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 September 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 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 registrant's Common Stock, $.10 par value,
outstanding on November 10, 1999 was 7,854,110 shares.
SWISS ARMY BRANDS, INC.
AND SUBSIDIARIES
INDEX
PART I: FINANCIAL INFORMATION Page No.
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
September 30, 1999 (unaudited) and
December 31, 1998. 3 - 4
Consolidated Statements of Operations
for the Three and Nine Months Ended
September 30, 1999 and 1998 (unaudited). 5
Consolidated Statements of Stockholders'
Equity for the Nine Months Ended
September 30, 1999 and 1998 (unaudited). 6
Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 1999
and 1998 (unaudited). 7
Notes to Consolidated Financial Statements 8 - 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 11 - 14
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 15
Part II: OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 16
Signatures 16
The Exhibit Index appears on page 16.
2
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
Assets
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $ - $1,309
Accounts receivable, less
allowance for doubtful accounts
of $975 for both periods 29,463 31,321
Inventories 38,643 28,890
Deferred income taxes 2,217 2,205
Prepaid and other 4,071 6,658
--------- ---------
Total current assets 74,394 70,383
--------- ---------
Deferred income taxes 1,355 1,069
Property, plant and equipment, net 4,853 3,735
Investments 4,479 9,467
Intangible assets, net 9,064 2,875
Other assets, net 13,557 12,875
--------- ---------
Total Assets $107,702 $100,404
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
3
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
Liabilities and Stockholders' Equity
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
Current liabilities:
Accounts payable $7,653 $5,140
Accrued liabilities 7,708 12,439
Line of credit 18,990 8,227
-------- --------
Total current liabilities 34,351 25,806
-------- --------
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 -
8,868,218 and 8,858,218, respectively 886 885
Additional paid-in capital 48,025 46,472
Accumulated other comprehensive income (loss) (449) 177
Retained earnings 33,743 35,456
--------- ---------
82,205 82,990
Less: Treasury stock; 1,014,108 and 950,108
shares, respectively (8,711) (8,194)
Deferred compensation (143) (198)
--------- ---------
Total stockholders' equity 73,351 74,598
--------- ---------
Total Liabilities and Stockholders' Equity $107,702 $100,404
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
4
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Net sales $33,026 $31,370 $86,992 $86,167
Cost of sales 20,228 18,680 53,255 52,605
--------- --------- --------- ---------
Gross profit 12,798 12,690 33,737 33,562
Selling, general and
administrative expenses 11,210 11,880 32,530 33,715
--------- --------- --------- ---------
Operating income (loss) 1,588 810 1,207 (153)
Interest income (expense), net (235) (4) (371) 112
Gain (loss) on investments - - (2,280) 1,500
--------- --------- --------- ---------
Total other income
(expense), net (235) (4) (2,651) 1,612
--------- --------- --------- ---------
Income (loss) before
income taxes 1,353 806 (1,444) 1,459
Income tax provision 587 341 269 605
--------- --------- --------- ---------
Net income (loss) $766 $465 ($1,713) $854
========= ========= ========= =========
Earnings per share:
Basic $0.10 $0.06 ($0.22) $0.10
===== ===== ======= =====
Diluted $0.10 $0.06 ($0.22) $0.10
===== ===== ======= =====
Weighted average number of
shares outstanding:
Basic 7,854 8,213 7,864 8,215
===== ===== ===== =====
Diluted 8,048 8,237 7,864 8,241
===== ===== ===== =====
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(in thousands, except for share data)
Accumulated
Common Stock Additional Other
Paid-In Comprehensive Retained Treasury Comprehensive
Shares Amount Capital Income (Loss) Earnings Stock Income (Loss)
------ ------ ---------- ------------- --------- ------- --------------
BALANCE
December 31, 1997 8,823,718 $882 $46,186 ($240) $33,993 ($5,113)
Comprehensive income:
Net income for
nine months ended
September 30, 1998 - - - - 854 - $854
Change in unrealized gain
on marketable securities - - - 303 - - 303
