UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2005
or
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-19254
LIFETIME BRANDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-2682486
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE MERRICK AVENUE, WESTBURY, NEW YORK, 11590
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(516) 683-6000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [_] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [_] No [X]
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 periods 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [_]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(check one):
Large accelerated filer [_] Accelerated filer [X] Non-accelerated filer [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b(2) of the Exchange Act).
Yes [_] No [X]
The aggregate market value of 7,592,539 shares of the voting stock held by
non-affiliates of the registrant as of June 30, 2005 was approximately
$148,282,287. Directors, executive officers, and trusts controlled by said
individuals are considered affiliates for the purpose of this calculation, and
should not necessarily be considered affiliates for any other purpose.
The number of shares of Common Stock, par value $.01 per share, outstanding as
of February 28, 2006 was 12,961,795.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the registrant's definitive proxy statement for the 2006 Annual Meeting
of Stockholders to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 are incorporated by reference in Part III of this Annual
Report.
LIFETIME BRANDS, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
1. Business.....................................................................................4
1A. Risk Factors................................................................................16
1B. Unresolved Staff Comments...................................................................25
2. Properties..................................................................................26
3. Legal Proceedings...........................................................................27
4. Submission of Matters to a Vote of Security Holders.........................................27
PART II
5. Market for the Registrant's Common Stock, Related Stockholder Matters and Issuer
Purchases of Equity Securities..............................................................28
6. Selected Financial Data.....................................................................29
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................................31
7A. Quantitative and Qualitative Disclosures about Market Risk..................................41
8. Financial Statements and Supplementary Data.................................................42
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................................................42
9A. Controls and Procedures.....................................................................43
9B. Other Information...........................................................................47
PART III
10. Directors and Executive Officers of the Registrant..........................................47
11. Executive Compensation......................................................................47
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.......................................................................47
13. Certain Relationships and Related Transactions..............................................47
14. Principal Accounting Fees and Services .....................................................47
PART IV
15. Exhibits and Financial Statement Schedules..................................................48
Signatures........................................................................................50
1
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains "forward-looking statements" as defined
by the Private Securities Litigation Reform Act of 1995. These forward-looking
statements include information concerning Lifetime Brands, Inc.'s (the
"Company's") plans, objectives, goals, strategies, future events, future
revenues, performance, capital expenditures, financing needs and other
information that is not historical information. Many of these statements appear,
in particular, under the headings "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business." When used in this
Annual Report on Form 10-K, the words "estimates," "expects," "anticipates,"
"projects," "plans," "intends," "believes" and variations of such words or
similar expressions are intended to identify forward-looking statements. All
forward-looking statements, including, without limitation, the Company's
examination of historical operating trends, are based upon the Company's current
expectations and various assumptions. The Company believes there is a reasonable
basis for its expectations and assumptions, but there can be no assurance that
the Company will realize its expectations or that the Company's assumptions will
prove correct.
There are a number of risks and uncertainties that could cause the Company's
actual results to differ materially from the forward-looking statements
contained in this Annual Report on Form 10-K. Important factors that could cause
the Company's actual results to differ materially from those expressed as
forward-looking statements are set forth in this Annual Report on Form 10-K,
including under the heading "Risk Factors." As described in this Annual Report
on Form 10-K, such risks, uncertainties and other important factors include,
among others:
o the Company's relationship with key customers;
o the Company's relationship with key licensors;
o the Company's dependence on foreign sources of supply and foreign
manufacturing;
o the level of competition in the Company's industry;
o changes in demand for the Company's products and the success of new
products;
o changes in general economic and business conditions which could affect
customer payment practices or consumer spending;
o industry trends;
o increases in costs relating to manufacturing and transportation of
products;
o the seasonal nature of the Company's business;
o departure of key personnel;
o the timing of orders received from customers;
o fluctuations in costs of raw materials;
o encroachments on the Company's intellectual property;
o product liability claims or product recalls;
o the increased size of the Company's direct-to-consumer retail business;
and
o future acquisitions and integration of acquired businesses.
There may be other factors that may cause the Company's actual results to differ
materially from the forward-looking statements. Except as may be required by
law, the Company undertakes no obligation to publicly update or revise
forward-looking statements which may be made to reflect events or circumstances
after the date made or to reflect the occurrence of unanticipated events.
2
OTHER INFORMATION
The Company is required to file its annual reports on Forms 10-K and quarterly
reports on Forms 10-Q, and other reports and documents as required from time to
time with the United States Securities and Exchange Commission (the "SEC"). The
public may read and copy any materials that the Company files with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
Information may be obtained with respect to the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an
Internet site that contains reports, proxy and information statements, and other
information regarding the Company's electronic filings with the SEC at
http://www.sec.gov. The Company also maintains a website at
http://www.lifetimebrands.com where users can access the Company's electronic
filings free of charge.
3
PART I
ITEM 1. BUSINESS
OVERVIEW
The Company is a leading designer, developer and marketer of a broad range of
nationally branded consumer products used in the home. The Company markets its
products under some of the most well-respected and widely-recognized brand names
in the U.S. housewares industry including three of the four most recognized
brands in the "Kitchen Tool, Cutlery and Gadgets" product category according to
the HFN Brand Survey for 2005. The Company primarily targets moderate to premium
price points through every major level of trade and generally markets several
lines within each of its product categories, often under more than one brand. At
the heart of the Company is a strong culture of innovation and new product
development. The Company developed or redesigned over 700 products in 2005 and
expects to develop or redesign approximately 1,400 products in 2006. The Company
has been sourcing its products in Asia for over 40 years and currently sources
its products from approximately 137 suppliers located primarily in China. In
June 2005, the Company changed its name from Lifetime Hoan Corporation to
Lifetime Brands, Inc. to better reflect the Company's business.
The Company's five main product categories are: (1) Kitchenware (which includes
kitchen tools and gadgets, barbecue accessories and functional glassware), (2)
Tabletop (which includes dinnerware, crystal, flatware, glassware, serveware,
tabletop accessories and barware), (3) Cutlery and Cutting Boards, (4) Bakeware
(which includes bakeware and fondues) and (5) Pantryware and Spices (which
includes pantryware, spices and spice racks). The Company's principal brands and
their respective product categories include:
Pfaltzgraff(R) Tabletop, Bakeware, Pantryware and Spices
KitchenAid(R) Kitchenware, Cutlery and Cutting Boards, Bakeware
Farberware(R) Kitchenware, Cutlery and Cutting Boards, Tabletop, Bakeware
Cuisinart(R) Cutlery and Cutting Boards
Sabatier(R) Cutlery and Cutting Boards, Bakeware, Tabletop
Calvin Klein(R) Tabletop
Hoffritz(R) Cutlery and Cutting Boards, Kitchenware, Tabletop, Bakeware
The Company also sells and markets its products under the following brands and
trademarks which are owned or licensed: Atlantis (Tabletop), Baker's
Advantage(R) (Bakeware), Block(R) (Tabletop), CasaModa(TM) (Tabletop), Cuisine
de France(R) (Cutlery and Cutting Boards), DBK(TM) Daniel Boulud Kitchen
(Cutlery and Cutting Boards, Bakeware, Pantryware and Spices), Gemco(R)
(Tabletop), Hershey(R)'s (Bakeware), Hoan(R) (Kitchenware), Joseph Abboud
Environments(R) (Tabletop), Kamenstein(R) (Pantryware and Spices), Kathy Ireland
Home(R) (Tabletop), NapaStyle(TM) (Tabletop), Nautica(R) (Tabletop), Retroneu(R)
(Tabletop), Roshco(R) (Bakeware), Sasaki(R) (Tabletop), Stiffel(R) (Tabletop)
and Weir in Your Kitchen(TM) (Bakeware). In addition, the Company sells and
markets products in the Bath Hardware and Accessories product category under its
:USE(R) and Gemco(R) brands and the Company sells and markets products in the
Cookware product category under the DBK(TM) Daniel Boulud Kitchen brand.
4
The Company continuously innovates and introduces hundreds of new products
across all of its product categories and brands each year. The substantial
majority of the Company's products are designed and developed in-house by the
Company's design and development team, which consists of 55 professional
artists, designers and engineers. Utilizing the latest available design tools,
technology and materials, the Company works closely with its suppliers to enable
efficient and timely manufacturing of the Company's products.
The Company sells its products to a diverse nationwide customer base including
mass merchants (such as Wal-Mart and Target), specialty stores (such as Bed Bath
& Beyond and Linens'n Things), national chains (such as Kohl's, JC Penney and
Sears), department stores (such as Bloomingdale's, Macy's and Saks), warehouse
clubs (such as Costco, Sam's Club and BJ's Wholesale Club), home centers (such
as Lowe's and The Home Depot), supermarkets (such as Stop & Shop and Kroger) and
off-price retailers (such as Marshalls, T.J. Maxx and Ross Stores), as well as
through other channels of distribution. Wal-Mart Stores, Inc. (including Sam's
Club), which accounted for 20% of the Company's net sales in 2005, is the
Company's single largest customer.
The Company also sells its products directly to the consumer through its own
outlet stores, mail order catalogs, and the Internet. At December 31, 2005 the
Company had 121 outlet stores in 38 states operating under the Farberware(R) or
Pfaltzgraff(R) names. In January 2006 the Company closed 20 Farberware(R) stores
and 13 Pfaltzgraff(R) stores in order to consolidate certain Farberware(R) and
Pfaltzgraff(R) stores that coexisted within the same geographic area and to
eliminate certain unprofitable stores.
The Company's 21 most important retail customers are each serviced by an
in-house team that includes representatives from the Company's sales, marketing,
merchandising and product development departments. The Company generally
collaborates with its retail customers and in many instances produces specific
versions of the Company's product lines with exclusive designs and packaging for
their stores, which are appropriately priced for their respective customer
bases.
The Company's six primary distribution centers are strategically located near
the ports of entry on the East and West Coasts and afford the Company nationwide
distribution capabilities. The Company's largest distribution center is a modern
facility located in Robbinsville, New Jersey. The Company also operates two
additional distribution facilities located in York, Pennsylvania that were
acquired as part of the Pfaltzgraff acquisition and a distribution facility
located in Winchendon, Massachusetts. The Company also utilizes two facilities
located in California, which are operated for the Company by a third-party
logistics provider.
