three months ended March 31, 2001 compared with $1.2 million in the comparable period in 2001. The change resulted primarily from a larger decrease in accounts receivable in 2001 as compared to 2000 offset in part by a decrease in accounts payable in 2001 as compared to an increase in 2000. The Company meets its liquidity needs with cash generated from operations, and, when necessary, bank borrowings under its line of credit. As of March 31, 2001, the Company had $2,430,000 of outstanding borrowings under its line of credit. Also, the Company has approximately $10,677,000 of outstanding term loans and debt related to acquisitions. The Company has a $16.0 million credit line of which $13,570,000 is available for borrowings. The credit line was renewed in May 2001 under similar terms and conditions as the existing line of credit and is due to expire in June 2003. 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 will be sufficient to meet its operating needs at least for the next twelve months. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- Foreign Exchange Risk The Company is exposed to significant 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 accounted for under the provisions of SFAS No. 133, and are generally recognized when the related inventory is sold. At March 31, 2001, the Company has entered into foreign currency contracts and options to purchase approximately 74,500,000 Swiss francs in the years 2001 and 2002 at a weighted average rate of $1.636 Swiss franc/dollar. 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. At March 31, 2001, 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. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- a.) Exhibits (11) Statement regarding computation of per share earnings is not required because the relevant computation can be clearly determined from the material contained in the Financial Statements included herein. b.) The Company filed a report on Form 8-K on March 19, 2001, related to changes in its executive management. . Pursuant to the requirements to 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) Date: May 15, 2001 By /s/ Thomas M. Lupinski Name: Thomas M. Lupinski Title: Senior Vice President, Chief Financial Officer, Secretary and Treasurer