UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 September 30, 2011March 31, 2012
OR
¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period fromto
Commission File Number 1-5354
Swank, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 04-1886990 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) | |
90 Park Avenue New York, NY | 10016 | |
(Address of principal executive offices) | (Zip code) |
(212) 867-2600
(Registrant’s telephone number, including area code)
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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Item 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
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 | |
Common Stock, $.10 par value |
SWANK, INC.
Page No. | ||||||||||
Item 1. | 3 – 9 | |||||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 9 – 14 | ||||||||
Item 3. | 14 | |||||||||
Item 4. | 14 | |||||||||
Item 2. | 15 | |||||||||
Item 6. | 15 | |||||||||
16 | ||||||||||
17 |
2
SWANK, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands except share and per share data)
September 30, 2011 | December 31, 2010 | March 31, 2012 | December 31, 2011 | |||||||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Current: | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 251 | $ | 3,235 | $ | 371 | $ | 287 | ||||||||||||||||
Accounts receivable, less allowances of $7,384 and $7,798, respectively | 22,768 | 20,214 | ||||||||||||||||||||||
Accounts receivable, less allowances of $4,840 and $6,637, respectively | 19,196 | 23,275 | ||||||||||||||||||||||
Inventories, net: | ||||||||||||||||||||||||
Work in process | 1,190 | 773 | 931 | 930 | ||||||||||||||||||||
Finished goods | 33,601 | 21,848 | 26,034 | 24,084 | ||||||||||||||||||||
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34,791 | 22,621 | 26,965 | 25,014 | |||||||||||||||||||||
Deferred taxes, current | 2,713 | 2,713 | 2,101 | 2,101 | ||||||||||||||||||||
Prepaid expenses and other current assets | 1,417 | 1,150 | 1,920 | 1,185 | ||||||||||||||||||||
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Total current assets | 61,940 | 49,933 | 50,553 | 51,862 | ||||||||||||||||||||
Property, plant and equipment, net of accumulated depreciation | 1,011 | 1,132 | 914 | 975 | ||||||||||||||||||||
Deferred taxes, noncurrent | 2,118 | 2,118 | 2,258 | 2,258 | ||||||||||||||||||||
Other assets | 2,562 | 2,905 | 2,467 | 2,547 | ||||||||||||||||||||
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Total assets | $ | 67,631 | $ | 56,088 | $ | 56,192 | $ | 57,642 | ||||||||||||||||
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LIABILITIES | ||||||||||||||||||||||||
Current: | ||||||||||||||||||||||||
Note payable to bank | $ | 16,895 | $ | 5,287 | $ | 4,118 | $ | 669 | ||||||||||||||||
Current portion of long-term obligations | 703 | 711 | 1,967 | 1,967 | ||||||||||||||||||||
Accounts payable | 3,210 | 4,151 | 3,398 | 4,253 | ||||||||||||||||||||
Accrued employee compensation | 1,077 | 1,748 | 799 | 2,564 | ||||||||||||||||||||
Accrued royalties | 1,064 | 1,583 | 725 | 1,263 | ||||||||||||||||||||
Income taxes payable | 163 | 761 | 148 | 772 | ||||||||||||||||||||
Other current liabilities | 1,429 | 1,572 | 1,135 | 1,448 | ||||||||||||||||||||
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Total current liabilities | 24,541 | 15,813 | 12,290 | 12,936 | ||||||||||||||||||||
Long-term obligations | 6,780 | 6,584 | 5,422 | 5,330 | ||||||||||||||||||||
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Total liabilities | 31,321 | 22,397 | 17,712 | 18,266 | ||||||||||||||||||||
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STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
Preferred stock, par value $1.00: | ||||||||||||||||||||||||
Authorized – 1,000,000 shares | — | — | ||||||||||||||||||||||
Authorized - 300,000 shares | — | — | ||||||||||||||||||||||
Common stock, par value $.10: | ||||||||||||||||||||||||
Authorized - 43,000,000 shares | ||||||||||||||||||||||||
Issued — 6,429,095 shares | 642 | 642 | ||||||||||||||||||||||
Authorized - 43,000,000 shares Issued - 6,429,095 shares | 642 | 642 | ||||||||||||||||||||||
Capital in excess of par value | 2,795 | 2,605 | 2,900 | 2,858 | ||||||||||||||||||||
Retained earnings | 35,929 | 33,430 | 38,449 | 39,368 | ||||||||||||||||||||
Accumulated other comprehensive (loss), net of tax | (696 | ) | (696 | ) | (907 | ) | (907 | ) | ||||||||||||||||
Treasury stock, at cost, 820,856 and 800,350 shares, respectively | (2,360 | ) | (2,290 | ) | ||||||||||||||||||||
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Treasury stock, at cost, 879,502 and 874,843 shares, respectively | (2,604 | ) | (2,585 | ) | ||||||||||||||||||||
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Total stockholders’ equity | 36,310 | 33,691 | 38,480 | 39,376 | ||||||||||||||||||||
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Total liabilities and stockholders’ equity | $ | 67,631 | $ | 56,088 | $ | 56,192 | $ | 57,642 | ||||||||||||||||
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The accompanying notes are an integral part of the condensed financial statements.
3
SWANK, INC.
CONDENSED STATEMENTS OF INCOMEOPERATIONS (UNAUDITED)
FOR THE QUARTERSTHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2012 AND 2011 AND 2010
(Dollars in thousands except share and per share data)
2011 | 2010 | |||||||||||||||
2012 | 2011 | |||||||||||||||
Net sales | $ | 33,415 | $ | 32,595 | $ | 28,408 | $ | 26,084 | ||||||||
Cost of goods sold | 22,929 | 22,367 | 20,528 | 17,855 | ||||||||||||
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Gross profit | 7,880 | 8,229 | ||||||||||||||
Selling and administrative expenses | 8,390 | 8,153 | ||||||||||||||
Transaction costs | 935 | — | ||||||||||||||
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Gross profit | 10,486 | 10,228 | ||||||||||||||
Total selling and administrative expenses | 9,325 | 8,153 | ||||||||||||||
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Selling and administrative expenses | 8,594 | 8,238 | ||||||||||||||
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Income from operations | 1,892 | 1,990 | ||||||||||||||
(Loss) income from operations | (1,445 | ) | 76 | |||||||||||||
Interest expense | 107 | 119 | 37 | 42 | ||||||||||||
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(Loss) income from operations before income taxes | (1,482 | ) | 34 | |||||||||||||
(Benefit) provision for income taxes | (563 | ) | 2 | |||||||||||||
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Income before income taxes | 1,785 | 1,871 | ||||||||||||||
Income tax provision | 767 | 742 | ||||||||||||||
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Net income | $ | 1,018 | $ | 1,129 | ||||||||||||
Net (loss) income | $ | (919 | ) | $ | 32 | |||||||||||
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Share and per share information: | ||||||||||||||||
Basic and diluted net income per weighted average common share outstanding | $ | .18 | $ | .20 | ||||||||||||
Basic and diluted weighted average common shares outstanding | 5,608,239 | 5,673,910 | ||||||||||||||
Weighted average common shares outstanding – basic and diluted | 5,549,593 | 5,623,511 | ||||||||||||||
Basic and diluted net (loss) income per common share | $ | (.17 | ) | $ | .01 | |||||||||||
Comprehensive (loss) income | $ | (919 | ) | $ | 32 |
The accompanying notes are an integral part of the condensed financial statements.
