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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

June 30, 2011 For the quarterly period ended June 30, 2011

OR

 

¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from            to            

Commission File Number 1-5354

 

 

Swank, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		04-1886990
(State or other jurisdiction 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 July 31, 2011
Common Stock, $.10 par value		5,614,616

 

 

 

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SWANK, INC.

INDEX

 

				Page No.
Part I. Financial Information
Item 1.		Condensed Financial Statements and Related Notes			3 – 9
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			9 –14
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			14
Item 4.		Controls and Procedures			14
Part II. Other Information
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			15
Item 6.		Exhibits			15
Signatures					16
Exhibit Index					17

 

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Part I. Financial Information

Item 1. Financial Statements

SWANK, INC.

CONDENSED BALANCE SHEETS

(Dollars in thousands except share data)

 

		June 30, 2011								December 31, 2010
		(Unaudited)
ASSETS
Current:
Cash and cash equivalents						$	370							$	3,235
Accounts receivable, less allowances of $5,531 and $7,798, respectively							15,893								20,214
Inventories, net:
Work in process			1,032								773
Finished goods			27,189								21,848
							28,221								22,621
Deferred taxes, current							2,713								2,713
Prepaid expenses and other current assets							1,316								1,150
Total current assets							48,513								49,933
Property, plant and equipment, net of accumulated depreciation							1,037								1,132
Deferred taxes, noncurrent							2,118								2,118
Other assets							2,799								2,905
Total assets						$	54,467							$	56,088
LIABILITIES
Current:
Note payable to bank						$	171							$	5,287
Current portion of long-term obligations							703								711
Accounts payable							7,616								4,151
Accrued employee compensation							914								1,748
Accrued royalties							1,033								1,583
Income taxes payable							763								761
Other current liabilities							1,230								1,572
Total current liabilities							12,430								15,813
Long-term obligations							6,782								6,584
Total liabilities							19,212								22,397
STOCKHOLDERS’ EQUITY
Preferred stock, par value $1.00:
Authorized — 1,000,000 shares							—								—
Common stock, par value $.10:
Authorized — 43,000,000 shares
Issued — 6,429,095 shares							642								642
Capital in excess of par value							2,732								2,605
Retained earnings							34,911								33,430
Accumulated other comprehensive (loss), net of tax							(696	)							(696	)
Treasury stock, at cost, 814,479 and 800,350 shares, respectively							(2,334	)							(2,290	)
Total stockholders’ equity							35,255								33,691
Total liabilities and stockholders’ equity						$	54,467							$	56,088

The accompanying notes are an integral part of the condensed financial statements.

 

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SWANK, INC.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE QUARTERS ENDED JUNE 30, 2011 AND 2010

(Dollars in thousands except share and per share data)

 

 

 

		2011				2010
Net sales		$	32,162			$	29,420
Cost of goods sold			21,187				20,784
Gross profit			10,975				8,636
Selling and administrative expenses			8,534				8,460
Income from operations			2,441				176
Interest expense			61				107
Income before income taxes			2,380				69
Income tax provision			931				130
Net income (loss)		$	1,449			$	(61	)
Share and per share information:
Basic and diluted net income (loss) per weighted average common share outstanding		$	.26			$	(.01	)
Basic and diluted weighted average common shares outstanding			5,614,709				5,675,363

The accompanying notes are an integral part of the condensed financial statements.

 

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SWANK, INC.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(Dollars in thousands except share and per share data)

 

 

 

		2011				2010
Net sales		$	58,246			$	55,075
Cost of goods sold			39,042				38,174
Costs associated with Style 365 termination			—				1,492
Total cost of sales			39,042				39,666
Gross profit			19,204				15,409
Selling and administrative expenses			16,687				16,810
Income (loss) from operations			2,517				(1,401	)
Interest expense			103				169
Income (loss) before income taxes			2,414				(1,570	)
Income tax provision (benefit)			933				(1,052	)
Net income (loss)		$	1,481			$	(518	)
Share and per share information:
Basic and diluted net income (loss) per weighted average common share outstanding		$	.26			$	(.09	)
Basic and diluted weighted average common shares outstanding			5,619,110				5,672,549

The accompanying notes are an integral part of the condensed financial statements.