For the year ended December 31, 2005, the Company generated net sales of $307.9
million, which represented growth of 62.5 % over the previous year. Excluding
approximately $68.8 million of net sales attributable to the Pfaltzgraff
business the Company acquired in July 2005 and approximately $3.4 million in net
sales attributable to the Salton business the Company acquired in September
2005, net sales for the year ended December 31, 2005 increased approximately
24.4% to $235.7 million.
The Company's business and working capital needs are highly seasonal, with a
significant majority of sales occurring in the third and fourth quarters. In
2005, 2004 and 2003, net sales for the third and fourth quarters combined
accounted for approximately 71%, 63% and 66% of total annual net sales,
respectively, and operating profit earned in the third and fourth quarters
combined accounted for approximately 83%, 92% and 97% of total annual operating
profit, respectively. Net sales and operating profit for the third and fourth
quarters of 2005 include net sales and operating profit from the Pfaltzgraff and
Salton businesses from their respective acquisition dates.
5
With the addition of the retail outlet store, mail-order catalog and Internet
businesses from Pfaltzgraff in the third quarter of this year, the Company
determined that it has two reportable segments--wholesale and
direct-to-consumer. The wholesale segment is comprised of the Company's business
that designs, markets and distributes household products to retailers and
distributors. The direct-to-consumer segment is comprised of the Company's
business that sells household products directly to the consumer through the
Company's retail outlet stores, mail-order catalogs and the Internet. The
Company has segmented its operations in a manner that reflects how management
reviews and evaluates the results of the Company's operations. While both
segments distribute similar products, the segments are distinct due to their
different types of customers and the different methods used to sell, market and
distribute the products in each segment. Certain general and administrative
expenses that are not allocated to the segments are reflected as unallocated
corporate expenses.
Additional information regarding the operating performance of each of the
Company's segments is discussed in Note F of the Notes to the Consolidated
Financial Statements beginning on page F-1.
The Company has assembled a seasoned management team with experience and talent
in the housewares and consumer products industries. The Company's management
team is focused on growing the Company's business by capitalizing on the
reputation of the Company's well-respected and widely-recognized brands, the
Company's strengths in product design and innovation, product sourcing
experience and expertise and long-term retail customer and supplier
relationships.
ACQUISITIONS AND DISPOSITIONS
Since 1995 the Company has completed eight acquisitions that expanded the
Company's product offerings, allowed the Company to enter new product categories
and add brands. In 1995, the Company acquired the Hoffritz(R) trademarks and
brand name which the Company uses on various cutlery, kitchenware, bakeware and
barware products. In 1998, the Company entered the bakeware category with the
acquisition of Roshco, Inc., a Chicago-based bakeware and baking-related
products company. In September 2000, the Company acquired M. Kamenstein, Inc., a
107-year old housewares company, whose products included pantryware, teakettles,
spices and spice racks, and home organization accessories. In 2003, the Company
made two additional acquisitions, :USE(R)--Tools for Civilization Division of DX
Design Express, Inc. (":USE") and Gemco Ware, Inc.("Gemco"), that introduced the
Company to two new product categories: bath accessories and functional glassware
products. In July 2004, the Company acquired Excel Importing Corp. ("Excel"),
which provided the Company with two new product categories: tabletop and
cookware. In July 2005, the Company acquired The Pfaltzgraff Co.
("Pfaltzgraff"), one of America's leading designers and marketers of dinnerware
and tabletop accessories for the home. In September 2005, the Company acquired
certain assets and business of Salton, Inc. ("Salton") which provided the
Company with additional brands and licenses in the tabletop category. With the
addition of the Excel, Pfaltzgraff, and Salton businesses, the Company has
established a formidable presence in the tabletop category.
SALTON ACQUISITION. In September 2005, the Company acquired certain tabletop
assets and the related business of Salton. Salton's products include dinnerware,
flatware, glassware, crystal and tabletop accessories. The assets acquired
include Salton's Block(R) and Sasaki(R) brands, licenses to market Calvin
Klein(R) and NapaStyle(TM) tabletop products and distribution rights of upscale
crystal products under the Atlantis brand. In addition, the Company entered into
a license agreement with Salton to market tabletop products under the Stiffel(R)
brand. The purchase price was approximately $14.0 million.
6
PFALTZGRAFF ACQUISITION. In July 2005, the Company acquired the business and
certain assets of Pfaltzgraff. Pfaltzgraff designed ceramic dinnerware and
tabletop accessories for the home and distributed these products through retail
chains, company-operated outlet stores and through catalog and Internet
operations. The purchase price for the acquisition was approximately $38.2
million.
EXCEL ACQUISITION. In July 2004, the Company acquired the business and
substantially all of the assets of Excel, which designed, marketed and
distributed a diversified line of high quality cutlery, tabletop, cookware and
barware products under well-recognized premium brand names, including
Sabatier(R), Farberware(R), Joseph Abboud Environments(R) and DBK(TM) Daniel
Boulud Kitchen, all of which are licensed, and Retroneu(R), which is owned. The
purchase price for the acquisition was approximately $7.1 million.
GEMCO ACQUISITION. In November 2003, the Company acquired the business and
certain assets of Gemco, a 50-year old supplier of functional glassware products
for storing and dispensing food and condiments, a new product category for the
Company at the time.
:USE ACQUISITION. In October 2003, the Company acquired the business and certain
assets of :USE which focused on creating high-end contemporary lifestyle
products for the home, including decorative hardware, mirrors and lighting for
the bath and decorative window accessories.
LICENSES
The Company uses the Farberware(R) brand name pursuant to a 200 year
royalty-free license and licenses the KitchenAid(R) and Cuisinart(R) brand names
from Whirlpool Corporation and Conair Corporation, respectively. In February
2004, the Company entered into a license agreement with Hershey Foods
Corporation to market S'mores Makers(TM) and fondues under the Hershey's(R)
brand, and in July 2004 with the acquisition of Excel, the Company acquired
license agreements for the Sabatier(R), Joseph Abboud Environments(R) and
DBK(TM) Daniel Boulud Kitchen brand names and an additional license for
Farberware(R) dinnerware, flatware, plastic beverage, plastic giftware and
plastic serviceware not covered by the Company's existing Farberware(R) license.
The Company also acquired license agreements for the Nautica(R) and Weir in Your
Kitchen(TM) brands with the acquisition of the business and certain assets of
Pfaltzgraff in July 2005 and for the Calvin Klein(R) and NapaStyle(TM) brands
with the acquisition of the tabletop assets and related business of Salton in
September 2005. In addition, the Company entered into a license agreement with
Salton to market tabletop products under the Stiffel(R) brand.
FARBERWARE AGREEMENTS. In 1996, the Company entered into an agreement to acquire
certain assets of Farberware, Inc. Under the terms of the acquisition agreement
the Company acquired a 200 year, royalty-free, exclusive right to use the
Farberware(R) name in connection with product lines covered by then existing
license agreements between the Company and Farberware(R), which included kitchen
cutlery products (excluding flatware) and kitchen tools such as spatulas,
barbecue forks and kitchen "gadgets" (but excluding appliances), plus a limited
number of certain additional products. The Company also acquired 50
Farberware(R) retail outlet stores pursuant to the acquisition agreement. Upon
the acquisition of Excel, the Company obtained an additional Farberware(R)
licensing agreement for dinnerware, flatware, plastic beverage and plastic
giftware/serviceware which was recently extended for four years beginning on
July 1, 2005 and extending through June 30, 2009.
7
KITCHENAID AGREEMENT. On September 29, 2000, the Company entered into a
licensing agreement with Whirlpool Corporation. The agreement allows the Company
to design, manufacture and market an extensive range of kitchen utensils,
barbecue items and pantryware products under the KitchenAid(R) brand name.
Shipments of products by the Company under the KitchenAid(R) name began in the
second quarter of 2001.
On January 1, 2002, the licensing agreement between the Company and Whirlpool
Corporation was amended expanding the covered products to include bakeware and
baking related products. A second amendment to the licensing agreement was
entered into effective August 1, 2003, which extended the term of the agreement
through December 31, 2007 and further expanded the covered products to include
kitchen cutlery. A third amendment to the licensing agreement was entered into
effective August 1, 2005, which extended the term of the agreement through
December 31, 2009 and further expanded the covered products to include sinkware,
pantryware and spices.
CUISINART AGREEMENT. On March 19, 2002, the Company entered into a licensing
agreement with Conair Corporation that allows the Company to design, manufacture
and market a wide variety of kitchen cutlery products under the Cuisinart(R)
brand name. On April 8, 2004, the Company's licensing agreement with Conair
Corporation was amended, expanding the covered products to include cutting board
products. The license for kitchen cutlery products expires on June 30, 2006 and
the license for cutting board products expires on June 30, 2007. Each license
renews automatically for successive one year terms provided the agreement is not
earlier terminated by either party and certain minimum royalty requirements are
met. Shipments of products by the Company under the Cuisinart(R) name began in
the fourth quarter of 2002.
HERSHEY'S AGREEMENT. On February 20, 2004, the Company entered into a two year
licensing agreement with Hershey Foods Corporation that allows the Company to
design, manufacture and market S'mores Makers(TM) and fondues under the
Hershey(R)'s brand name. The license may be renewed for one year at the
Company's option provided certain minimum royalty requirements are met. Shipment
of products under the Hershey(R)'s name began in the second half of 2004. In
February 2006 the Company renewed the license for one year to February 28, 2007
and expanded the products that can be produced under the license to include
metal bakeware and cookie guns.
SABATIER AGREEMENT. On July 23, 2004, the Company acquired from Excel a
licensing agreement with Rousellon Freres to utilize the Sabatier(R) brand name
for cutlery as well as flatware, serveware, bakeware and dinnerware line
extensions. The licensing agreement was extended for twenty years until December
31, 2023 and may be automatically renewed for two ten-year terms.