4
SWANK, INC.
CONDENSED STATEMENTS OF INCOMECASH FLOWS (UNAUDITED)
FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2012 AND 2011 AND 2010
(Dollars in thousands except share and per share data)thousands)
2011 | 2010 | |||||||
Net sales | $ | 91,661 | $ | 87,670 | ||||
Cost of goods sold | 61,971 | 60,541 | ||||||
Costs associated with Style 365 termination | — | 1,492 | ||||||
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Total cost of sales | 61,971 | 62,033 | ||||||
Gross profit | 29,690 | 25,637 | ||||||
Selling and administrative expenses | 25,281 | 25,048 | ||||||
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Income from operations | 4,409 | 589 | ||||||
Interest expense | 210 | 288 | ||||||
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Income before income taxes | 4,199 | 301 | ||||||
Income tax provision (benefit) | 1,700 | (310 | ) | |||||
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Net income | $ | 2,499 | $ | 611 | ||||
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Share and per share information: | ||||||||
Basic and diluted net income per weighted average common share outstanding | $ | .45 | $ | .11 | ||||
Basic and diluted weighted average common shares outstanding | 5,615,486 | 5,673,003 |
2012 | 2011 | |||||||
Cash flows from operating activities: | ||||||||
Net (loss) income | $ | (919 | ) | $ | 32 | |||
Adjustments to reconcile net (loss) income to net cash (used in) operations: | ||||||||
Depreciation and amortization | 95 | 94 | ||||||
Provision (recoveries) for bad debts | 2 | (126 | ) | |||||
Stock-based compensation expense | 42 | 63 | ||||||
Proceeds from life insurance, net of benefits paid | 154 | — | ||||||
Changes in assets and liabilities: | ||||||||
Decrease in accounts receivable | 4,077 | 3,382 | ||||||
(Increase) in inventories | (1,951 | ) | (2,036 | ) | ||||
(Increase) in prepaid and other assets | (763 | ) | (374 | ) | ||||
(Decrease) in accounts payable | (855 | ) | (976 | ) | ||||
(Decrease) in accrued royalties | (538 | ) | (621 | ) | ||||
(Decrease) in all other current liabilities | (2,702 | ) | (1,918 | ) | ||||
Increase in long-term obligations | 92 | 99 | ||||||
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Net cash (used in) operations | (3,266 | ) | (2,381 | ) | ||||
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Cash flows from investing activities: | ||||||||
Capital expenditures | (27 | ) | (21 | ) | ||||
Premiums on life insurance | (53 | ) | (20 | ) | ||||
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Net cash (used in) investing activities | (80 | ) | (41 | ) | ||||
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Cash flows from financing activities: | ||||||||
Borrowing under revolving credit agreements | 10,036 | 11,316 | ||||||
Payments of revolving credit obligations | (6,587 | ) | (11,774 | ) | ||||
Treasury stock repurchased | (19 | ) | (16 | ) | ||||
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Net cash provided by (used in) financing activities | 3,430 | (474 | ) | |||||
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Net increase (decrease) in cash and cash equivalents | 84 | (2,896 | ) | |||||
Cash and cash equivalents at beginning of period | 287 | 3,235 | ||||||
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Cash and cash equivalents at end of period | $ | 371 | $ | 339 | ||||
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Cash paid during the three months for: | ||||||||
Interest | $ | 37 | $ | 42 | ||||
Taxes | $ | 831 | $ | 958 |
The accompanying notes are an integral part of the condensed financial statements.
5
SWANK, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Dollars in thousands)
2011 | 2010 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 2,499 | $ | 611 | ||||
Adjustments to reconcile net income to net cash (used in) operating activities: | ||||||||
Depreciation and amortization | 277 | 254 | ||||||
Bad debt (recoveries) expense | (80 | ) | 306 | |||||
Stock-based compensation expense | 190 | 190 | ||||||
Proceeds from life insurance, net of benefits paid | 203 | 390 | ||||||
Changes in assets and liabilities | ||||||||
(Increase) in accounts receivable | (2,474 | ) | (4,898 | ) | ||||
(Increase) in inventory | (12,170 | ) | (4,534 | ) | ||||
(Increase) in prepaid and other assets | (84 | ) | (19 | ) | ||||
(Decrease) in accounts payable | (941 | ) | (5,410 | ) | ||||
(Decrease) increase in accrued royalties | (519 | ) | 176 | |||||
(Decrease) in all other current liabilities | (1,420 | ) | (1,046 | ) | ||||
Increase in long-term obligations | 248 | 508 | ||||||
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Net cash (used in) operating activities | (14,271 | ) | (13,472 | ) | ||||
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Cash flows from investing activities: | ||||||||
Capital expenditures | (136 | ) | (435 | ) | ||||
Premiums on life insurance | (115 | ) | (116 | ) | ||||
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Net cash (used in) investing activities | (251 | ) | (551 | ) | ||||
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Cash flows from financing activities: | ||||||||
Borrowing under revolving credit agreement | 63,566 | 68,099 | ||||||
Payments of revolving credit agreement | (51,958 | ) | (54,355 | ) | ||||
Treasury stock repurchased | (70 | ) | (9 | ) | ||||
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Net cash provided by financing activities | 11,538 | 13,735 | ||||||
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Net (decrease) in cash and cash equivalents | (2,984 | ) | (288 | ) | ||||
Cash and cash equivalents at beginning of period | 3,235 | 571 | ||||||
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Cash and cash equivalents at end of period | $ | 251 | $ | 283 | ||||
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Cash paid during the nine months for: | ||||||||
Interest | $ | 210 | $ | 288 | ||||
Income taxes | $ | 2,723 | $ | 1,350 | ||||
Non-cash transactions during the period: | ||||||||
Issuance of common stock in lieu of cash compensation | $ | — | $ | 30 |
The accompanying notes are an integral part of the condensed financial statements.
6
SWANK, INC.
