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