DBK DANIEL BOULUD KITCHEN AGREEMENTS. On July 23, 2004 the Company also acquired
three licensing and endorsement agreements with Dinex Licensing (amended in
September 2004) from Excel to use the DBK(TM) Daniel Boulud Kitchen brand for
cutlery and holloware (expires September 30, 2007), cookware, kitchen gadgets,
bakeware and barware (expires September 30, 2007), and flatware, drinkware and
vases (expires June 30, 2008). The Company also negotiated a separate license
for spices that expires on March 31, 2008. The licenses renew automatically for
successive one year terms provided the agreements are not earlier terminated by
either party and certain minimum royalty requirements are met.
JOSEPH ABBOUD ENVIRONMENTS AGREEMENT. Another license agreement acquired from
Excel on July 23, 2004 was with JA Apparel Corp. for the Joseph Abboud
Environments(R) brand for flatware, dinnerware, glassware, textile tableware and
giftware products. Distribution is limited to approved upscale retailers. The
license extends to December 31, 2007 (which may be renewed with the consent of
JA Apparel Corp. for the period January 1, 2008 through December 31, 2010).
8
NAUTICA AGREEMENT. On July 11, 2005, the Company acquired a licensing agreement
from Pfaltzgraff with Nautica Apparel Inc. to utilize the Nautica(R) brand name
for dinnerware. The license expired on December 31, 2005. The Company plans to
extend the license and has entered into a letter agreement with Nautica to
extend the re-negotiation period on the license to March 31, 2006.
WEIR IN YOUR KITCHEN AGREEMENT. On July 11, 2005, the Company acquired from
Pfaltzgraff a licensing agreement with Joanne Weir to utilize the Weir In Your
Kitchen(TM) brand for bakeware. The license extends to January 2010 and will be
automatically renewed for one additional five-year term commencing February 2010
provided that either party does not terminate the agreement earlier and certain
minimum royalty requirements are met.
CALVIN KLEIN AGREEMENT. On September 19, 2005, the Company acquired a licensing
agreement with Calvin Klein, Inc. to utilize the Calvin Klein(R) brand name for
tabletop products (including dinnerware, flatware, glassware and crystal) from
Salton. The license extends to December 31, 2010 provided that certain minimum
royalty requirements are met.
NAPASTYLE AGREEMENT. On September 19, 2005 the Company also acquired a licensing
agreement with NapaStyle LLC to utilize the NapaStyle(TM) brand to market
tabletop products (including glassware, dinnerware and tabletop accessories)
from Salton. The license extends to December 31, 2020 provided that either party
does not terminate the agreement earlier and certain minimum royalty
requirements are met.
STIFFEL AGREEMENT. The Company entered into a license agreement with Salton in
September 2005 to market tabletop products under the Stiffel(R) brand. The
license extends to September 19, 2008 and may be renewed 90 days or more before
expiration at the Company's option provided that the Company is in compliance
with all of the terms and conditions of the agreement.
ROYALTIES. The Company's license agreements require it to pay royalties on sales
of licensed products. Future minimum royalties payable under these agreements
are as follows (in thousands):
YEAR ENDING DECEMBER 31:
2006............................................................. $ 6,784
2007............................................................. 7,487
2008............................................................. 8,302
2009............................................................. 9,366
PRODUCTS
The Company designs, develops and markets a broad range of branded consumer
products used in the home, including Kitchenware, Cutlery and Cutting Boards,
Bakeware and Cookware, Pantryware and Spices, Tabletop and Bath Accessories. The
Company has a design and development team consisting of 55 professional artists,
designers and engineers who create new products, packaging, and merchandising
concepts. In 2005, the Company developed or redesigned over 700 individual
products. The Company's products are marketed under various trade names
including Farberware(R), KitchenAid(R), Cuisinart(R), Hoffritz(R), Sabatier(R),
DBK(TM)Daniel Boulud Kitchen, Joseph Abboud Environments(R), Retroneu(R),
Kamenstein(R), PerfectTear(R), CasaModa (TM), Hoan(R), Roshco(R), Baker's
Advantage(R), Gemco(R) and :USE(R). The Company's in-house product design and
development staff designs virtually all of the Company's products, packaging,
and merchandising concepts. The Company's products are manufactured to the
Company's specifications, primarily in the People's Republic of China, and are
generally shipped fully assembled.
9
KITCHENWARE
The Company sells over 4,000 kitchenware items under various brand names
including KitchenAid(R), Farberware(R), Sabatier(R), Hoffritz(R), DBK(TM)Daniel
Boulud Kitchen, Gemco(R) and Hoan(R). The Company's kitchenware products include
tools and gadgets used in the preparation and serving of meals, functional
glassware products for storing and dispensing food and condiments, and barbeque
tools and accessories. These items are typically packaged on cards, which
generally are hung on racks for maximum point of sale display visibility. The
Company also provides J-Hook and Clip Strip merchandising systems to retail
customers, especially supermarkets and mass merchants, to create additional
selling space and to trigger impulse buying.
Major developments in 2005 for the Company's Kitchenware product category
included the introduction of KitchenAid(R) branded sinkware, a new line of
Hoffritz(R) kitchen gadgets including silicone gadgets such as grabbers and oven
mitts, and a new line of tools and gadgets under the Sabatier(R) name. Also
introduced in 2005 were 40 new items under the Gemco(R) name, including the
Tilt-N-Serve snack dispenser and various storage and cleaning items and 25 new
barbeque items, including KitchenAid(R) silicone handled barbeque tools and
Farberware(R) Professional series soft handle barbeque tools.
In 2006 the Company expects to expand the KitchenAid(R) sinkware line and the
Hoffritz(R) gadget line and will also launch the Sabatier(R) Pro Forged line of
tools and gadgets in 2006.
TABLETOP
The Company designs and sells dinnerware, flatware, drinkware, crystal, and
tabletop accessories under the Pfaltzgraff(R), Farberware(R), Sabatier(R),
Joseph Abboud Environments(R), Retroneu(R), Nautica(R), Weir In Your
Kitchen(TM), Atlantis, Block(R), Calvin Klein(R) Home, Sasaki(R) and Stiffel(R)
brands. Dinnerware includes plates, bowls, cups and accessories, which are sold
in boxed sets and as individual pieces in both casual and formal styles.
Flatware includes knives, forks, spoons, and hostess serving pieces; drinkware
comprises glassware, stemware and barware, as well as pitchers, vases and
related accessories; crystal includes stemware, barware, decanters and
decorative objects, such as picture frames; and tabletop accessories including
salad bowls, serving bowls, and serving platters.
Among the major developments in 2005 have been the acquisitions of the business
and certain assets of Pfaltzgraff and the tabletop business and related assets
of Salton. The acquisitions of Pfaltzgraff and Salton gave the Company entree
into the upscale tabletop business with the addition of the Pfaltzgraff and
Calvin Klein(R) Home brands, as well as the prestigious Atlantis Crystal and
Sasaki(R) brands, and the promotional Block(R), Stiffel(R), and Tabla brands.
Key items in development for 2006 for the Pfaltzgraff brand include three
trend-right fashion dinnerware ensembles; the Matika Collection, Eastside
Collection, and the Garden Of Eden Collection.
Plans in 2006 for the Salton group of brands include a major reintroduction of
the Sasaki(R) brand, which will encompass the current art glass collection and a
new formal tabletop collection including updated porcelain and stoneware
dinnerware groupings, and upscale crystal and barware collections. The Company
will also reintroduce Block(R) China with a new updated casual stoneware
dinnerware collection.
10
CUTLERY AND CUTTING BOARDS
The Company offers full lines of kitchen cutlery under a variety of brands,
including KitchenAid(R), Farberware(R), Cuisinart(R), Sabatier(R), Hoffritz(R)
and DBK(TM) Daniel Boulud Kitchen. Cutlery products include kitchen knives,
steak knives, shears, sharpening steels and specialty items, such as the
Japanese-inspired Santoku knife, which features grooved kullens to facilitate
cutting through foods of all types. Cutlery products are offered in open stock,
in sets, and in countertop blocks and carousels. The Company also sells a line
of Cuisinart(R) cutlery in a patented Knife Vault(R) that allows knives to be
stored safely in an easily accessible counter top container with a childproof
locking mechanism.
2005 was the first full year at retail for the Company's new KitchenAid(R)
cutlery, which proved to be extremely successful. There was widespread placement
at key retailers, and consumer acceptance of the world's first series of
silicone cutlery handles, which offer comfort, balance and slip resistance. The
Company also introduced riveted, Dupont Delrin(R) handles, as well as stainless
steel handles, to round out the full scope of the Company's KitchenAid(R)
cutlery offerings and also added Kitchenaid(R) cutting boards in bamboo and
wood.
In 2005, the Company also introduced Farberware(R) forged cutlery with wood and
soft-grip Santoprene(R) handles and expanded the looks of the Sabatier(R)
cutlery line to reflect European styling in both block sets and the popular
Laguiole steak knife series.
Under the Cuisinart(R) brand, the Company introduced red handles and mini
Santoku knives in its best selling riveted cutlery line and also added a new
line of stainless steel cutlery. The Company also introduced new sizes of
polypropylene Cuisinart(R) cutting boards with color accents, and the Slice and
Slide board.
In 2005 the Company had continued success with its Santoku knives across all
brands, which has led to the introduction of more sizes and merchandising tools,
such as counter display units, which offer the opportunity for increased visible
display at point of sale. These popular knives have also been added to many
knife block sets.
Key items in development for 2006 include: Santoku knives in new sizes and new
merchandising methods; the use of color in cutlery, and the introduction of
smaller block sets offering key knives in all lines. A new series of
Farberware(R) cutlery will also be introduced in 2006. Also planned for 2006 are
the introduction of new handle designs in Kitchenaid(R) cutlery, new
introductions to the Cusinart(R) line, and added emphasis on Euro styling in the
Sabatier(R) line. The Hoffritz(R) line will feature all new offerings in 2006
that combine style and affordability. The shears/scissors category will also
feature new combination set offerings in all lines. In 2006, cutting boards in
new woods will be introduced and new looks will be added to existing styles,
while color in cutting boards will be further developed.