Notes to Condensed Financial Statements (Unaudited)
(1) | Basis of |
(2) | Net |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Numerator: | ||||||||||||||||
Net income | $ | 1,018 | $ | 1,129 | $ | 2,499 | $ | 611 | ||||||||
Denominator: | ||||||||||||||||
Shares used in computing basic net income per weighted average common share outstanding | 5,608,239 | 5,673,910 | 5,615,486 | 5,673,003 | ||||||||||||
Effect of dilutive securities | — | — | — | — | ||||||||||||
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Shares used in computing net income per weighted average common share outstanding assuming dilution | 5,608,239 | 5,673,910 | 5,615,486 | 5,673,003 | ||||||||||||
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Basic and fully diluted net income per weighted average common share outstanding | $ | .18 | $ | .20 | $ | .45 | $ | .11 |
Quarter Ended March 31, | ||||||||
2012 | 2011 | |||||||
Numerator: | ||||||||
Net (loss) income | $ | (919 | ) | $ | 32 | |||
Denominator: | ||||||||
Shares used in computing basic net (loss) income per weighted average common share outstanding | 5,549,593 | 5,623,511 | ||||||
Effect of dilutive options | — | — | ||||||
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Shares used in computing net (loss) income per weighted average common share outstanding assuming dilution | 5,549,593 | 5,623,511 | ||||||
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Basic and fully diluted net (loss) income per weighted average common share outstanding | $ | (.17 | ) | $ | .01 |
For the periods ended September 30, 2011As of March 31, 2012 and 2010,2011, options to purchase 375,000 shares were outstanding but not included in the weighted average common share calculation as the effect would have been anti-dilutive.
(3) | Segment Information.We presently have one reportable segment, men’s and women’s accessories, consisting of |
(4) | Stock Options |
During the first quarter of 2008, we granted options for the remaining 375,000 shares under the 1998 Plan to certain of our key executives. Of the 375,000 option shares, 260,000 shares were granted at an exercise price equal to the fair market price on the date of the grant of $5.05 per share. The remaining 115,000 shares, which were issued to participants owning greater than 10% of the Company’s outstanding voting stock, were issued at an exercise price of 110% of the fair market value at the date of the grant, or $5.56 per share. The options expire five years from the date of grant and vest 25% on each of the first four anniversary dates of the grant. The fair value of the option grant was estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility was estimated using the Company’s historical volatility, calculated on a trailing 39-month basis. The expected term of the options is four years, based on the simplified method of calculating expected life pursuant to ASC 718-10 (formerly SFAS 123(R) and Staff Accounting Standards Codification topicBulletin No. 107), “Compensation – Stock Compensation.” The risk-free rate of 2.73% is based upon the yield of a zero-coupon U.S. Treasury Note with a maturity date close to the expiration date of the expected term of the grant. ASC 718-10 “Stock Compensation” (“ASC 718-10”) requires the Company to reflect the benefits of tax deductions in excess of recognized compensation cost to be reported as both a financing cash inflow and an operating cash outflow. The Company has recognized no such tax benefits to date. The 1998 Plan expired by its terms in 2008, and no further awards may be granted. All options under the 1998 Plan have been granted and 375,000 shares remain outstanding.
There were no stock options exercised and the Company did not recognize any related tax benefits during the ninethree months ended September 30, 2011March 31, 2012 or 2010.2011. During each of the ninethree months ended September 30,March 31, 2012 and 2011, and 2010, we recognized $190,000$42,000 and $63,000, respectively, in compensation expense related to the 2008 grant. As of September 30,March 31, 2012, all compensation cost had been recognized and, as of March 31, 2011, and 2010, there was $106,000 and $359,000, respectively,$232,000 in total unrecognized compensation cost related to outstanding options granted after the adoption of ASC 718-10 that is expected to bewhich was recognized over the remaining vesting period of the grant.
7
Option activity under the stock-based compensation plans during the ninethree months ended September 30, 2011March 31, 2012 is summarized below:
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value (in | Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value (in thousands) * | |||||||||||||||||||||||||
Outstanding at December 31, 2010 | 375,000 | $ | 5.21 | 2.16 | $ | — | ||||||||||||||||||||||||||
Outstanding at December 31, 2011 | 375,000 | $ | 5.21 | 1.17 | $ | — | ||||||||||||||||||||||||||
Granted | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Exercised | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Forfeited/ Expired | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
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Outstanding at September 30, 2011 | 375,000 | $ | 5.21 | 1.42 | $ | — | ||||||||||||||||||||||||||
Outstanding at March 31, 2012 | 375,000 | $ | 5.21 | 0.92 | $ | 2,023 | ||||||||||||||||||||||||||
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Vested and Exercisable at September 30, 2011 | 281,250 | $ | 5.21 | 1.42 | $ | — | ||||||||||||||||||||||||||
Vested and Exercisable at March 31, 2012 | 375,000 | $ | 5.21 | 0.92 | $ | 2,023 |
* | The aggregate intrinsic value on this table was calculated based on the positive difference, if any, between the trading price of our common stock on |
The above table reflects the 375,000 option shares issued under the 1998 Plan.
During 2008, our stockholders approved the Swank, Inc. 2008 Stock Incentive Plan (the “2008 Plan”) to replace the 1998 Plan that had expired by its terms. The 2008 Plan permits our Board of Directors to grant a maximum of 1,000,000 shares to key employees through stock options, stock appreciation rights, restricted stock units, performance awards and other stock-based awards. DuringSince the nine months ended September 30, 2010,inception of the 2008 Plan, we have granted aggregate stock awards of 10,30643,716 shares (net of shares withheld in connection with income tax and other withholdings), respectively, to a certain key employeeemployees in lieu of cash bonus earnedbonuses. No shares were granted under this plan during fiscal 2009. We recorded the related compensation charge of $50,0002011 or during the fourthfirst quarter of 2009.2012.
(5) | Income Taxes |
During the nine-month period ended September 30, 2010, we recorded a state income tax benefit of $538,000 plus accrued interest income of $57,000 in connection with a tax refund received during the second quarter. The refund resulted from a state tax audit that led to the application of certain net operating loss carryforwards generated in previous years, to years during which the Company had taxable income.
(6) | Fair Value Measurements |
of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
8
Level 2: Inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
Our cash and cash equivalents consist of cash on deposit at various financial institutions at September 30, 2011March 31, 2012 and 2010.December 31, 2011. Included on the balance sheet in prepaid expenses and other current assets are securities available for sale, stated at fair market value, of approximately $11,000 at September 30, 2011March 31, 2012 and 2010.December 31, 2011.