 

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SWANK, INC.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(Dollars in thousands)

 

 

 

		2011				2010
Cash flows from operating activities:
Net income (loss)		$	1,481			$	(518	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			185				176
Bad debt (recoveries) expense			(73	)			185
Stock-based compensation expense			127				127
Changes in assets and liabilities
Decrease (increase) in accounts receivable			4,394				(3,120	)
(Increase) decrease in inventory			(5,600	)			1,603
(Increase) in prepaid and other assets			(40	)			(610	)
Increase (decrease) in accounts payable			3,465				(4,287	)
(Decrease) in accrued royalties			(550	)			(65	)
(Decrease) in all other current liabilities			(1,182	)			(1,343	)
Increase in long-term obligations			198				220
Net cash provided by (used in) operating activities			2,405				(7,632	)
Cash flows from investing activities:
Capital expenditures			(75	)			(402	)
Premiums on life insurance			(35	)			(36	)
Net cash (used in) investing activities			(110	)			(438	)
Cash flows from financing activities:
Borrowing under revolving credit agreement			28,530				40,377
Payments of revolving credit agreement			(33,646	)			(32,063	)
Treasury stock repurchased			(44	)			(9	)
Net cash (used in) provided by financing activities			(5,160	)			8,305
Net (decrease) increase in cash and cash equivalents			(2,865	)			235
Cash and cash equivalents at beginning of period			3,235				571
Cash and cash equivalents at end of period		$	370			$	806
Cash paid during the six months for:
Interest		$	103			$	169
Income taxes		$	1,076			$	915
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.

 

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SWANK, INC.

Notes to Condensed Financial Statements (Unaudited)

 

(1)

Basis of Presentation. The unaudited information furnished herein reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary to present a fair statement of the results for the periods ended June 30, 2011 and 2010. The financial information contained herein represents condensed financial data and, therefore, does not include all footnote disclosures required to be included in financial statements prepared in conformity with generally accepted accounting principles. Footnote information was included in the financial statements included in the Company’s 2010 Annual Report on Form 10-K. The condensed financial data included herein should be read in conjunction with the information in the Annual Report. The results of operations for the six months ended June 30, 2011 may not be indicative of the results that may be expected for the year ended December 31, 2011 or any other period.

 

(2)	Net Income (Loss) per Share. The following table sets forth the computation of the net income (loss) per share for the periods ended June 30, 2011 and 2010 (in thousands, except for share and per share data):

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Numerator:
Net income (loss)		$	1,449			$	(61	)		$	1,481			$	(518	)
Denominators:
Shares used in computing basic net income (loss) per weighted average common share outstanding			5,614,709				5,675,363				5,619,110				5,672,549
Effect of dilutive securities			—				—				—				—
Shares used in computing net income (loss) per weighted average common share outstanding assuming dilution			5,614,709				5,675,363				5,619,110				5,672,549
Basic and fully diluted net income (loss) per weighted average common share outstanding		$	.26			$	(.01	)		$	.26			$	(.09	)

As of June 30, 2011 and 2010, options to purchase 375,000 shares and 376,667 shares, respectively, 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 men’s costume jewelry, belts and suspenders and personal leather goods.

 

(4)

Stock Options. In April 1998, our stockholders approved the Swank, Inc. 1998 Equity Incentive Compensation Plan (the “1998 Plan”) which replaced the Company’s prior incentive stock plans, all of which had expired by their terms. The 1998 Plan permitted 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. We granted options for 625,000 shares under the 1998 Plan in 2001. These shares vested immediately.

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. 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 either been exercised or expired by their respective terms.

There were no stock options exercised and the Company did not recognize any related tax benefits during the six months ended June 30, 2011 or 2010. During each of the six months ended June 30, 2011 and 2010, we recognized $127,000 in compensation expense related to the 2008 grant. As of June 30, 2011 and 2010, there was $169,000 and $422,000, respectively, in total unrecognized compensation cost related to outstanding options granted after the adoption of ASC 718-10 that is expected to be recognized over the remaining vesting period of the grant.

 

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Option activity under the stock-based compensation plans during the six months ended June 30, 2011 is summarized below:

 

		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			$	—
Granted			—				—				—				—
Exercised			—				—				—				—
Forfeited/ Expired			—				—				—				—
Outstanding at June 30, 2011			375,000			$	5.21				1.67			$	—
Vested and Exercisable at June 30, 2011			281,250			$	5.21				1.67			$	—

 

*

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 June 30, 2011 and the exercise price of the underlying options.

 

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. During the six months ended June 30, 2010, we granted aggregate stock awards of 10,306 shares (net of shares withheld in connection with income tax and other withholdings) to a certain key employee in lieu of cash bonus earned during fiscal 2009. We recorded the related compensation charge of $50,000 during the fourth quarter of 2009.