11
BAKEWARE AND COOKWARE
The Company sells a variety of metal, ceramic, and silicone bakeware and baking
related products under the Roshco(R), KitchenAid(R), Baker's Advantage(R),
Hoffritz(R), Pfaltzgraff(R) and Weir In Your Kitchen(TM) trade names. These
products include baking, measuring, and rangetop products such as cake and pie
pans, cookie sheets, cookie presses, muffin pans, roasters, scraper sets,
whisks, cutters, rolling pins, baking shells, baking cups, measuring devices,
thermometers, timers, pizza stones, fondues and woks.
The Company also markets a diverse line of products for casual home
entertaining, including barware, buffet servers and warmers, fondues, and
devices for tabletop cooking. These products are marketed under the Hoffritz(R),
Farberware(R), Hershey(R)'s, Hershey's Kisses(R) and CasaModa (TM) brands.
In 2005 the Company introduced Silicone baking mats, as well as core Silicone
baking items, such as square and round baking pans under the Roshco(R) and
Kitchen Aid(R) brands. The Company also introduced Kitchen Aid(R) ceramic
bakeware in the fall of 2005. The ceramic bakeware features a distinctive design
language accentuated by removable, stay-cool, non-slip silicone grips.
In 2006 the Company will continue to expand its line of silicone bakeware by
introducing specialty bakeware in a vast array of colors, and will expand its
silicone mat products by introducing mats to be used in ovens, toaster ovens and
microwaves. In 2006 the Company will also introduce new metal bakeware that
combines metal and silicone, and cast bakeware pans in unique designs under the
KitchenAid(R) and Roshco(R) brands. The Company plans to expand its Hershey(R)'s
product offerings from 2 items to 13 items and has also entered into an
agreement with Jell-O(R) and will offer 10 items from minis (single serve
Jell-O(R) trays) to Jigglers(R) and traditional full-size molds.
The Company currently sells a line of stainless steel cookware under the DBK(TM)
Daniel Boulud Kitchen brand. In 2006, Cookware will begin to be marketed under
Sabatier(R), Hoffritz(R) and Cuisine De France(R) brands. A key item in this
category will be the "Chef Toss", a patented pan that allows the consumer to
cook like a professional.
PANTRYWARE AND SPICES
The Company's pantryware lines include wood, wire and stainless steel
breadboxes, mug holders, paper towel dispensers, spice racks, grinders, caddies,
teakettles and storage and organization products. The Company also sells
individual spices, rubs and blends in single containers and in sets. These
products are distributed under the Kamenstein(R), Farberware(R), KitchenAid(R),
DBK(TM) Daniel Boulud Kitchen and Hoffritz(R) trade names. The Company fills
spice containers in its Winchendon, Massachusetts facility.
In 2003, the Company introduced the PerfectTear(R) paper towel holder. The
PerfectTear(R) incorporates a patented mechanism that allows easy removal of
paper towels from the roll, one sheet at a time.
In 2005 the Company introduced a new line of Kamenstein (R) countertop solutions
products in stainless steel, each with unique features and the DBK(TM) Daniel
Boulud Kitchen line of seasoning racks and open stock seasonings.
Key items in development for 2006 include the introduction of an extensive line
of KitchenAid(R) pantryware and KitchenAid(R) barware, as well as a line of
Hoffritz(R) barware.
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BATH ACCESSORIES
The Company designs and markets decorative hardware, mirrors and lighting for
the bath, and decorative window accessories under the :USE(R) trade name.
Decorative hardware includes towel bars, towel racks, soap dishes, hooks, toilet
tissue holders and metal and wire baskets.
A major development in 2005 has been the introduction of WetNets(TM) bathroom
organizers targeting the back-to-school market, making it simple and inexpensive
for students to accessorize their bath. Nine styles in eight colors were
introduced.
:USE is focusing on three key developments for 2006. Bathables Frosted(TM),
available in six styles, is a collection of decorative bath hardware with the
look of frosted crystal and highlighted by polished chrome accents. New bath
shower baskets, featuring a unique installation system to compensate for uneven
tile, while also hiding the mounting screws, will be available in 11 styles in
both polished chrome and solid brass. There is also an extensive assortment of
over the door hooks in development for the upcoming year.
CUSTOMERS AND DISTRIBUTION
The Company's products are sold primarily in the United States to retail
customers including mass merchants, specialty stores, national chains,
department stores, warehouse clubs, supermarkets, off-price retailers and home
centers, as well as through other channels of distribution. During the years
ended December 31, 2005, 2004 and 2003, Wal-Mart Stores, Inc. (including Sam's
Clubs) accounted for approximately 20%, 24% and 29% of net sales, respectively.
No other customer accounted for 10% or more of the Company's net sales during
2005, 2004 or 2003. For the years ended December 31, 2005, 2004 and 2003, the
Company's ten largest customers accounted for approximately 51%, 59% and 62% of
net sales, respectively.
The Company sells its products to most major retailers in the United States. The
Company distributes its products through a diverse nationwide customer base of
retail customers including mass merchants (such as Wal-Mart and Target),
specialty stores (such as Bed Bath & Beyond and Linens `n Things), national
chains (such as JC Penney, Kohl's and Sears), department stores (such as
Bloomingdale's, Macy's and Saks), warehouse clubs (such as Costco, BJ's
Wholesale Club and Sam's Club), home centers (such as Lowe's and The Home
Depot), supermarkets (such as Stop & Shop and Kroger) and off-price retailers
(such as Marshalls, T.J. Maxx and Ross Stores), as well as through other
channels of distribution. The Company also sells its products directly to the
consumer through its Company-owned outlet stores, mail order catalogs and the
Internet.
The Company's 550,000 square foot distribution facility in Robbinsville, New
Jersey is the Company's largest distribution facility and a significant portion
of the Company's products are shipped from this facility. This modern
distribution facility was designed to enable the Company to comply with the
current "just-in-time" delivery requirements of its major customers, as well as
to enable the Company to meet the increasingly more stringent requirements that
the Company anticipates will be imposed upon it by its retail customers in the
foreseeable future. In 2006, the Company plans to expand this facility to add
approximately 147,600 square feet of additional storage space. The Company also
operates two distribution facilities in York, Pennsylvania that were acquired
from Pfaltzgraff with combined storage space of approximately 473,000 square
feet. The Company also operates a distribution facility in Winchendon,
Massachusetts with approximately 169,000 square feet of storage space. On the
West Coast the Company utilizes two distribution facilities located in
California, which are operated for the Company by a third-party logistics
provider.
SALES AND MARKETING
The Company's 21 most important retail customers are each serviced by an
in-house team that includes representatives from the Company's sales, marketing,
merchandising and product development
13
departments. The Company generally collaborates with its retail customers and in
many instances produces specific versions of the Company's product lines with
exclusive designs and packaging for their stores.
At December 31, 2005 the Company operated 64 retail outlet stores in 34 states
under the Farberware(R) name. In 2004 under an agreement with the Meyer
Corporation, Meyer Corporation assumed responsibility for merchandising and for
stocking Farberware(R) cookware products in the stores, received all revenue
from store sales of Farberware(R) cookware, occupied 30% of the space in each
store and reimbursed the Company for 30% of the operating expenses of the
stores. In 2003 Meyer Corporation occupied 50% of each store's space during the
first nine months of the year and reimbursed the Company for 50% of the
operating expenses of the stores and occupied 30% of each store's space and
reimbursed the Company for 30% of the operating expenses of the stores in the
final three months of the year.
As a result of the Pfaltzgraff acquisition in July 2005, at December 31, 2005
the Company also operated 57 Pfaltzgraff(R) retail outlet stores in 31 states
and a catalog and Internet business.
The above operations, that comprise the Company's direct-to-consumer segment,
represented 21.5%, 8.4% and 6.9% of the Company's net sales in 2005, 2004 and
2003, respectively.
In January 2006 the Company closed a total of 33 of its Farberware(R) and
Pfaltzgraff(R) stores in order to consolidate certain Farberware(R) and
Pfaltzgraff(R) stores that coexisted within the same geographic area and to
eliminate certain unprofitable stores.
SOURCES OF SUPPLY
The Company sources its products from approximately 137 suppliers located
primarily in the People's Republic of China, and to a lesser extent in the
United States, Taiwan, Thailand, Malaysia, Indonesia, Germany, France, Korea,
Czech Republic, Italy, India and Hong Kong. The Company has been sourcing
products in Asia for over 40 years. The Company does not own or operate any
manufacturing facilities (other than its spice container filling operation
within its Winchendon, Massachusetts facility), but instead relies on
established long-term relationships with its major suppliers. The Company
collaborates with its major suppliers during the product development process and
on manufacturing technology to achieve efficient and timely production. The
Company's three largest suppliers provided it with approximately 54% of the
products the Company distributed in 2005 and 2004.
The Company's policy is to maintain several months of supply of inventory and,
accordingly, the Company orders products substantially in advance of the
anticipated time of their sale to the Company's customers. While the Company
does not have any long-term formal arrangements with any of its suppliers, in
certain instances, particularly with respect to the manufacture of cutlery, the
Company places firm commitments for products several months in advance of
receipt of firm orders from its customers. The Company's arrangements with most
manufacturers allow for some flexibility in modifying the quantity, composition
and delivery dates of orders. All purchase orders are in United States dollars.
14
COMPETITION
The markets for Kitchenware, Tabletop, Cutlery and Cutting Boards, Bakeware and
Pantryware and Spices are highly competitive and include numerous domestic and
foreign competitors, some of which are larger than the Company. The primary
competitive factors in selling such products to retailers are consumer brand
name recognition, quality, aesthetic appeal to consumers, packaging, breadth of
product line, distribution capability, prompt delivery and selling price.
PATENTS AND TRADEMARKS
The Company owns approximately 144 design and utility patents on the overall
design of some of its products. The Company acquired patents and copyrights as
part of the Hoffritz, Roshco, Kamenstein, :USE, Excel, Pfaltzgraff and Salton
acquisitions. The Company believes that the expiration of any of its patents
would not have a material adverse effect on the Company's business. In addition,
the Company owns or has rights to approximately 138 trademarks and trade names.