(7) | Recent Accounting |
In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”. The amendments in this update defer certain provisions of ASU 2011-05, “Comprehensive Income (Topic 220). Presentation of Comprehensive Income” (“ASU 2011-05”), including the requirement to present reclassified adjustments separately with their respective components of net income and other comprehensive income. During the deferral period, the existing requirements for reclassification adjustments on the face of the financial statement in which comprehensive income is reported or disclosed in the notes to the financial statements remain applicable. The amendments in this accounting standard update are effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance did not have a material impact on our financial condition, results of operations or cash flow.
(8) | Eighth amendment to loan agreement. The Company’s revolving credit line is provided by Wells Fargo Capital Finance, Inc. (formerly Wells Fargo Foothill, Inc.) (“WFF”) under a $32,000,000 Loan and Security Agreement signed on June 30, 2004, as amended (the “2004 Loan Agreement”). On March 7, 2012, we entered into an Eighth Amendment (the “Eighth Amendment”) to the 2004 Loan Agreement. Among other things, the Eighth Amendment reduces the interest rate payable on advances under the Loan and Security Agreement that bear interest at the prime or LIBOR rate, revises collateral reporting requirements, defines certain circumstances under which the Company is not subject to certain of the cash management control requirements of the 2004 Loan Agreement, and extends the maturity date of the 2004 Loan Agreement from June 29, 2012 to June 30, 2013. The 2004 Loan Agreement is collateralized by substantially all of our assets, including accounts receivable, inventory, and machinery and equipment. The 2004 Loan Agreement contains a $5,000,000 sublimit for the issuance of letters of credit and also prohibits us from paying dividends, imposes limits on additional indebtedness for borrowed money, and contains minimum monthly earnings before interest, taxes, depreciation, and amortization requirements. The terms of the 2004 Loan Agreement permit us to borrow against a percentage of eligible accounts receivable and eligible inventory at an interest rate based on Wells Fargo Bank, N.A.’s prime lending rate plus .25% or at WFF’s LIBOR rate plus 2.00%. We also are required to pay a monthly unused line fee of .375% of the maximum revolving credit amount (except that for the period January 1 through June 30 of each year, the amount used in the calculation of the unused line fee is $25,000,000) less the average daily balance of loans and letters of credit outstanding during the immediately preceding month. |
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owned by stockholders who have properly demanded and not effectively withdrawn or lost appraisal rights in accordance with applicable law, will be converted into the right to receive $10.00 in cash, without interest and less any applicable withholding taxes. On April 19, 2012, we filed a Definitive Proxy Statement on Schedule 14A with the SEC relating to the proposed special meeting of our stockholders scheduled for May 17, 2012 to consider and vote on a proposal to adopt the Merger Agreement.
The consummation of the Merger is subject to certain conditions, including, without limitation, (i) the adoption of the Merger Agreement by the affirmative vote of a majority of the outstanding shares of Common Stock entitled to vote thereon; (ii) the holders of not more than 15% of the Common Stock outstanding have properly exercised (and not withdrawn) appraisal rights in accordance with applicable law; (iii) the termination of the Rights Agreement, dated as of November 11, 2009, between the Company and American Stock Transfer and Trust Company LLC; (iv) since the date of the Merger Agreement a Material Adverse Effect (as defined in the Merger Agreement) has not occurred; (v) certain schedules to the Merger Agreement have been updated by us; and (vi) the absence of any law or order prohibiting or otherwise making illegal the Merger, the transactions contemplated by the Merger Agreement, or the debt financing in connection with the Merger and any alternative financing in connection with the Merger. Moreover, each party’s obligation to consummate the Merger is subject to certain other conditions, including, without limitation, (a) the accuracy of the representations and warranties made by the other party to the Merger Agreement, subject to customary materiality qualifiers, and (b) the compliance by the other party with its obligations and pre-closing covenants thereunder, subject to customary materiality qualifiers.
If the Merger Agreement is terminated under specified circumstances, the Company may be required to pay Randa a termination fee of $2,000,000 (or, if the Merger Agreement is terminated by the Company in order to enter into a definitive agreement in connection with the “go shop” process, $1,720,000).
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are currently engaged in the importation, sale and distribution of men’s and women’s belts, and men’s leather accessories, suspenders, and men’s jewelry. Our products are sold both domestically and internationally under a broad assortment of brands including both licensed tradenames and private labels. We distribute our merchandise principally through department stores and through a wide variety of specialty stores and mass merchandisers. We also operate threeone factory outlet storesstore that distributedistributes excess and out of line merchandise as well as certain other accessories.
Our net sales during the quarter ended September 30, 2011March 31, 2012 increased 2.5%8.9% to $33,415,000$28,408,000 compared to $32,595,000$26,084,000 for the corresponding period in 2010, and for the nine-month period increased 4.6% to $91,661,000 compared to $87,670,000 for the corresponding period in 2010.2011. The increases during both the quarter and year to date periods were primarilyincrease was mainly due to higher shipmentsnet sales of our men’s personal leather goodsbelt merchandise, offset in part by a decreasedecreases in men’s belts. A more favorable returns adjustment also had a favorable effect on net sales in the year to date period relative to the corresponding period last year.personal leather goods and gifts. Gross profit forduring the quarter and nine-month periods ended September 30, 2011 increased 2.5% and 15.8%, respectively, in both casesof $7,880,000 decreased by $349,000 or 4.2% compared to the same periods last year.year’s gross profit of $8,229,000. Gross profit expressed as a percentage of net sales for the quarter was even at 31.4%, and for the nine-month period, rosedecreased to 32.4%27.7% from 29.2%, in each case as compared to the previous year.
The improvement in gross profit as a percentage of net sales during the nine-month period was mainly31.5% last year principally due to a reduction in product costs resulting from a better sales mix as well as a more favorable returns adjustment relative to last year. In addition, gross profit for the nine-month period last year was adversely affected by an expense included in cost of sales of $1,492,000 recorded during the first quarter of 2010 which was associated with the termination of our relationship
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with Style 365 (see Note 8 above). Selling and administrative expenses during the quarter increased $1,172,000 or 14.4% to $9,325,000 or 32.8% of net sales compared to $8,153,000 or 31.3% of net sales for the quarter ended September 30, 2011 increased $356,000, or 4.3%, and for the nine-monthsame period increased $233,000, or less than 1% compared to the respective periods last year. The increasesincrease was due to $934,000 in transaction-related costs recorded during the quarter in connection with the Merger (see Note 9 to the condensed financial statements above) as well as increases in freight on sales and district sales expenses, offset in part by decreases in insurance, professional fees not related to the nine-month periods were mainly due to compensation, freight costsMerger, and professional fees.life insurance proceeds.