 

(5)

Income Taxes. We adopted the provisions of ASC 740-10 (formerly FIN 48), “Accounting for Uncertainty in Income Taxes – an interpretation of ASC 740 (formerly FASB Statement No. 109)” (“ASC 740-10”), on January 1, 2007. We performed a comprehensive review of our tax positions in accordance with recognition standards established by ASC 740-10. In this regard, an uncertain tax position represents our treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of our review, we do not believe that we have any “uncertain tax positions” in our federal income tax return or in any state income tax returns. With few exceptions, we are no longer subject to federal income tax examinations for years prior to 2003.

 

During the six-month period ended June 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. In September 2006, the FASB issued ASC 820-10-65 (formerly Statement of Financial Accounting Standards No. 157), “Fair Value Measurements and Disclosures”. ASC 820-10-65 defines fair value, provides guidance for measuring fair value and requires certain disclosures. This statement applies under other accounting pronouncements that require or permit fair value measurements. The statement indicates, among other things, that a fair value measurement assumes that a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. ASC 820-10-65 defines fair value based upon an exit price model. ASC 820-10-65 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value 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:

 

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•

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

•

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 June 30, 2011 and 2010. Included on the balance sheet in prepaid and other current assets are securities available for sale, stated at fair market value, of approximately $11,000 at June 30, 2011 and 2010.

 

(7)

Recent Accounting Pronouncements. In January 2010, the FASB issued an update regarding improving disclosures about fair value measurements. The update provides amendments requiring entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In addition the update requires entities to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). The disclosures related to Level 1 and Level 2 fair value measurements were effective for us in the first quarter of 2010 and the disclosures related to Level 3 fair value measurements were effective for us in the first quarter of 2011. This new accounting update did not have a material impact on our financial condition, results of operations or cash flows.

 

(8)

Termination of Style 365 Agreement. During 2009, the Company announced that it had entered into a strategic alliance with Style 365 LLC (“Style 365”), a marketer of women’s fashion belts and accessories. During the six months ended June 30, 2010, the Company decided to terminate that relationship. As a result, the Company recorded a pretax charge of $1,492,000 during the first quarter of 2010 in connection with certain inventory commitments made prior to the termination of its relationship with Style 365. The Company is licensed to manufacture, distribute and sell women’s fashion accessories under certain of its license agreements, and continues to manufacture and sell women’s fashion accessories directly to certain of its licensors.

 

(9)

Subsequent Events. The Company has evaluated all subsequent events through August 12, 2011, which represents the filing date of this Form 10-Q with the Securities and Exchange Commission, to ensure that this Form 10-Q includes appropriate disclosure of events both recognized in the financial statements as of June 30, 2011, and events which occurred subsequent to June 30, 2011 but were not recognized in the financial statements. As of August 12, 2011, there were no subsequent events which required recognition or disclosure.

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 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 three factory outlet stores that distribute excess and out of line merchandise as well as certain other accessories.

Our net sales during the quarter ended June 30, 2011 increased 9.3% to $32,162,000 compared to $29,420,000 for the corresponding period in 2010, and for the six-month period increased 5.8% to $58,246,000 compared to $55,075,000 for the corresponding period in 2010. The increase during the quarter was primarily due to higher shipments of our men’s jewelry and personal leather goods merchandise, offset in part by a decrease in men’s belts. For the year to date period, the increase was primarily attributable to an increase in personal leather goods shipments, offset partially by a decrease in belts. A more favorable returns adjustment also had a favorable effect on net sales in both periods relative to the corresponding periods last year. Gross profit for the quarter and six-month periods increased 27.1% and 24.6%, respectively, in both cases compared to the same periods last year. Gross profit expressed as a percentage of net sales for the quarter improved to 34.1% from 29.4% and, for the six-month period, rose to 33.0% from 28.0%, in each case as compared to the previous year.

The improvement in gross profit as a percentage of net sales during both periods was mainly 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 six-month period last year was adversely affected by an expense included in cost of sales of

 

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$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). Selling and administrative expenses for the quarter ended June 30, 2011 increased $74,000, or less than 1% but, for the six-month period, declined $123,000, or less than 1% compared to the respective periods last year. The increase during the quarter was mainly due to distribution, freight, and trade show expenses, offset in part by a decrease in professional fees. The decrease during the six-month period was due to a reduction in professional fees and selling expenses associated with our former Style 365 division.

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 provisions (recoveries) for bad debts during the quarters and six-month periods ended June 30, 2011 and 2010 were $53,000 and $87,000, respectively, and ($73,000) and $185,000, 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 - 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 second quarter are not necessarily indicative of the results to be expected for the full year.