The Company considers these trademarks significant to its competitive position.
Some of these trademarks are registered in the United States and others have
become distinctive marks as to which the Company has acquired common law rights.
For a more detailed discussion of the Company's trademarks, refer to "Overview".
BACKLOG
Backlog is not material to the Company's business because actual confirmed
orders are typically not received until close to the required shipment dates.
EMPLOYEES
As of December 31, 2005, the Company had 1,042 full-time employees, of whom 7
were employed in an executive capacity, 150 in sales, marketing, design or
product development capacities, 110 in financial, administrative or clerical
capacities, 387 in warehouse or distribution capacities and 388 in the Company's
direct-to-consumer business. In addition, the Company employs 664 people on a
part-time basis, predominately in its direct-to-consumer business. None of the
Company's employees are represented by a labor union. The Company considers its
employee relations to be good.
REGULATORY MATTERS
Certain of the products the Company manufactures are subject to the jurisdiction
of the U.S. Consumer Product Safety Commission. The Company's spice container
filling operation in Winchendon, Massachusetts is regulated by the Food and Drug
Administration. The Company's products are also subject to regulation under
certain state laws pertaining to product safety and liability.
15
ITEM 1A. RISK FACTORS
The Company's business, operations, and financial condition are subject to
various risks. Some of these risks are described below. This section does not
describe all risks that may be applicable to the Company, the Company's
industry, or the Company's business, and it is intended only as a summary of
certain material risk factors.
THE COMPANY MUST SUCCESSFULLY ANTICIPATE CHANGING CONSUMER PREFERENCES AND
BUYING TRENDS AND MANAGE ITS PRODUCT LINE AND INVENTORY COMMENSURATE WITH
CUSTOMER DEMAND.
The Company's success depends upon its ability to anticipate and respond to
changing merchandise trends and customer demands in a timely manner. Consumer
preferences cannot be predicted with certainty and may change between selling
seasons. The Company must make decisions as to design, development, expansion
and production of new and existing product lines. If the Company misjudges
either the market for its products, the purchasing patterns of its retailers'
customers, or the appeal of the design, functionality or variety of its product
lines, the Company's sales may decline significantly, and it may be required to
mark down certain products to sell the resulting excess inventory or sell such
inventory through the Company's outlet stores, or other liquidation channels, at
prices which can be significantly lower than the Company's normal wholesale
prices, each of which would harm its business and operating results.
In addition, the Company must manage its inventory effectively and commensurate
with customer demand. A substantial portion of the Company's inventory is
sourced from vendors located outside the United States. The Company generally
commits to purchasing products before it receives firm orders from its retail
customers and frequently before trends are known. The extended lead times for
many of the Company's purchases, as well as the development time for design and
deployment of new products, may make it difficult for the Company to respond
rapidly to new or changing trends. In addition, the seasonal nature of the
Company's business requires it to carry a significant amount of inventory prior
to the year-end holiday selling season. As a result, the Company is vulnerable
to demand and pricing shifts and to misjudgments in the selection and timing of
product purchases. If the Company does not accurately predict its customers'
preferences and acceptance levels of its products, the Company's inventory
levels may not be appropriate, and its business and operating results may be
adversely impacted.
THE COMPANY'S BUSINESS DEPENDS, IN PART, ON FACTORS AFFECTING CONSUMER SPENDING
THAT ARE OUT OF THE COMPANY'S CONTROL.
The Company's business depends on consumer demand for its products and,
consequently, is sensitive to a number of factors that influence consumer
spending, including general economic conditions, disposable consumer income,
recession and inflation, incidents and fears relating to national security,
terrorism and war, hurricanes, floods and other natural disasters, inclement
weather, consumer debt, unemployment rates, interest rates, sales tax rates,
fuel and energy prices, consumer confidence in future economic conditions and
political conditions, and consumer perceptions of personal well-being and
security generally. Adverse changes in factors affecting discretionary consumer
spending could reduce consumer demand for the Company's products, change the mix
of products the Company sells to a different mix with a lower average gross
margin, slower inventory turnover and greater markdowns on inventory, thus
reducing the Company's sales and harming its business and operating results.
16
THE COMPANY FACES INTENSE COMPETITION FROM COMPANIES WITH SIMILAR BRANDS OR
PRODUCTS AND FROM COMPANIES IN THE RETAIL INDUSTRY.
The markets for Kitchenware, Tabletop, Cutlery and Cutting Boards, Bakeware and
Pantryware and Spices are highly competitive and include numerous domestic and
foreign competitors, some of which are larger than the Company, have greater
financial and other resources than the Company and may have more established
brand names in some or all of the markets the Company serves. The primary
competitive factors in selling such products to retailers are consumer brand
name recognition, quality, packaging, breadth of product line, distribution
capability, prompt delivery in response to retail customers' order requirements,
and ultimate price to the consumer.
The competitive challenges facing the Company include:
o anticipating and quickly responding to changing consumer
demands better than the Company's competitors;
o maintaining favorable brand recognition and achieving customer
perception of value;
o effectively marketing and competitively pricing the Company's
products to consumers in several diverse market segments and
price levels; and
o developing innovative, high-quality products in designs and
styles that appeal to consumers of varying groups, tastes and
price level preferences, and in ways that favorably
distinguishes the Company from its competitors.
In addition, the Company operates its outlet store, mail order catalog and
Internet businesses under highly competitive conditions. The Company has
numerous and varied competitors at the national and local levels, including
conventional and specialty department stores, other specialty stores, mass
merchants, value retailers, discounters, and Internet and mail order retailers.
Competition is characterized by many factors, including product assortment,
advertising, price, quality, service, location, reputation and credit
availability. If the Company does not compete effectively with regard to these
factors, its results of operations could be materially and adversely affected.
In light of the many competitive challenges facing the Company, the Company may
not be able to compete successfully. Increased competition could adversely
affect the Company's sales, operating results and business, by forcing the
Company to lower its prices or sell fewer units, which could reduce the
Company's gross profit and net income.
THE COMPANY'S RECENTLY EXPANDED DIRECT-TO-CONSUMER RETAIL BUSINESS MAY NOT BE
SUCCESSFUL.
The Company's recent acquisition of the business and certain assets of
Pfaltzgraff included Pfaltzgraff's outlet store, mail order catalog and Internet
businesses. As a result, the Company's direct-to-consumer retail segment has
become a more significant part of its overall business. In recent years,
Pfaltzgraff incurred significant losses in the operation of its outlet stores
and the Company incurred losses operating its Farberware(R) outlet stores. The
Company intends to restructure its outlet stores operations by consolidating
some locations and closing a significant percentage of its Pfaltzgraff(R) and
Farberware(R) outlet stores. The Company may also open new Pfaltzgraff(R) and
Farberware(R) stores and introduce new store formats. There can be no assurance
that the Company can restructure its outlet store operations so as to achieve
profitability. Moreover, the Company has no prior experience in mail order
catalog and Internet sales operations. The Company's failure to compete
effectively in these areas would have an adverse effect upon the results of its
operations.
17
THE COMPANY HAS A SINGLE CUSTOMER THAT ACCOUNTED FOR 20% OF ITS NET SALES IN
2005.
The Company distributes its products through a diverse nationwide base of retail
customers including mass merchants, specialty stores, national chains,
department stores, warehouse clubs, home centers, supermarkets and off-price
retailers, as well as through other channels of distribution, including its
outlet store, catalog and Internet businesses. However, during the years ended
December 31, 2005, 2004 and 2003, Wal-Mart Stores, Inc. (including Sam's Club)
accounted for approximately 20%, 24% and 29% of net sales, respectively, and the
Company's ten largest customers accounted for approximately 51%, 59% and 62% of
net sales, respectively. Any material reduction of product orders by Wal-Mart
Stores, Inc. could have significant adverse effects on the Company's business
and operating results, including the loss of predictability and volume
production efficiencies associated with such a large customer. In addition,
pressure by Wal-Mart Stores, Inc. to reduce the price of the Company's products
could result in the reduction of the Company's operating margin. No customer
other than Wal-Mart Stores, Inc. accounted for 10% or more of the Company's net
sales during 2005, 2004 or 2003.
THE COMPANY DEPENDS ON KEY VENDORS FOR TIMELY AND EFFECTIVE SOURCING OF ITS
PRODUCTS, AND THE COMPANY IS SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES THAT MAY
AFFECT ITS VENDORS' ABILITY TO PRODUCE QUALITY MERCHANDISE.
Other than its spice container filling operation in Winchendon, Massachusetts
facility, the Company does not own any manufacturing facilities and is dependent
on key vendors for its production requirements. The Company's performance
depends on its ability to have its products manufactured to its design and
specifications in sufficient quantities at competitive prices. The Company has
no contractual assurances of continued supply, pricing or access to products,
and generally, vendors could discontinue selling to the Company at any time. In
the future, the Company may not be able to acquire its products in sufficient
quantities, with the quality assurance it requires, or with terms acceptable to
the Company.
The Company sources its products from approximately 137 suppliers located
primarily in the People's Republic of China, and to a lesser extent in the
United States, Taiwan, Thailand, Malaysia, Indonesia, Germany, France, Korea,
Czech Republic, Italy, India and Hong Kong. The Company's three largest
suppliers provided it with approximately 54% of the products the Company
distributed in 2005 and 2004. This concentration of sourcing in certain key
vendors is a risk to the Company's business. Furthermore, because the Company's
product lines cover thousands of products, many products are produced for the
Company by only one or two manufacturers. An interruption of supply from any of
these manufacturers could have an adverse impact on the Company's ability to
fill orders on a timely basis.