Critical Accounting Policies and Estimates
We believe that the accounting policies discussed below are important to an understanding of our financial statements because they require management to exercise judgment and estimate the effects of uncertain matters in the preparation and reporting of financial results. Accordingly, management cautions that these policies and the judgments and estimates they involve are subject to revision and adjustment in the future.
Revenue Recognition
Net sales are generally recorded upon shipment, provided there exists persuasive evidence of an arrangement, the fee is fixed or determinable and collectability of the related receivable is reasonably assured. Allowances, including cash discounts, in-store customer allowances, cooperative advertising allowances and customer returns, which are all accounted for in accordance with ASC 605-15 (formerly Statement of Financial Accounting Standards No. 48), “Revenue Recognition When Right of Return Exists” and ASC 815-30 (formerly Emerging Issues Task Force Issue No. 01-09), “Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products”, are provided for at the time the revenue is recognized based upon historical experience, current trends in the retail industry and individual customer and product experience. Each spring upon the completion of processing returns from the preceding fall season, we record adjustments to net sales in the second quarter to reflect the difference between customer returns of prior year shipments actually received in the current year and the estimate used to establish the allowance for customer returns at the end of the preceding fiscal year.
Allowance for Doubtful Accounts
Our allowances for receivables include cash discounts, doubtful accounts, in-store markdowns, cooperative advertising and customer returns. Provisions for doubtful accounts are reflected in selling and administrative expenses. We perform ongoing credit evaluations of our customers and maintain allowances for potential bad debt losses. We do not typically require collateral from our customers. The allowance for customer returns results from the reversal of sales for estimated returns and associated costs. Allowances for in-store markdowns and cooperative advertising reflect the estimated costs of our share of certain promotions by our retail customers. Allowances for accounts receivable are generally at their seasonal highs on December 31. Reductions of allowances occur principally in the first and second quarters when the balances are adjusted to reflect actual charges as processed. Allowances for accounts receivable are estimates made by management based on historical experience, adjusted for current conditions, and may differ from actual results. The (recoveries) expenseprovisions for bad debts during the quartersthree months ended March 31, 2012 and nine-month periods ended September 30, 2011 were $2,000 and 2010 were $(133,000) and $121,000, respectively, and ($80,000) and $306,000,$(126,000), respectively.
Environmental Costs
In accordance with ASC 410-30 (formerly AICPA Statement of Position 96-1), “Environmental Remediation Liabilities”, environmental expenditures that relate to current operations are expensed or capitalized, as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. Generally, adjustments to these accruals coincide with the completion of a feasibility study or a commitment made by us to a formal plan of action or other appropriate benchmark.
Inventory and Reserves
Inventories are stated at the lower of cost (principally average cost which approximates FIFO) or market. Our inventory is somewhat fashion oriented and, as a result, is subject to risk of rapid obsolescence. We believe that our inventory has been adequately adjusted, where appropriate, and that we have adequate channels to dispose of excess and obsolete inventory.
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Income Taxes
We utilize the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Net deferred tax assets are recorded when it is more likely than
not that such tax benefits will be realized. When necessary, a valuation allowance is recorded to reflect the estimated realization of the deferred tax asset. We determine if a valuation allowance for deferred tax assets is required based upon projections of taxable income or loss for future tax years in which the temporary differences that created the deferred tax asset are anticipated to reverse and the likelihood that the deferred tax assets will be recovered.
Results of Operations
As is customary in the fashion accessories industry, we make modifications to our merchandise lines coinciding with our Spring (January - September)June) and Fall (July - December) selling seasons. We believe that the 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 for the third quarter are not necessarily indicative of the results to be expected for the full year.
Net Sales
NetOur net sales forduring the quarter ended September 30, 2011March 31, 2012 increased 2.5%$2,324,000 or 8.9% to $33,415,000$28,408,000 compared to $32,595,000 last year, and for the nine-month period increased 4.6% to $91,661,000 compared to $87,670,000$26,084,000 for the corresponding period in 2010.2011. The increases during both the quarter and nine-month period were primarilyincrease was due to higher shipmentsnet sales of our personal leather goodsbelt merchandise offset in part by a decrease in men’s belts. A more favorable returns adjustment (see below) also had a larger positive effect on net sales during the nine-month period relative to the corresponding period last year.
The increasereduction in personal leather goods and gift net sales. The increase in belt net sales during the quarter and nine-month periods was principallymainly due to higher shipments of licensed and private label goods to certain major department stores and other retailers as well as increases in our luxury business. Belt net sales declined during both the quarter and nine-month periods due to a reduction in orders receivedstore accounts in connection with various brandedboth new and existing merchandise programs primarily from certain chain store accounts. Theprograms. For personal leather goods, a decrease in belt net sales during the nine-month periodshipments to certain “labels for less” customers was also due to club store sales recorded during last year’s second quarter which were only partially offset in part by increases at other accounts.to department store customers.
Net sales to international customers (including certain military accounts) increased $804,000decreased $157,000 or 36.8% and $1,160,000 or 16.6%6.5% during the quarter and nine-months ended September 30, 2011, respectively, compareddue mostly to the same periods last year. The increase during both periods was due to higherreduced shipments of certain branded personal leather goods and belt net salesmerchandise collections to certain licensor affiliates.
Included in net sales for the nine months ended September 30, 2011retail stores and 2010, 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. This adjustment increased net sales by $2,223,000 for the nine-month period ended September 30, 2011, compared to an increase of $782,000 for the comparable period in 2010. The favorable adjustments result from actual returns experience during both the spring 2011 and spring 2010 seasons being lower than anticipated compared to the reserves established at December 31, 2010 and December 31, 2009. These reserves are in consideration of shipments made during the preceding holiday selling seasons. The reserve established at December 31, 2010 was substantially larger than in previous years due to relatively heavy shipments of more volatile seasonal merchandise collections. During our fall 2010 season, we made significant shipments to certain wholesale club accounts and shipped an unusually large holiday gift program to a major customer which is customarily subject to season-end stock adjustments. Returns experience overall during the spring 2011 season was much better than expected leading to a larger returns adjustment relative to the prior year.other licensor-affiliates.
Gross profit
Gross profit forduring the quarter ended September 30, 2011 increased $258,000of $7,880,000 decreased by $349,000 or 2.5% and, for the nine-month period, increased $4,053,000 or 15.8%,4.2% compared to the corresponding prior year periods.last year’s $8,229,000. Gross profit expressed as a percentage of net sales for the quarter was even at 31.4%, and for the nine-month period was 32.4% compareddecreased to 29.2% for the prior27.7% from 31.5% last year.