Net Sales

Net sales for the quarter ended June 30, 2011 increased 9.3% to $32,162,000 compared to $29,420,000 last year, and for the six-month period increased 5.8% to $58,246,000 compared to $55,075,000 for the corresponding period in 2010. The increase during the quarter was primarily due to higher shipments of our men’s jewelry and personal leather goods merchandise, offset in part by a decrease in men’s belts. For the year to date period, the increase was due to higher personal leather goods shipments, offset partially by a decrease in belts. A more favorable returns adjustment (see below) also had a favorable effect on net sales in both periods relative to the corresponding periods last year.

The increase in jewelry net sales during the quarter was principally associated with higher shipments of certain licensed merchandise to our department and chain store accounts. Net sales of our personal leather goods collections increased due to higher shipments of licensed and private label goods to department stores as well as increases in our Tumi business. Export net sales of our personal leather goods declined mainly because of a shift in the timing of certain orders received from a licensor-affiliate. Increased belt shipments of our various licensed and private label merchandise to other customers during the quarter largely offset the loss of last year’s club store sales during the quarter.

Personal leather goods net sales rose during the six-months ended June 30, 2011 due to increases in certain licensed collections shipped to department store customers, as well as higher shipments to a number of other retailers including off-price and chain store accounts. Belt net sales declined during the six-month period due to decreases in our club store, off-price and luxury businesses. We made substantial shipments to a major wholesale club account during last year’s second quarter which were offset in part this year by shipments to our department and chain store customers.

Net sales to international customers (including certain military accounts) increased $259,000 or 10.2% and $366,000 or 7.5% during the quarter and six-months ended June 30, 2011, respectively, compared to the same periods last year. The increase during both periods was due to higher belt net sales to certain licensor affiliates.

Included in net sales for the quarter and six months ended June 30, 2011 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 three-month and six-month periods ended June 30, 2011, compared to an increase of $782,000 for the comparable periods in 2010. The favorable adjustments result from actual returns experience during both the spring 2011 and spring 2010 seasons being better 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.

 

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Gross profit

Gross profit for the quarter ended June 30, 2011 increased $2,339,000 or 27.1% and, for the six-month period, increased $3,795,000 or 24.6%, compared to the corresponding prior year periods. Gross profit expressed as a percentage of net sales for the quarter was 34.1% compared to 29.4% last year and, for the six-month period was 33.0% compared to 28.0% for the prior year.

The improvement in gross profit as a percentage of net sales during both periods was mainly due to a reduction in product costs resulting from a better 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 six-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 quarter and six months ended June 30, 2011 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. 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 quarter and six-month periods ended June 30, 2011 and June 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.

Selling and Administrative Expenses

Selling and administrative expenses for the quarter ended June 30, 2011 increased $74,000, or less than 1% but, for the six-month period, declined $123,000, 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 26.5% and 28.8% for the quarters ended June 30, 2011 and 2010 respectively, and 28.6% and 30.5% for the six months ended June 30, 2011 and 2010, respectively.

Selling expenses for the quarter increased $140,000 or 2.2% compared to last year and, as a percentage of net sales, decreased to 20.3% from 21.7%. For the six-month period ended June 30, 2011, selling expenses increased $14,000 or less than 1% and as a percentage of net sales decreased to 21.9% compared to 23.2% for the same period last year. The increases in both periods were due to higher warehouse and distribution costs as well as increases in certain district sales expenses including compensation and trade show costs, offset in part by a reduction in advertising and 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 our business. 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 $1,061,000 or 3.3% of net sales compared to $1,177,000 or 4.0% percent of net sales for the quarters ended June 30, 2011 and 2010, respectively. Advertising and promotion expenses, including cooperative advertising, for the six months ended June 30, 2011 were $2,025,000 or 3.5% of net sales compared to $2,297,000 or 4.2% of net sales for the corresponding period last year.

For the quarter and six months ended June 30, 2011, administrative expenses decreased $66,000 or 3.2% and $137,000 or 3.4%, respectively, compared to the same periods last year. Administrative expenses expressed as a percentage of net sales were 6.3% and 7.1% for the quarters ended June 30, 2011 and 2010, respectively, and 6.7% and 7.4% for the six months ended June 30, 2011 and 2010, respectively. The decrease in administrative expenses for both the quarter and six-month periods was primarily due to a reduction in professional fees.