Foreign currency
translation adjustment - - - (165) - - (165)
-----
Comprehensive income $992
=====
Stock options exercised 9,500 - 70 - - -
Stock grant 25,000 3 216 - - -
Stock repurchase - - - - - (2,563)
----------- ------ --------- -------- -------- ---------
BALANCE, September
30, 1998 (unaudited) 8,858,218 $885 $46,472 ($102) $34,847 ($7,676)
=========== ====== ========= ======== ======== =========
BALANCE
December 31, 1998 8,858,218 $885 $46,472 $177 $35,456 ($8,194)
Comprehensive Loss:
Net loss for nine
months ended
September 30, 1999 - - - - (1,713) - ($1,713)
Foreign currency
translation adjustment - - - 155 - - 155
Change in unrealized
Gain in marketable
Securities - - - (781) - - (781)
--------
Comprehensive Loss ($2,339)
========
Acquisition of Bear MGC
Cutlery, Inc. - - 1,500 - - -
Stock options exercised 10,000 1 53 - - -
Stock repurchase - - - - - (517)
----------- ------ -------- --------- --------- --------
BALANCE
September 30, 1999
(unaudited) 8,868,218 $ 886 $48,025 ($449) $33,743 ($8,711)
=========== ====== ======== ========= ========= ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
6
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine months ended
September 30,
1999 1998
---- ----
Cash flows from operating activities:
Net income (loss) ($1,713) $ 854
Adjustments to reconcile net income (loss) to cash
provided from (used for) operating activities:
Depreciation and amortization 2,389 2,172
Stock compensation expense 55 3
Deferred income taxes (298) 26
(Gain) loss on sale of investments 2,280 (1,500)
-------- --------
2,713 1,555
Changes in other current assets and liabilities:
Accounts receivable 3,099 (257)
Inventories (8,147) (1,253)
Prepaid and other 2,651 (446)
Accounts payable (5,184) 1,296
Accrued liabilities (556) 692
-------- --------
Net cash provided from (used for) operating
activities (5,424) 1,587
Cash flows from investing activities:
Acquisition of Bear MGC Cutlery, Inc., net of
cash acquired (7,976) -
Capital expenditures (1,190) (1,115)
Other assets (2,031) (1,917)
Proceeds from sale of investment 1,972 1,613
-------- --------
Net cash (used for) investing activities (9,225) (1,419)
-------- --------
Cash flows from financing activities:
Borrowings under the line of credit agreement 47,580 9,044
Repayments under line of credit agreement (33,730) (7,214)
Repurchase of common stock (517) (2,563)
Proceeds from exercise of stock options 54 70
-------- --------
Net cash provided from (used for)
financing activities 13,387 (663)
-------- --------
Effect of exchange rate changes on cash (47) 33
-------- --------
Net decrease in cash and cash equivalents (1,309) (462)
Cash and cash equivalents, beginning of period 1,309 1,078
-------- --------
Cash and cash equivalents, end of period $ - $ 616
======== ========
Cash paid during the period:
Interest $ 330 $ 32
======== ========
Income taxes $ 425 $1,062
======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
7
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 and 1998
(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 footnote 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 financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998. 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.
ACQUISITION
- -----------
On April 16, 1999, Swiss Army and Bear Cutlery, Inc., a Delaware
corporation and a wholly- owned subsidiary of Swiss Army (collectively, the
"Buyer") entered into an Asset Purchase Agreement (the "Agreement") with Bear
MGC Cutlery, Inc. ("Bear MGC") and the stockholders (the "Shareholders") of Bear
MGC, pursuant to which the Buyer acquired substantially all of the assets and
assumed certain of the liabilities of Bear MGC. In consideration for the
acquisition of the assets, the Buyer paid Bear MGC $6,970,000 in cash and repaid
debt of $298,000 upon execution of the Agreement. In further consideration of
the acquired assets, on each of April 16, 2000, 2001 and 2002, the Company shall
transfer to Bear MGC 52,868 shares of the Swiss Army's common stock, valued at
$500,000 (based on the average daily closing price of the Common Stock during
the 30 trading days prior to April 16, 1999). The total value of these shares of
Common Stock is included in additional paid-in capital as of September 30, 1999.