As a result, an interruption of supply from any of the Company's suppliers, or
the loss of one or more key vendors, could have a negative effect on the
Company's business and operating results because the Company would be missing
products that could be important to its assortment or to coordinated branded
product lines, unless and until alternative supply arrangements are secured. The
Company may not be able to develop relationships with new vendors, and products
from alternative sources, if any, may be of a lesser quality and/or more
expensive than those it currently purchases. Replacement of manufacturing
sources would require long lead-times to assure the vendor's capability to
manufacture to the Company's designs and specifications, maintain quality
control and achieve the production levels the Company requires. In addition,
some of the Company's customers demand a certain standard of shipping
fulfillment (usually as a percentage of orders placed) and any disruption in the
manufacturing of the Company's products could result in the Company's failure to
meet such standards.
18
In addition, the Company is subject to certain risks, including availability of
raw materials, labor disputes, union organizing activity, inclement weather,
natural disasters, and general economic and political conditions, that might
limit the Company's vendors' ability to provide it with quality merchandise on a
timely basis. For these or other reasons, one or more of the Company's vendors
might not adhere to its quality control standards, and the Company might not
identify the deficiency before products are shipped to its retail customers. The
Company's vendors' failure to manufacture or ship quality merchandise in a
timely and efficient manner could damage the Company's reputation and that of
brands offered by it, and could lead to a loss or reduction in orders by the
Company's retail customers and an increase in product liability claims or
litigation.
BECAUSE MOST OF THE COMPANY'S VENDORS ARE LOCATED IN FOREIGN COUNTRIES, THE
COMPANY IS SUBJECT TO A VARIETY OF ADDITIONAL RISKS AND UNCERTAINTIES.
The Company's dependence on foreign vendors means, in part, that the Company may
be affected by declines in the relative value of the U.S. dollar to other
foreign currencies. Although substantially all of the Company's foreign
purchases of products are negotiated and paid for in U.S. dollars, declines in
foreign currencies and currency exchange rates might negatively affect the
profitability and business prospects of the Company's foreign vendors. This, in
turn, might cause such foreign vendors to demand higher prices for products,
hold up shipments to the Company or discontinue selling to the Company, any of
which could ultimately reduce the Company's sales or increase its costs.
The Company is also subject to other risks and uncertainties associated with
changing economic and political conditions in foreign countries. These risks and
uncertainties include import duties and quotas, concerns over anti-dumping, work
stoppages, economic uncertainties (including inflation), foreign government
regulations, incidents and fears involving security, terrorism and wars,
political unrest and other trade restrictions. The Company cannot predict
whether any of the countries in which its products are currently manufactured or
may be manufactured in the future will be subject to trade restrictions imposed
by the U.S. or foreign governments or the likelihood, type or effect of any such
restrictions. Any event causing a disruption or delay of imports from foreign
vendors, including the imposition of additional import restrictions,
restrictions on the transfer of funds and/or increased tariffs or quotas, or
both, with respect to products for the home could increase the cost or reduce
the supply of products available to the Company and adversely affect the
Company's business, financial condition and operating results. Furthermore, some
or all of the Company's foreign vendors' operations may be adversely affected by
political and financial instability resulting in the disruption of trade from
exporting countries, restrictions on the transfer of funds and/or other trade
disruptions.
In addition, there is a risk that one or more of the Company's foreign vendors
will not adhere to its compliance standards such as fair labor practices and
prohibitions on child labor. Such circumstances might create an unfavorable
impression of the Company's sourcing practices or the practices of some of its
vendors that could harm the Company's image. Additionally, certain of the
Company's major retail customers, including Wal-Mart Stores, Inc., routinely
inspect its suppliers' facilities to determine their compliance with applicable
labor laws. A determination by such customers that one or more of the Company's
suppliers violate such standards could jeopardize the Company's sales to such
customers if the Company or the suppliers cannot effectively remedy any such
violation in a timely manner. If any of these occur, the Company could lose
sales, customer goodwill and favorable brand recognition, which could negatively
affect the Company's business and operating results.
19
MANY OF THE COMPANY'S LEADING PRODUCT LINES ARE MANUFACTURED UNDER LICENSED
TRADEMARKS AND ANY FAILURE TO RETAIN SUCH LICENSES ON ACCEPTABLE TERMS MAY HAVE
AN ADVERSE EFFECT ON THE COMPANY'S BUSINESS.
The Company promotes and markets some of its most successful product lines under
trademarks the Company licenses from third-parties. Several of these license
agreements are subject to termination by the licensor.
The Company's license agreement with Whirlpool Corporation allows it to design,
manufacture and market an extensive range of kitchenware, bakeware, cutlery,
sinkware, pantryware and spices under the KitchenAid(R) brand name. The Company
has recently extended the term of the license agreement to December 31, 2009.
Whirlpool Corporation may terminate this license for cause if the Company is in
default or upon the occurrence of a change of control of the Company. In
addition, Whirlpool Corporation may terminate the agreement if, based on certain
statistical parameters, a customer survey conducted by it shows that customers
are dissatisfied with the products the Company markets under the license.
Products marketed under the KitchenAid(R) name accounted for a substantial
portion of the Company's revenues in the fiscal year ended December 31, 2005.
The Company may not be successful in maintaining or renewing the KitchenAid(R)
license, which has significant commercial value to the Company, on terms that
are acceptable to the Company or at all. The loss of the KitchenAid(R) license,
or an increase in the royalties the Company pays under such license upon
renewal, could have a material adverse affect on the Company's results of
operations.
In addition, any of the licensors of the previously mentioned trade names may
encounter problems that would potentially diminish the prestige of the licensed
trade names. In turn, this could negatively impact sales of the Company's line
of products that are marketed under the applicable trade name. In the event that
this occurs with respect to one of the Company's leading product lines, its
sales and financial results may be adversely affected.
THE COMPANY MUST SUCCESSFULLY MANAGE THE COMPLEXITIES ASSOCIATED WITH A
MULTI-CHANNEL AND MULTI-BRAND BUSINESS.
The Company's business requires the development, marketing and production of a
wide variety of products in several categories: Kitchenware, Tabletop, Cutlery
and Cutting Boards, Bakeware and Pantryware and Spices. Within each of these
categories, it is necessary to market several full lines of branded products
targeting different price and prestige levels, and each of these branded lines
must contain an assortment of products and accessories with matched designs and
packaging which are often sold as sets. The Company's different product lines
are sold under a variety of brand names, some of which are owned and some of
which are licensed. Many of the Company's products are inherently of the type
that consumers prefer to purchase as part of a branded, matched line.
Accordingly, both for marketing reasons and the requirements of the Company's
license agreements, the Company must maintain breadth of product lines and it
must devote significant resources to developing and marketing new designs for
the Company's product lines. The inability to maintain the breadth of the
Company's product lines--whether due to vendor difficulties, design issues,
retail orders for less than all of the products in a line, or other
problems--could result in competitive disadvantages as well as the potential
loss of valuable license arrangements.
In addition, the Company sells its products through several different
distribution channels (mass merchants, specialty stores, national chains,
department stores, warehouse clubs, home centers, supermarkets, off-price
retailers, outlet stores, catalogs and over the Internet) and the Company must
manage the selective deployment of branded lines within these channels so as to
achieve maximum revenue and profitability. Failure to properly align brands and
product lines to the price and prestige levels associated with particular
channels of distribution could result in product line failures, damage to the
Company's reputation, and lost sales and profits.
20
THE COMPANY'S ABILITY TO DELIVER PRODUCTS TO ITS CUSTOMERS IN A TIMELY MANNER
AND TO SATISFY ITS CUSTOMERS' FULFILLMENT STANDARDS IS SUBJECT TO SEVERAL
FACTORS, SOME OF WHICH ARE BEYOND THE COMPANY'S CONTROL.
The Company's retail customers place great emphasis on timely delivery of its
products for specific selling seasons and to fulfill consumer demand throughout
the year. The Company cannot control all of the various factors that might
affect product delivery to its retail customers. Vendor production delays,
difficulties encountered in shipping from overseas as well as customs clearance
are on-going risks of the Company's business. The Company also relies upon
third-party carriers for its product shipments from the Company's warehouse
facilities to customers, and it relies on the shipping arrangements the
Company's suppliers have made in the case of products shipped directly to its
retail customers from the supplier. Accordingly, the Company is subject to
risks, including labor disputes such as the West Coast port strike of 2002,
union organizing activity, inclement weather, natural disasters, possible acts
of terrorism, availability of shipping containers and increased security
restrictions, associated with such carriers' ability to provide delivery
services to meet the Company's shipping needs. Failure to deliver products in a
timely and effective manner to the Company's retail customers could damage its
reputation and brands and result in loss of customers or reduced orders. In
addition, fuel costs have increased substantially, which will likely result in
increased shipping expenses. Increased transportation costs and any disruption
in the Company's distribution process, especially during the second half of the
year, which is the Company's busiest selling period, could adversely affect the
Company's business and operating results.
THE COMPANY'S RELIANCE ON A THIRD PARTY LOGISTIC PROVIDER MAY RESULT IN CUSTOMER
DISSATISFACTION OR INCREASED COSTS.
A third-party logistics provider currently operates the Company's two
distribution facilities in California. Failure of the third-party logistics
provider to effectively and accurately manage on-site inventory and logistics
functions at these distribution facilities, especially during the second half of
the year, could have an adverse effect on the Company's business and its
financial results.
THE COMPANY'S QUARTERLY RESULTS OF OPERATIONS MIGHT FLUCTUATE DUE TO A VARIETY
OF FACTORS, INCLUDING ORDERING PATTERNS OF THE COMPANY'S CUSTOMERS AND THE
SEASONALITY OF THE COMPANY'S BUSINESS.
The Company's quarterly results have fluctuated in the past and may fluctuate in
the future, depending upon a variety of factors, including, but not limited to
the ordering patterns and timing of promotions of the Company's major retail
customers, which may differ significantly from period to period or from the
Company's original forecasts, and the strategic importance of third and fourth
quarter results. A significant portion of the Company's revenues and net
earnings are realized during the second half of the calendar year, as order
volume from the Company's retail customer base reaches its peak as the Company's
customers increase their inventories for the end of year holiday season. If, for
any reason, the Company were to realize significantly lower-than-expected sales
during the September through December selling season, the Company's business and
results of operations would be materially adversely affected.