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The improvementdecrease in gross profit as a percentage of net sales during the nine-month periodthis year was due mainly due to higher net sales, a reduction in product costsmerchandise markup resulting in part from a moreless favorable sales mix a decrease in inventory control costs (including inventory shortages and markdowns), and a more favorable returns adjustment relative to last year. In addition, gross profit for the nine-month period last year, was adversely affected by an expense included in cost of sales of $1,492,000 recorded during the first quarter of 2010 which was associated with the termination of our relationship with Style 365 (see Note 8 above).
Included in gross profit for the nine months ended September 30, 2011increased product and 2010, are annual second quarter adjustments to record the variance between customer returns of prior year shipments actually received in the current yeardisplay costs and the allowance for customer returns which was established at the end of the preceding fiscal year. The adjustment to net sales recorded in the second quarter described above resulted in a favorable adjustment to gross profit of $1,203,000 and $547,000 for the nine-month periods ended September 30, 2011 and September 30, 2010, respectively. As discussed above, customer returns were lower than anticipated during both the spring 2011 and spring 2010 seasons due mainly to better retail performance than was assumed in the development of the reserves. The reserve at December 31, 2010 reflected a significant increase in our more volatile seasonal businesses during the fall 2010 season, including shipments to certain wholesale club stores, coupled with an unusually large holiday gift program. These programs are routinely associated with end of season stock adjustments which can be substantial depending on retail performance during the holiday selling period.higher royalty expense.
Selling and Administrative Expenses
Selling and administrative expenses during the quarter increased $1,172,000 or 14.4% to $9,325,000 or 32.8% of net sales at March 31, 2012 from $8,153,000 or 31.3% of net sales at March 31, 2011.
Selling expenses during the current quarter increased $206,000 or 3.3% to $6,456,000 compared to $6,250,000 for the quarter ended September 30,March 31, 2011, increased $356,000, or 4.3%, and, for the nine-month period, increased $233,000, or less than 1%, in each case compared to the respective periods last year. Selling and administrative expenses expressed as a percentage of net sales, were 25.7% and 25.3% for the quarters ended September 30, 2011 and 2010 respectively, and 27.6% and 28.6% for the nine months ended September 30, 2011 and 2010, respectively.
Selling expenses for the quarter increased $192,000 or 3.0%22.7% this year compared to last year and, as a percentage of net sales, was 19.8% which was approximately even with last year. For the nine-month period ended September 30, 2011, selling expenses increased $206,000 or 1.1% and as a percentage of net sales decreased to 21.2% compared to 21.9% for the same period24.0% last year. The increasesincrease in both periods weredollars was due mainly to higher freight costs and increases in variable sales-related costs, partially offset by decreases in warehouse and distribution and merchandising costs offset in part by reductions in sales administration and promotional costs. For the nine-month period, selling expenses were also impacted by the elimination of Style 365-related expenses. As discussed in Note 8 above, we terminated our relationship with Style 365 during the quarter ended March 31, 2010.
We routinely make expenditures for advertising and promotion as necessary to maintain and enhance both our business.licensed and private label businesses. Certain of our license agreements also require specified levels of spending. These expenditures, which consist primarily of media and print advertising, image fund contributions and other promotional costs, are included in selling and administrative expenses as incurred. In addition, we frequently make expenditures in connection with cooperative advertising programs, which are recorded as a reduction to net sales, to support various marketing initiatives sponsored by our customers. Expenditures for advertising and promotion, including cooperative advertising, totaled $1,212,000$957,000 or 3.7%3.4% of net sales for the quarter ended March 31, 2012, compared to $1,205,000$964,000 or 3.7% percent of net sales for the quarterssame quarter in fiscal 2011.
Administrative expenses increased $966,000 or 50.7% during the quarter ended September 30, 2011 and 2010, respectively. Advertising and promotion expenses, including cooperative advertising, for the nine months ended September 30, 2011 were $3,237,000 or 3.6% of net salesMarch 31, 2012 to $2,869,000 compared to $3,502,000 or 4.0% of net sales for the corresponding period last year.
For the quarter and nine months ended September 30, 2011, administrative expenses increased $164,000 or 9.1% and $27,000 or less than 1.0%, respectively, compared to the same periods$1,903,000 last year. Administrative expenses expressed as a percentage of net sales were 5.9%10.1% and 5.6%7.3% for the quarters ended September 30,
March 31, 2012 and 2011, and 2010, respectively, and 6.4% and 6.7% for the nine months ended September 30, 2011 and 2010, respectively. The increasesincrease was due mainly to legal and other professional fees totaling $935,000 incurred in administrative expenses for bothconnection with the quarter and nine-month periods were primarily dueMerger (see Note 9 to higher compensation costs and professional feesthe condensed financial statements) offset in part by reductionsdecreases in insurance costsexpense, routine professional fees not related to the Merger, and an increase in net bad debt recoveries.life insurance proceeds.
Interest Expense
Net interestInterest expense fordecreased by $5,000 or 11.9% during the quarter and nine-month periods ended September 30, 2011 decreased by $12,000 or 10.1% and $78,000 or 27.1%, respectively,March 31, 2012 compared to the same periods in 2010.corresponding period last year. The decrease during both the quarter and nine-month periods was due to lowera reduction in average borrowings. Average outstanding revolver borrowings declined 13.6% during the
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quarter and fell 41.0% during the nine-month period, in each case as compared to last year. Average borrowings under our revolving credit facilityagreement during the first nine months of 2011 were lower thanquarter fell $494,000 or 30.5% compared to the prior year mainlysame period last year. The decrease in average borrowings was due to higher net income as well as an increase in cash collections offset in part by an increase in inventory investment during the first quarter, of 2011 resulting from higher net sales during the fourth quarter of 2010,in each case relative to the corresponding period last year’s corresponding periods.year.
Income Taxes
We recorded an income tax provisionbenefit for the quarter and nine month periods ended September 30, 2011March 31, 2012 of $767,000 and $1,700,000,$(563,000) reflecting an effective tax rate of 43.0% and 40.5%, respectively.38.0%. We recorded an income tax provision for the quarter ended September 30, 2010March 31, 2011 of $742,000 and$2,000 reflecting an incomeeffective tax benefitrate of $310,000 for5.3%. State tax refunds of $12,000 recorded during last year’s first quarter reduced the nine-month period ended September 30, 2010. Included in the incomeeffective tax benefit for the nine-month period ended September 30, 2010 is a benefit of $538,000 associated with a state income tax refund resulting from a state tax audit in connection with the reallocation of certain net operating loss carryforwards generated in prior years to years during which the Company had taxable income.rate by 34.1 percentage points. As of September 30, 2011,March 31, 2012, there have been no material changes to our uncertain tax positions as disclosed anddisclosure as provided in Note D to the financial statements included in our 20102011 Form 10-K. We do not anticipate that our unrecognized tax benefits will significantly change during the next 12 months.