Pursuant to the Agreement, Swiss Army may also pay up to an additional
$2,500,000 in either cash or a combination of cash and shares as determined in
accordance with the Agreement, if Bear MGC attains certain earnings targets for
the year ending December 31, 1999.
8
The purchase method of accounting was used to account for the acquisition.
The aggregate purchase price has been allocated to the assets and liabilities of
Bear MGC based on preliminary estimates of fair market value. The purchase price
allocation does not include the potential additional consideration to be paid to
Bear MGC if Bear MGC attains certain earnings targets for the year ending
December 31, 1999. Any adjustments resulting from the final purchase price
allocation, which could result in changes to the carrying values of assets and
liabilities, including goodwill, are not expected to be material to the
consolidated financial statements. The purchase price has resulted in acquired
goodwill and other intangible assets of approximately $6.4 million, which is
being amortized on a straight-line basis over 20 years. The following is a
summary of the preliminary allocation (in thousands):
Cash...................................... $ 16
Accounts receivable....................... 1,215
Inventory................................. 1,496
Other current assets...................... 13
Plant and equipment....................... 1,025
Intangible assets and goodwill............ 6,421
Accrued expenses and other liabilities.... (396)
Debt...................................... (298)
---------
$9,492
=========
INVESTMENTS
- -----------
Investments consist of the following:
September 30,1999 December 31, 1998
----------------- -----------------
(in thousands)
Preferred units of Hudson
River Capital LLC (A) $3,613 $6,313
Preferred units of
Victory Ventures LLC (B) 851 851
------ ------
Total investments in
preferred units $4,464 $7,164
Common stock of Iron Mountain
Incorporated (C) - $2,273
Common stock of Chaparral
Resources, Inc. (D) 15 30
------- -------
Total investments in common
stock $ 15 $2,303
------- -------
Total investments $4,479 $9,467
======= =======
(A) Hudson River Capital LLC, ("Hudson River") is a private equity firm
specializing in middle market acquisitions, re-capitalization and expansion
capital investments. In the quarter ended June 30, 1999, the Company recorded a
$2.7 million non-cash write-down of its investment in Hudson River due to the
permanent impairment of the value of the investment. The Company accounts for
this investment on the cost basis, subject to review for permanent impairment.
Since this investment does not have a readily determinable fair value, the
valuation is subject to uncertainty.
(B) Victory Ventures LLC is a private equity firm specializing in small venture
capital investments.
(C) Iron Mountain, Inc., a publicly traded company, is a full service provider
of records management and related services. The Company sold its common stock
investment in Iron Mountain, Inc. in January 1999 and recognized a gain of
approximately $420,000.
9
(D) Chapparal Resources, Inc. ("Chapparal"), a publicly traded company, is an
independent oil and gas exploration and production company. At September 30,
1999, the Company owned 1,461 shares (adjusted for a reverse stock split of one
share in exchange for sixty) of Chapparal common stock valued at $10.25 per
share. The Company accounts for this investment at fair value, with changes
between cost and fair value reflected as a component of stockholders' equity.
INCOME TAXES
- ------------
Income taxes are provided at the projected annual effective tax rate. The
income tax benefit for the nine months ended September 30, 1999 is lower than
the federal statutory rate of 34% as the Company has taken limited tax benefits
on the capital loss write-down of the Hudson River investment. The income tax
provisions for the three month period ended September 30, 1999 and the 1998
periods exceed the federal statutory rate of 34% due primarily to state income
taxes (net of federal benefit).