21
THE COMPANY'S CORPORATE COMPLIANCE PROGRAM CANNOT ASSURE THAT IT WILL BE IN
COMPLETE COMPLIANCE WITH ALL POTENTIALLY APPLICABLE REGULATIONS, INCLUDING THE
SARBANES-OXLEY ACT OF 2002.
As a publicly traded company the Company is subject to significant regulations,
including the Sarbanes-Oxley Act of 2002. Many of these regulations were
recently adopted and may be subject to change. In connection with the Company's
assessment of the effectiveness of its internal controls over financial
reporting as of December 31, 2005, and the corresponding audit of that
assessment by the Company's independent registered accounting firm, the Company
did not identify any deficiencies in the Company's internal control over
financial reporting that constituted a "material weakness" as defined by the
Public Company Accounting Oversight Board. The Company cannot assure that it
will not find material weaknesses in the future or that the Company's
independent registered public accounting firm will conclude that the Company's
internal control over financial reporting is operating effectively.
THE COMPANY MAY NOT BE ABLE TO SUCCESSFULLY IDENTIFY, MANAGE AND INTEGRATE
FUTURE ACQUISITIONS.
Since 1995 the Company has completed eight acquisitions. Although the Company
has grown significantly through acquisitions and intends to continue to pursue
additional acquisitions in the future, the Company may not be able to identify
appropriate acquisition candidates or, if its does, it may not be able to
successfully negotiate the terms of the acquisition, finance the acquisition or
integrate the acquired business effectively and profitably into the Company's
existing operations. Integration of an acquired business could disrupt the
Company's business by diverting management away from day-to-day operations.
Furthermore, failure to successfully integrate any acquisition may cause
significant operating inefficiencies and could adversely affect the Company's
profitability.
THE COMPANY MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE THE RECENT PFALTZGRAFF AND
SALTON ACQUISITIONS.
The Company is currently integrating the operations of its recently acquired
Pfaltzgraff and Salton businesses. The Company may experience difficulties in
managing the integration process or in establishing effective internal controls
over these businesses, which could adversely affect the Company's results. In
addition, the independent registered public accounting firm auditing the
Company's financial statements must attest to and report on management's
assessment of the effectiveness of the Company's internal control over financial
reporting on an annual basis. If the Company's independent registered public
accounting firm is not satisfied with the Company's internal controls related to
financial reporting, it may decline to attest to management's assessment or
issue a qualified report. This could result in a loss of confidence in the
reliability of the Company's financial statements, which could adversely affect
the market price of the Company's common stock.
THE COMPANY HAS LIMITED EXPERIENCE OPERATING IN THE TABLETOP CATEGORY WHICH IS
THE COMPANY'S SECOND LARGEST PRODUCT CATEGORY.
The Company recently acquired from Pfaltzgraff and Salton several brands and
several product lines in categories where the Company has limited experience,
including flatware, dinnerware, glassware, crystal, serveware and tabletop
accessories. Although the businesses acquired from Pfaltzgraff and Salton are
related to the Company's existing categories of business, the Company has
limited experience operating in the Tabletop category. The Company may encounter
delays or difficulties in transitioning these brands and product lines and may
not achieve the expected growth or cost savings, and it is not possible to
predict the success of cross-selling the Company's other product categories
under the brands acquired from Pfaltzgraff or Salton or selling the Company's
other higher end brands to their respective upscale retail customers. In
particular, sales of the Tabletop category businesses tend to rely significantly
more on the appeal to consumers of the aesthetic design of the products than the
Company's other products lines whose sales tend to depend more upon product
functionality. Additionally, under their previous ownership, the recently
acquired Pfaltzgraff and Salton businesses suffered material operating losses.
The Company cannot assure that it can restore these product lines to
profitability or that there will not be delays in doing so.
22
LOSS OF KEY EMPLOYEES MAY NEGATIVELY IMPACT THE COMPANY'S SUCCESS.
The Company's success depends on its ability to identify, hire and retain
skilled personnel. The Company's industry is characterized by a high level of
employee mobility and aggressive recruiting among competitors for personnel with
track records of success. The Company may not be able to attract and retain
skilled personnel or may incur significant costs in order to do so. If Jeffrey
Siegel, the Company's Chairman, President and Chief Executive Officer, were to
leave the Company, it would have a materially adverse effect on the Company.
THE COMPANY MAY COMPETE WITH ITS CUSTOMERS' INTERNAL EFFORTS TO DESIGN AND
MANUFACTURE PRODUCTS SIMILAR TO THE COMPANY'S.
Some of the Company's existing and potential customers continuously evaluate
whether to design and manufacture their own products or purchase them directly
from outside vendors and distribute them under their own brand names. Although,
based on the Company's past experience, such products usually target the lower
price point portion of the market; if any of the Company's customers or
potential customers pursue such options it may adversely affect the Company's
business.
HIGH COSTS OF RAW MATERIALS AND ENERGY MAY RESULT IN INCREASED OPERATING
EXPENSES AND ADVERSELY AFFECT THE COMPANY'S RESULTS OF OPERATIONS AND CASH FLOW.
Significant variations in the costs and availability of raw materials and energy
may negatively affect the Company's results of operations. The Company's vendors
purchase significant amounts of metal and plastic to manufacture the Company's
products. They also purchase significant amounts of electricity to supply the
energy required in the Company's production processes. The rising cost of fuel
may also increase the Company's transportation costs. The cost of these raw
materials and energy, in the aggregate, represents a significant portion of the
Company's operating expenses. The Company's results of operations have been and
could in the future be significantly affected by increases in these costs. Price
increases increase the Company's working capital needs and, accordingly, can
adversely affect the Company's liquidity and cash flow. Additionally, higher
fuel prices may decrease the number of consumer shopping trips and lower demand
for merchandise sold through the Company's outlet stores.
IF THE COMPANY FAILS TO ADEQUATELY PROTECT OR ENFORCE ITS INTELLECTUAL PROPERTY
RIGHTS, COMPETITORS MAY PRODUCE AND MARKET PRODUCTS SIMILAR TO THE COMPANY'S. IN
ADDITION, THE COMPANY MAY BE SUBJECT TO INTELLECTUAL PROPERTY LITIGATION AND
INFRINGEMENT CLAIMS BY THIRD PARTIES.
The success of the Company's products is inherently dependent on new and
original designs that appeal to consumer tastes and trends at various price and
prestige levels. The Company's trademarks, service marks, patents, trade dress
rights, trade secrets and other intellectual property are valuable assets that
are critical to the Company's success. Although the Company attempts to protect
its proprietary properties through a combination of trademark, patent and trade
secret laws and non-disclosure agreements, these may be insufficient. Although
the Company has trademarks and certain patents issued or licensed to it for its
products, the Company may not always be able to successfully protect or enforce
its trademarks and patents against competitors, or against challenges by others.
The Company sources substantially all of its products from foreign vendors, and
the ability to protect the Company's intellectual property rights in foreign
countries may be far more difficult than in the United States. Many foreign
jurisdictions provide less legal protection of intellectual property rights than
the United States and it is difficult to even detect infringing products in such
jurisdictions until they are already in widespread distribution. The costs of
enforcing the Company's intellectual property may adversely affect its operating
results.
23
In addition, the Company may be subject to intellectual property litigation and
infringement claims, which could cause it to incur significant expenses or
prevent the Company from selling its products. A successful claim of trademark,
patent or other intellectual property infringement against the Company could
adversely affect the Company's growth and profitability, in some cases
materially. Others may claim that the Company's proprietary or licensed products
are infringing their intellectual property rights, and the Company's products
may infringe those intellectual property rights. The Company may be unaware of
intellectual property rights of others that may cover some of its products. If
someone claims that the Company's products infringe their intellectual property
rights, any resulting litigation could be costly and time consuming and would
divert the attention of management and key personnel from other business issues.
The Company also may be subject to significant damages or injunctions preventing
it from manufacturing, selling or using some aspect of the Company's products in
the event of a successful claim of patent or other intellectual property
infringement. Any of these adverse consequences could have a material adverse
effect on the Company's business and profitability.
IF THE COMPANY'S PRODUCTS ARE FOUND TO BE DEFECTIVE, THE COMPANY'S CREDIBILITY
AND THAT OF ITS BRANDS MAY BE HARMED, MARKET ACCEPTANCE OF THE COMPANY'S
PRODUCTS MAY DECREASE AND THE COMPANY MAY BE EXPOSED TO LIABILITY IN EXCESS OF
ITS PRODUCTS LIABILITY INSURANCE COVERAGE.
The marketing of certain of the Company's consumer products, such as tabletop
cookware, involve an inherent risk of product liability claims or recalls or
other regulatory or enforcement actions initiated by the U.S. Consumer Product
Safety Commission, by state regulatory authorities or through private causes of
action. Any defects in products the Company markets could harm the Company's
credibility, adversely affect its relationship with its customers and decrease
market acceptance of the Company's products and the strength of the brand names
under which the Company markets such products. In addition, potential product
liability claims may exceed the amount of the Company's insurance coverage under
the terms of the Company's policy. In the event that the Company is held liable
for a product liability claim for which it is not insured, or for damages
exceeding the limits of the Company's insurance coverage, such claim could
materially damage the Company's business and its financial condition.
THE COMPANY EXPERIENCES BUSINESS RISKS AS A RESULT OF THE COMPANY'S INTERNET
BUSINESS.
The Company competes with Internet businesses that handle similar lines of
merchandise. These competitors have certain advantages, including the
inapplicability of sales tax and the absence of retail real estate and related
costs. As a result, increased Internet sales by the Company's competitors could
result in increased price competition and decreased margins adversely affecting
the Company's retail outlet, mail order catalog and Internet businesses as well
as the company's wholesale business. The Company's Internet operations are
subject to numerous risks, including:
o reliance on third-party hosting and computer software and
hardware providers;
o diversion of sales from the Company's outlet stores and mail
order catalogs; and
o online security breaches and/or credit card fraud.
The Company's inability to effectively address these risks and any other risks
that it faces in connection with its Internet business could adversely affect
the profitability of the Company's Internet business.