Liquidity and Capital Resources
Transactions Relating to the Merger
Randa anticipates that the total amount of funds necessary to complete the Merger will be approximately $71,700,000. The merger consideration, as well as payments to employees of the Company in consideration of the cancellation of their options to purchase shares of Common Stock, and of the termination of their termination or “golden parachute” agreements, will be paid in cash and Randa intends to satisfy these obligations from available cash resources and proceeds from a new $65,000,000 senior secured first lien revolving credit facility (the “Debt Financing”).
Randa has obtained the Debt Financing commitment described below (the “Debt Financing Commitment”) in connection with the Merger. In addition, Randa, Intermediate Sub and Merger Sub have agreed in the Merger Agreement to maintain a consolidated tangible net worth through March 30, 2012 of not less than $40,000,000, including cash balances and cash equivalents reasonably acceptable to us of not less than $10,000,000, and have further agreed to maintain a consolidated tangible net worth of not less than $50,000,000, including cash balances and cash equivalents of not less than $20,000,000 commencing on March 31, 2012 until the earlier of (a) the effective time of the Merger, (b) the termination of the Merger Agreement under any provision of the Merger Agreement other than a provision that requires a reverse termination fee or (c) two business days after a date the Merger Agreement is terminated, although Randa, Intermediate Sub and Merger Sub will be required to maintain a consolidated tangible net worth of $15,000,000, of which at least $2,500,000 shall be in cash or cash equivalents, for the period beginning on the day immediately after this two business day period and continuing until the earliest of the day on which (i) Randa pays the full reverse termination fee of $5,000,000 to us, (ii) Randa, Intermediate Sub or Merger Sub pays to us an amount less than the full reverse termination fee if a court of law or equity in an action brought under the provisions of the Merger Agreement has finally determined that a lesser amount is due or if such parties mutually agree to a lesser amount, or (iii) a court of law or equity in an action brought under the provisions of the merger agreement has finally determined that none of Randa, Intermediate Sub or Merger Sub owe all or any portion of the reverse termination fee. Based on the financial information previously provided to us, Randa was in compliance with the consolidated net worth requirements of the Merger Agreement as of March 31, 2012.
The Debt Financing is subject to certain conditions, including conditions that do not relate directly to the Merger Agreement. Randa and we believe the amounts committed under the Debt Financing Commitment together with Randa’s anticipated cash balances and cash equivalents will be sufficient to complete the transactions contemplated by the Merger Agreement, but we cannot be assured that the full amount of the Debt Financing will be available or that the committed financing and anticipated cash balances and cash equivalents will be sufficient to complete the transactions contemplated by the Merger Agreement. For example, the amounts committed might be insufficient if, among other things, one or more of the parties to the Debt Financing Commitment fails to fund the committed amounts in breach of the Debt Financing Commitment, if the conditions to the commitments to fund the amounts set forth in the Debt Financing Commitment are not
met, if Randa, Intermediate Sub and Merger Sub breach their tangible net worth covenant, or, even if they are in compliance with their tangible net worth covenant, their collective cash balances and cash equivalents, when taken together with funds from anticipated financing sources, are not sufficient to consummate the merger. The failure of Randa, Intermediate Sub and Merger Sub to obtain any portion of the committed Debt Financing and/or have available to them at the closing of the Merger sufficient cash balances and cash equivalents may result in the failure of the merger to be consummated.
If all or any portion of the Debt Financing becomes unavailable in accordance with the terms of the Debt Financing Commitment, then Randa must promptly notify the Company and Randa, Intermediate Sub and Merger Sub are required to use their respective reasonable best efforts to obtain any unavailable portion of any Debt Financing from alternative sources as promptly as practicable, but in any event on or before June 17, 2012, on terms that would not reasonably be expected to prevent, materially delay or materially impair the ability of Randa, Intermediate Sub or Merger Sub to consummate the transactions contemplated by the Merger Agreement on or before June 17, 2012.
If Randa, Intermediate Sub and Merger Sub fail to obtain sufficient financing and/or to maintain sufficient cash balances and cash equivalents, then, under certain circumstances, they will be required to pay a reverse termination fee to us in the amount of $5,000,000.
General
As is customary in the fashion accessories industry, substantial percentages of our sales and earnings occur in the months of September, October and November, when we make significant shipments of our products to retailers for sale during the holiday season. As a result, accounts receivable peak in the fourth quarter. We build inventory during the year to meet the demand for the holiday season. The required cash is provided by a revolving credit facility.
Our working capital increased by $3,279,000decreased $663,000 during the nine-month periodquarter ended September 20, 2011March 31, 2012 compared to an increase of $1,762,000 during$295,000 for the nine-month periodquarter ended September 30, 2010.March 31, 2011. The increase during both yearsdecrease this year was mostlymainly due to higher netreductions in accounts receivable and increases in bank borrowings, which were offset in part by increases in inventory balancesand prepaid and other current assets and decreases in accounts payable, and accrued employee compensation, offset in part by an increase in outstanding revolver borrowings, net of cash balances. The increase in inventory balances during both periods was generally due to seasonal purchases in anticipation of fourth quarter shipments, and for 2011, additional purchases associated with a number of new merchandise programs scheduled for shipment to customers during the fall season. As discussed above, average bank borrowings were lower during the first nine months of 2011 relative to the prior year due mostly to higher cash collections during the first quarter resulting from increased net sales during 2010’s fourth quarter, offset in part by an increase in inventory purchases particularly during the third quarter this year compared to the same time last year.other current liabilities.
Cash used in operations during the nine monthsquarter ended September 30, 2011 totaled $14,271,000March 31, 2012 was $3,266,000 compared to cash used of $2,381,000 for the quarter ended March 31, 2011. Cash used in operations during the corresponding periodfirst quarter of this year and last year of $13,472,000. Cash was used in both years for seasonal increases in net accounts receivable and inventories andprimarily reflect decreases in accounts payable and other current liabilities offsetas well as net accounts receivable, and increases in part by net income as adjusted for depreciation, amortization,inventory, and stock-based compensation charges.prepaid and other current assets.
Cash used in investing activities was $251,000$80,000 and $41,000 for the nine-month periodquarters ended September 30,March 31, 2012 and March 31, 2011, compared to cash used of $551,000 for the nine-month period ended September 30, 2010.respectively. Cash was used in investing activities during both years forreflects capital expenditures and premiums on corporate-ownedcertain life insurance contracts.contracts owned by us.