EARNINGS PER SHARE
- ------------------
For the nine month period ended September 30, 1999, the weighted average
number of shares of common stock outstanding do not include the effect of stock
options as they would have an anti-dilutive effect.
LINE OF CREDIT
- --------------
On September 30, 1998, the Company amended its line of credit agreement,
which among other things, extended the maturity of the agreement to June 29,
1999. The agreement stated that the Company can borrow up to $10,000,000 for
working capital purposes at one of three interest rate options available; (i)
LIBOR plus 1.1%; (ii) Base Rate, as defined; or (iii) Cost of Funds rate, as
defined. The line of credit was unsecured and contains certain financial
covenants including, but not limited to, minimum tangible net worth, interest
rate coverage, current ratio, and the continuation of the exclusive
distributorship arrangement with Victorinox Cutlery Company. This agreement was
amended, which among other things, extended the maturity date of the agreement
to November 1999, raised the available borrowings to $23.0 million, changed the
LIBOR rate option from LIBOR plus 1.0% to LIBOR plus 1.75% and the line of
credit became secured by certain assets of the Company. The Company is currently
in the process of finalizing a new bank agreement with its current lender which,
among other things, will extend the maturity of the debt and will add a term
loan element to the line of credit. As of September 30, 1999, the Company had
$19.0 million outstanding under the line of credit and is in compliance with the
covenants contained in the agreement.
10
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(unaudited)
FORWARD LOOKING STATEMENTS
--------------------------
The following discussion contains, in addition, to historical information,
forward looking statements. The forward looking statements were prepared on the
basis of certain assumptions which relate, among other things, to the demand for
and cost of purchasing and marketing the Company's products; the prices at which
such products may be sold; new product development; seasonal selling trends; the
Swiss franc- U.S. dollar exchange rates; the extent to which the Company is able
to successfully hedge against foreign currency fluctuations; the impact of the
year 2000 issue on the Company's financial position or results of operations and
the Company's anticipated credit needs and ability to obtain such credit. Even
if the assumptions upon which the projections are based prove accurate and
appropriate, the actual results of the Company's operations in the future may
vary widely from financial projections due to increased competition, changes in
consumer tastes and other factors not yet known or anticipated. Accordingly, the
actual results of the Company's operations in the future may vary widely from
the forward-looking statements included herein.
RESULTS OF OPERATIONS
---------------------
Comparison of the Three Months Ended September 30, 1999 and 1998
- ----------------------------------------------------------------
Sales for the three months ended September 30, 1999 were $33.0 million
compared with $31.4 million for the same period in 1998, an increase of $1.7
million or 5.3%. Sales comparisons were impacted by special promotional programs
with one customer which accounted for approximately 10.2% and 8.6% of sales in
the three months ended September 30, 1999 and 1998, respectively. Excluding
sales related to these special promotional programs, sales increased by $1.0
million or 3.4% in the three months ended September 30,1999 compared with the
comparable period in 1998. The sales increase was primarily due to $1.6 million
in sales related to Bear Cutlery Inc. ("Bear"), and an increase in watch sales
and professional cutlery sales offset in part by a decrease in sales of
Victorinox Original Swiss Army Knife sales.
Gross profit of $12.8 million for the three months ended September 30, 1999
increased $0.1 million or 0.9% from 1998. The gross profit margin percentage for
the third quarter of 1999 of 38.8% was lower than the gross profit margin
percentage of 40.4% for the same period in 1998 primarily due to unfavorable
product mix offset in part by the increase in the value of the U.S. dollar
versus the Swiss franc. The Company's gross profit margin is a function of both
product mix and Swiss franc exchange rates. Since the Company imports the
majority 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 appropriately hedged through the third
quarter of 2000. 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, it is uncertain as to what extent to which
such hedging transactions will reduce the effect of adverse currency
fluctuations.