 

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Interest Expense

Net interest expense for the quarter and six-month periods ended June 30, 2011 decreased by $46,000 or 43.0% and $66,000 or 39.1%, respectively, compared to the same periods in 2010. The decrease during both the quarter and six-month periods was due to lower average borrowings. Average outstanding revolver borrowings declined 60.9% during the quarter and fell 60.4% during the six-month period, in each case as compared to last year. Average borrowings under our revolving credit facility were lower than the prior year during the first half of 2011 mainly due to higher net income as well as an increase in cash collections during the first quarter of 2011 resulting from higher net sales during the fourth quarter of 2010, relative to last year’s corresponding periods.

Income Taxes

We recorded an income tax provision for the quarter and six month periods ended June 30, 2011 of $931,000 and $933,000, reflecting an effective tax rate of 39.1% and 38.6%, respectively. We recorded an income tax provision for the quarter ended June 30, 2010 of $130,000 and an income tax benefit of $1,052,000 for the six-month period ended June 30, 2010. Included in the income tax benefit for the six-month period ended June 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. As of June 30, 2011, there have been no material changes to our uncertain tax positions as disclosed and as provided in Note D to the financial statements included in our 2010 Form 10-K. We do not anticipate that our unrecognized tax benefits will significantly change during the next 12 months.

Liquidity and Capital Resources

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 $1,963,000 during the six-month period ended June 20, 2011 compared to a decrease of $136,000 during the six-month period ended June 30, 2010. The increase this year was mostly due to higher inventory balances and a reduction in outstanding revolver borrowings offset in part by a decrease in net accounts receivable and an increase in accounts payable. The decrease during the six-month period ended June 30, 2010 was due to a decrease in inventory balances and an increase in bank borrowings, offset in part by an increase in net accounts receivable and a reduction in accounts payable. The increase in inventory balances during the first half of 2011 was generally due to purchases associated with certain new merchandise programs scheduled for shipment to customers during the early fall season. As discussed above, bank borrowings were lower during the first half of 2011 relative to the prior year due to higher cash collections during the first quarter resulting from increased net sales during 2010’s fourth quarter, compared to the same periods last year.

Cash provided by operations during the six months ended June 30, 2011 totaled $2,405,000 compared to cash used during the corresponding period last year of $7,632,000. Cash was provided this year mainly by net income as adjusted for depreciation, amortization, and stock-based compensation charges as well as decreases in net accounts receivable, and increases in accounts payable offset in part by increases in inventory and decreases in other current liabilities. Cash was used last year by the net loss for the six-month period along with increases in net accounts receivable and decreases in accounts payable and other current liabilities and a decrease in inventory. The increase in inventory during the six months ended June 30, 2011 is due to purchases associated with anticipated shipments to certain customers during the early fall season. The reduction in accounts payable is due to collections on receivables generated by higher net sales during the fourth quarter of 2010, relative to the corresponding prior year periods.

Cash used in investing activities was $110,000 for the six-month period ended June 30, 2011 compared to cash used of $438,000 for the six-month period ended June 30, 2010. Cash was used in both years for capital expenditures and premiums on corporate-owned life insurance contracts.

Cash used in financing activities during the first six months of 2011 was $5,160,000 compared to cash provided of $8,305,000 for same time last year. Cash used this year reflects net repayments under our revolving credit facility while cash used in 2010 reflects net borrowings. The net repayment of bank borrowings during 2011 resulted primarily from higher accounts receivable collections and an increase in accounts payable relative to last year.

 

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In the ordinary course of business, we may be contingently liable from time to time for performance under letters of credit. At June 30, 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 2010 Form 10-K under the caption “Executive Compensation – Employment Contracts and Severance Agreements.”

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. 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 June 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

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 June 30, 2011:

 

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
April 1, 2011 – April 30, 2011			8,872			$	3.08				—				—
May 1, 2011 – May 31, 2011			—				—				—				—
June 1, 2011 – June 30, 2011			—				—				—				—
Total			8,872			$	3.08				—				—

 

(1)	These shares of Common Stock were repurchased by us from former employees pursuant to terms of The New Swank, Inc. Retirement Plan as required under the Internal Revenue Code of 1986, as amended.

Item 6. Exhibits

 

Exhibit Number		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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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: August 12, 2011

 

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EXHIBIT INDEX

 

Exhibit Number		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.
101. INS		XBRL Instance Document
101. SCH		Taxonomy Extension Schema Document
101. CAL		Taxonomy Extension Calculation Linkbase Document
101. LAB		Taxonomy Extension Label Linkbase Document
101. PRE		Taxonomy Extension Presentation Linkbase Document

 

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