Cash provided by financing activities duringfor the first nine months of 2011quarter ended March 31, 2012 was $11,538,000$3,430,000 compared to cash providedused in financing activities of $13,735,000 for same time last year.$474,000 during the quarter ended March 31, 2011. Cash provided by financing activities in both yearsthe first quarter of this year primarily reflects net borrowings under our revolving credit facility.agreement. Cash used in financing activities in the first quarter of last year primarily reflects net payments under our revolving credit agreement.
Working capital financing is provided primarily by cash flows from operating activities and a $32,000,000 Loan and Security Agreement signed on June 30, 2004, as amended (the “2004 Loan Agreement”) with Wells Fargo Capital Finance, Inc. (formerly Wells Fargo Foothill, Inc.) (“WFF”). On March 7, 2012, we entered into an Eighth Amendment (the “Eighth Amendment”) to the 2004 Loan Agreement. Among other things, the Eighth Amendment reduces the interest rate payable on advances under the Loan and Security Agreement that bear interest at the prime or LIBOR rate, revises collateral reporting requirements, defines certain circumstances under which the Company is not subject to certain of the cash management control requirements of the 2004 Loan Agreement, and extends the maturity date of the 2004 Loan Agreement from June 29, 2012 to June 30, 2013.
The 2004 Loan Agreement is collateralized by substantially all of our assets, including accounts receivable, inventory, and machinery and equipment. The 2004 Loan Agreement contains a $5,000,000 sublimit for the issuance of letters of credit and also prohibits us from paying dividends, imposes limits on additional indebtedness for borrowed money, and contains minimum monthly earnings before interest, taxes, depreciation, and amortization requirements. The terms of the 2004 Loan Agreement permit us to borrow against a percentage of eligible accounts receivable and eligible inventory at an interest rate
based on Wells Fargo Bank, N.A.’s prime lending rate plus .25% or at WFF’s LIBOR rate plus 2.00%. We also are required to pay a monthly unused line fee of .375% of the maximum revolving credit amount (except that for the period January 1 through June 30 of each year, the amount used in the calculation of the unused line fee is $25,000,000) less the average daily balance of loans and letters of credit outstanding during the immediately preceding month. As of March 31, 2012, we were in compliance with all covenants contained within the 2004 Loan Agreement.
In the ordinary course of business, we may be contingently liable from time to time for performance under letters of credit. At September 30,March 31, 2012 and 2011, and 2010, there were no outstanding letters of credit. We presently are required to pay a fee quarterly equal to 2.00% per annum on outstanding letters of credit.
We are also a party to employment agreements with certain of our executive officers that provide for the payment of compensation and other benefits during the term of each executive’s employment and, under certain circumstances, for a period of time following their termination. Please see the information set forth in Item 11 of our fiscal 20102011 Form 10-K under the caption “Executive Compensation – Employment Contracts and Severance Agreements.” These agreements should be read in conjunction with the Merger Agreement.
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We are subject to legal proceedings and claims that arise in the ordinary course of our business. Although there can be no assurance as to the disposition of these proceedings, we do not anticipate that these matters will have a material impact on our results of operations or financial condition.
“Forward Looking Statements”
Certain of the preceding paragraphs contain “forward looking statements” which are based upon current expectations and involve certain risks and uncertainties. Under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, readers should note that these statements may be impacted by, and the Company’s actual performance may vary as a result of, a number of known and unknown risks and uncertainties that could cause actual results, performance or achievements to differ materially from those described or implied in the forward-looking statements, including, but not limited to, general economic and business conditions, competition in the accessories markets; potential changes in customer spending; acceptance of our product offerings and designs; the level of inventories maintained by our customers; the variability of consumer spending resulting from changes in domestic economic activity; a highly promotional retail environment; any significant variations between actual amounts and the amounts estimated for those matters identified as our critical accounting estimates as well as other significant accounting estimates made in the preparation of our financial statements; and the impact of the hostilities in the Middle East and the possibility of hostilities in other geographic areas as well as other geopolitical concerns. Accordingly, actual results may differ materially from such forward-looking statements.
You are urged to consider all such factors. In light of the uncertainty inherent in such forward-looking statements, you should not consider their inclusion to be a representation that such forward-looking matters will be achieved. Any forward-looking statements relating to the proposed transaction with Randa Accessories Leather Goods LLC, a Delaware limited liability company (“Randa”), discussed in this Form 10-Q are based on our current expectations, assumptions, estimates and projections and involve significant risks and uncertainties, including the many variables that may impact or are related to consummation of the transaction and the continuing determination of our board of directors that the transaction is in the best interests of all stockholders. We assume no obligation for updating any such forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4. Controls and Procedures
At the end of the period covered by this report, we carried out an evaluation, with the participation of our management including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective. There was no change in our internal control over financial reporting during the quarter ended September 30, 2011March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) | Not applicable. |
(b) | Not applicable. |
(c) | Issuer Purchases of Equity Securities. |
The following table provides certain information as to repurchases of shares of our Common Stock during the three months ended September 30, 2011:March 31, 2012:
Period | (a) Total Number of Shares (or Units) Purchased (1) | (b) Average Price Paid per Share (or Unit) | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
July 1, 2011 – July 31, 2011 | 6,377 | $ | 4.16 | — | — | |||||||||||
August 1, 2011 - August 31, 2011 | — | — | — | — | ||||||||||||
September 1, 2011 - September 30, 2011 | — | — | — | — | ||||||||||||
Total | 6,377 | $ | 4.16 | — | — |
Period | (a) Total Number of Shares (or Units) Purchased (1) | (b) Average Price Paid per Share (or Unit) | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
January 1, 2012 – January 31, 2012 | 4,659 | $ | 4.16 | — | — | |||||||||||
February 1, 2012 - February 29, 2012 | — | — | — | — | ||||||||||||
March 1, 2012 - March 31, 2012 | — | — | — | — | ||||||||||||
Total | 4,659 | $ | 4.16 | — | — |
(1) | These shares of Common Stock were repurchased by us from former employees pursuant to terms of The New Swank, Inc. Retirement Plan |
Exhibit | Description | |
31.01 | Rule 13a-14(a) Certification of John Tulin, Chief Executive Officer of the Company. | |
31.02 | Rule 13a-14(a) Certification of Jerold R. Kassner, Executive Vice President and Chief Financial Officer of the Company. | |
32.01 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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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 | ||
Date: May 15, 2012 | /s/ Jerold R. Kassner | |
Jerold R. Kassner, | ||
Executive Vice President, | ||
Chief Financial Officer and Treasurer |
Date: November 14, 2011
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Exhibit | Description | |
31.01 | Rule 13a-14(a) Certification of John Tulin, Chief Executive Officer of the Company. | |
31.02 | Rule 13a-14(a) Certification of Jerold R. Kassner, Executive Vice President and Chief Financial Officer of the Company. | |
32.01 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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