11
Selling, general and administrative expenses for the three months ended
September 30, 1999 of $11.2 million were $0.7 million or 5.6% lower than the
amount for the comparable period in 1998. The decrease was primarily due to
decreased expenses for advertising and promotion related to Swiss Army Brand
Sunglasses, offset in part by the operating expenses of Bear. As a percentage of
net sales, total selling general and administrative expenses decreased to 33.9%
in 1999 from 37.9% in 1998.
Interest income (expense) and other, net was expense of $235,000 for the
three months ended September 30, 1999, compared with $4,000 for the comparable
period in 1998 primarily due to increased borrowings related to the acquisition
of Bear MGC Cutlery, Inc.
As a result of these changes, income (loss) before income taxes for the
three months ended September 30, 1999 was income of $1,353,000 versus income of
$806,000 for the same period in 1998, an improvement of $547,000.
Income tax expense (benefit) was provided at an effective rate of 43.4% and
42.3% in 1999 and 1998, respectively.
As a result, net income for the three months ended September 30, 1999 was
$766,000 ($0.10 per share, basic and diluted) versus $465,000 ($0.06 per share,
basic and diluted) for the same period in 1998, an improvement of $301,000.
Comparison of the Nine Months Ended September 30, 1999 and 1998
- ---------------------------------------------------------------
Sales for the nine months ended September 30, 1998 were $87.0 million
compared with $86.2 million for the same period in 1998, an increase of $0.8
million or 1.0%. The sales increase was primarily due to $3.0 million in sales
related to Bear, and an increase in watch sales offset in part by a decrease in
sales of Victorinox Original Swiss Army Knife sales.
Gross profit of $33.7 million for the nine months ended September 30, 1998
increased $0.2 million or 0.5% from 1998. The gross profit margin percentage for
the nine months ended September 30, 1999 of 38.8% was lower than the gross
profit margin percentage of 38.9% for the same period in 1998. The gross profit
percentage decrease was primarily due to unfavorable product mix offset in part
by an increase in the value of the U.S. dollar versus the Swiss franc.
Selling, general and administrative expenses for the nine months ended
September 30, 1999 of $32.5 million were $1.2 million or 3.5% lower than the
amount for the comparable period in 1998. The decrease was primarily due to
decreased expenses for advertising and promotion related to Swiss Army Brand
Sunglasses offset in part by the operating expenses of Bear. As a percentage of
net sales, total selling general and administrative expenses decreased to 37.4%
in 1999 from 39.1% in 1998.
Interest income (expense) and other, net was expense of $371,000 for the
nine months ended September 30, 1999 compared with income of $112,000 in the
comparable period in 1998 due primarily to increased borrowings related to the
acquisition of Bear MGC Cutlery, Inc.
Gain (loss) on of investments was a loss of $2.3 million in 1999 versus a
gain of $1.5 million in 1998. In 1999, the Company recorded a $420,000 gain on
the sale of its common stock investment in Iron Mountain, Inc. and recorded a
$2.7 million write-down of its investment in Hudson River. In 1998, the Company
recorded a $1.5 million gain due to a cash and stock distribution from the
Company's investment in Hudson River Capital LLC.
12
As a result of these changes, income (loss) before income taxes for the
nine months ended September 30, 1999 was a loss of $1,444,000 versus income of
$1,459,000 for the same period in 1998 a change of $2,903,000.
Income tax expense (benefit) was an expense of $269,000 on a loss before
taxes of $1,444,000 as the Company has taken limited tax benefits on the capital
loss write-down of the Hudson River investment.
As a result, net income (loss) for the nine months ended September 30, 1999
was a loss of $1,713,000 ($0.22 per share, basic and diluted) versus income of
$854,000 ($0.10 per share) for the same period in 1998, a change of $2,567,000.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
As of September 30, 1999, the Company had working capital of $40.0 million
compared with $44.6 million as of December 31, 1998, a decrease of $4.6 million.
Significant uses of working capital included the acquisition of Bear MGC
Cutlery, Inc., capital expenditures of $1.2 million, additions to other assets
of $2.0 million and repurchases of the Company's common stock of $0.5 million. A
significant source of working capital included proceeds of $2.0 million from the
sale of its common stock investment of Iron Mountain, Inc. The Company currently
has no material commitments for capital expenditures.
Cash used in operating activities was approximately $5.4 million in the
nine months ended September 30, 1999 compared with cash provided from operating
activities of $1.6 million in the comparable period in 1998. The change resulted
from a larger increase in inventory in 1999 compared to 1998, a decrease in
accounts payable in 1999 versus an increase in 1998, offset in part by a larger
decrease in accounts receivable in 1999 compared to 1998.
The Company meets its short-term liquidity needs with cash generated from
operations, and, when necessary, bank borrowings under its bank agreement. As of
September 30, 1999, the Company had $18,890,000 of outstanding borrowings under
its bank agreement. The Company currently has a $23.0 million line of credit
agreement which expires in November 1999. The Company is currently finalizing a
long-term revolving and term loan credit agreement with its current lender and
fully expects to have it in place by November 30, 1999. The Company's short-term
liquidity is affected by seasonal changes in sales and inventory levels. The
Company believes its current liquidity levels and financial resources continue
to be sufficient to meet its operating needs.
Year 2000
- ---------
The Company has completed its review of its computer systems and operations
to identify those areas that could be affected by the "Year 2000" issue and has
developed an implementation plan to minimize disruption.
13
The Company has completed the assessment phase of its internal information
computer systems. Based upon that assessment, certain computer systems were
vulnerable to the Year 2000 issues. As a result of that assessment, the Company
made certain modifications to existing software and hardware, and invested in
new software and hardware. As a result of those actions, which have been
completed, the Company believes all the Year 2000 issues as it relates to its
own computer systems have been solved and will not pose significant operational
concerns. The costs associated with the Year 2000 compliance for the Company's
computer systems primarily included costs to upgrade non-compliant computer
systems. The majority of these costs were incurred in the normal course of
business as the Company has continually upgraded their hardware and software to
keep pace with technological advances. The costs of the Year 2000 initiative as
it relates to its own internal systems was less than $100,000, and as discussed
above, have been completed.
The Company is working with its significant suppliers and service providers
to ensure that those parties have appropriate plans to manage the Year 2000
issue as it relates to the Company's operations. The Company has communicated
with its significant suppliers and service providers and based upon those
communications believes that the Year 2000 problem will not affect the Company
as it relates to its significant suppliers or service providers.
While the Company believes its planning efforts are adequate to address its
Year 2000 concerns, there can be no assurance that the systems of other
companies on which the Company's systems and operations rely on will be
converted on a timely basis and will not have a material adverse effect on the
Company. However, based on the progress the Company has made on its internal
initiative and the information available from third parties, the Company has not
identified a need to develop an extensive contingency plan for non-compliance
issues at this time. The need for such plan is evaluated on an ongoing basis as
part of the Company's overall Year 2000 initiative.
14
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
- ---------------------
The Company is exposed to market risk from changes in foreign exchange
rates as the Company imports the majority of 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 deferred and recognized in
cost of sales when the related inventory is sold. At September 30, 1999, the
Company has entered into foreign currency contracts and options to purchase
approximately 59,500,000 Swiss francs in 1999 and 2000 at a weighted average
rate $1.486 Swiss franc/dollar. At September 30, 1999, the unrealized loss on
these contracts and options was approximately $0.4 million. 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.
15
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.
(27) Financial Data Schedule
B) There were no reports or exhibits on Form 8-K filed for the three months
ended September 30, 1999.
Signatures:
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: November 12, 1999
By /s/ Thomas M. Lupinski
Name: Thomas M. Lupinski
Title: Senior Vice President &
Chief Financial Officer, Secretary
and Treasurer
16