24
GOVERNMENT REGULATION OF THE INTERNET AND E-COMMERCE IS EVOLVING AND UNFAVORABLE
CHANGES COULD HARM THE COMPANY'S BUSINESS.
The Company is subject to general business regulations and laws, as well as
regulations and laws specifically governing the Internet and e-commerce. Such
existing and future laws and regulations may impede the growth of the Internet
or other online services. These regulations and laws may cover taxation, user
privacy, data protection, pricing, content, copyrights, distribution, electronic
contracts and other communications, consumer protection, the provision of online
payment services, broadband residential Internet access, and the characteristics
and quality of products and services. It is not clear how existing laws
governing issues such as property ownership, sales and other taxes, and personal
privacy apply to the Internet and e-commerce. Unfavorable resolutions of these
issues would harm the Company's business. This could, in turn, diminish the
demand for the Company's products on the Internet and increase the Company's
cost of doing business.
THE COMPANY MAY NOT BE ABLE TO ADAPT QUICKLY ENOUGH TO CHANGING CUSTOMER
REQUIREMENTS AND E-COMMERCE INDUSTRY STANDARDS.
Technology in the e-commerce industry changes rapidly. The Company may not be
able to adapt quickly enough to changing customer requirements and preferences
and e-commerce industry standards. These changes and the emergence of new
e-commerce industry standards and practices could render the Company's existing
websites obsolete.
THE COMPANY'S BUSINESS IS SUBJECT TO TECHNOLOGICAL RISKS.
The Company relies on several different information technology systems for the
operation of its principal business functions, including the Company's
enterprise, warehouse management, inventory and re-ordering, point of sale and
call center systems. In the case of the Company's inventory forecast and
re-ordering system, most of the Company's orders are received directly through
electronic connections with the Company's largest customers. The failure of any
one of these systems could have a material adverse effect on the Company's
business and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable
25
ITEM 2. PROPERTIES
The following table describes the facilities at which the Company operates its
business:
APPROXIMATE OWNED
SQUARE OR
DESCRIPTION/USE OF PROPERTY LOCATION FOOTAGE LEASED LEASE EXPIRATION DATE
- --------------------------- -------- ------- ------ ---------------------
Corporate headquarters...... Westbury, New York 47,000 Owned N/A
Kamenstein warehouse and
distribution facility..... Winchendon, Massachusetts 169,000 Owned N/A
Warehouse and distribution
facility.................. Robbinsville, New Jersey 550,000 Leased July 9, 2016
Pfaltzgraff warehouse and
distribution facility..... York, Pennsylvania 312,900 Leased July 31, 2008
Pfaltzgraff warehouse and
distribution facility..... York, Pennsylvania 160,000 Leased July 31, 2008
Pfaltzgraff design center... York, Pennsylvania 15,298 Leased Month-to-Month
Pfaltzgraff office.......... York, Pennsylvania 18,945 Leased Month-to-Month
Pfaltzgraff office.......... York, Pennsylvania 10,199 Leased Month-to-Month
Pfaltzgraff call center..... York, Pennsylvania 14,479 Leased October 18, 2012
Pfaltzgraff MIS office...... York, Pennsylvania 9,000 Leased July 31, 2007
Pfaltzgraff showroom........ New York, New York 1,780 Leased December 31, 2007
Showroom.................... Bentonville, Arkansas 3,750 Leased May 31, 2007
Tabletop showroom........... New York, New York 6,960 Leased August 31, 2009
Kamenstein office........... Elmsford, New York 6,200 Leased March 31, 2009
Showroom/office............. Zhuhai, China 4,000 Leased April 19, 2006
Showroom/office............. Shanghai, China 4,500 Leased November 10, 2008
Sales office................ Chicago, Illinois 750 Leased December 15, 2006
In addition to the properties listed above, at December 31, 2005 the Company's
direct-to-consumer segment leased 121 stores in retail outlet centers located in
38 states throughout the United States. The square footage of the stores range
from approximately 2,000 square feet to 18,600 square feet. The terms of these
leases ranged from month-to-month to 5 years with expiration dates beginning in
January 2006 and extending through November 2010. In January 2006 the Company
closed a total of 33 of its stores in order to consolidate certain Farberware(R)
and Pfaltzgraff(R) stores that coexisted within the same geographic area and to
eliminate certain unprofitable stores.
Subject to certain provisions in the lease agreement for the Robbinsville, New
Jersey distribution facility, the Company has three separate renewable options
each of which would extend the term of the lease for a period of five years.
Subject to certain provisions in the lease agreements for both of the
distribution facilities located in York, Pennsylvania, the Company has two
separate renewable options in each lease that would extend the term of the lease
for a period of three years.
In 2006 the Company plans to expand Robbinsville, New Jersey distribution
facility to add approximately 147,600 square feet of additional storage space.
The Company no longer occupies approximately 13,000 square feet of leased office
space located in Westbury, New York under a lease that will expire on May 31,
2006.
26
ITEM 3. LEGAL PROCEEDINGS
The Company has, from time to time, been involved in various legal proceedings.
The Company believes that all current litigation is routine in nature and
incidental to the conduct of its business, and that none of this litigation, if
determined adversely to it, would have a material adverse effect on the
Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
27
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded under the symbol "LCUT" on The Nasdaq
National Market ("Nasdaq") since its initial public offering in June 1991. The
Board of Directors of the Company has authorized a repurchase of up to 3,000,000
of its outstanding shares of common stock in the open market. Through December
31, 2005, a cumulative total of 2,128,000 shares of common stock had been
repurchased and retired at a cost of approximately $15,235,000. There were no
repurchases in 2005 or 2004.
The following table sets forth the high and low sales prices for the Common
Stock of the Company for the fiscal periods indicated as reported by Nasdaq.
2005 2004
--------------------------- --------------------------
HIGH LOW HIGH LOW
------------- ------------- ------------ -------------
First Quarter............... $17.34 $14.75 $17.65 $13.41
Second Quarter............ 19.74 14.55 22.79 17.78
Third Quarter.............. 27.00 19.98 22.98 14.85
Fourth Quarter............ 26.61 19.75 15.90 11.74
At December 31, 2005, the Company estimates that there were approximately 3,000
beneficial holders of the Common Stock of the Company.
The Company is authorized to issue 100 shares of Series A Preferred Stock and
2,000,000 shares of Series B Preferred Stock, none of which is issued or
outstanding.
The Company paid quarterly cash dividends of $0.0625 per share, or a total
annual cash dividend of $0.25 per share, on its Common Stock during 2005 and
2004. The Board of Directors currently intends to continue to pay quarterly cash
dividends of $0.0625 per share of Common Stock for the foreseeable future,
although the Board of Directors may in its discretion determine to modify or
eliminate such dividends at any time.
The following table summarizes the Company's equity compensation plans as of
December 31, 2005:
NUMBER OF SHARES OF NUMBER OF SHARES OF
COMMON STOCK TO BE WEIGHTED AVERAGE COMMON STOCK REMAINING
ISSUED UPON EXERCISE EXERCISE PRICE OF AVAILABLE FOR FUTURE
PLAN CATEGORY OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS ISSUANCE
------------- ---------------------- ------------------- --------
Equity compensation plans 875,157 $14.51 615,550
approved by security
holders
Equity compensation plans
not approved by security - - -
holders
------------------------ ----------------------- -------------------------
Total 875,157 $14.51 615,550
======================== ======================= =========================
28
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated income statement data for the years ended December 31,
2005, 2004 and 2003, and the selected consolidated balance sheet data as of
December 31, 2005 and 2004, have been derived from the Company's audited
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K. The selected consolidated income statement data for the years ended
December 31, 2002 and 2001, and the selected consolidated balance sheet data as
of December 31, 2003, 2002 and 2001, are derived from the Company's audited
consolidated financial statements which are not included in this Annual Report
on Form 10-K. The Company acquired M. Kamenstein, Inc. in September 2000 and the
business and certain assets of: :USE in October 2003, Gemco Ware, Inc. in
November 2003, Excel Importing Corp. in July 2004, Pfaltzgraff Co. in July 2005
and Salton, Inc. in September 2005. This information should be read together
with the discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and notes to those statements included elsewhere in this Annual
Report on Form 10-K.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
INCOME STATEMENT DATA: (IN THOUSANDS EXCEPT PER SHARE DATA)
Net sales $ 307,897 $ 189,458 $ 160,355 $ 131,219 $ 135,068
Cost of sales 177,493 111,497 92,918 73,145 75,626
Distribution expenses 32,966 22,830 21,030 22,255 22,037
Selling, general and administrative
expenses 72,266 40,282 31,762 28,923 30,427
--------- --------- --------- --------- ---------
Income from operations 25,172 14,849 14,645 6,896 6,978
Interest expense 2,489 835 724 1,004 1,015
Other income, net (73) (60) (68) (66) (98)
--------- --------- --------- --------- ---------
Income before income taxes 22,756 14,074 13,989 5,958 6,061
Income taxes 8,647 5,602 5,574 2,407 2,449
--------- --------- --------- --------- ---------
Income from continuing operations $ 14,109 $ 8,472 $ 8,415 $ 3,551 $ 3,612
========= ========= ========= ========= =========
Basic earnings per common share from
continuing operations $ 1.25 $ 0.77 $ 0.79 $ 0.34 $ 0.34
Weighted average shares - basic 11,283 10,982 10,628 10,516 10,492
========= ========= ========= ========= =========
Diluted earnings per common share from
continuing operations $ 1.23 $ 0.75 $ 0.78 $ 0.34 $ 0.34
Weighted average shares and common share
equivalents - diluted 11,506 11,226 10,754 10,541 10,537
========= ========= ========= ========= =========
Cash dividends paid per common share $ 0.25 $ 0.25 $ 0.25 $ 0.25 $ 0.25
========= ========= ========= ========= =========
29
DECEMBER 31,
----------------------------------------------------------------
2005 2004 2003 2002 2001
-------- --------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Current assets................................. $155,750 $ 103,425 $88,528 $66,189 $75,486
Current liabilities............................ 69,907 52,913 46,974 32,809 44,925
Working capital................................ 85,843 50,512 41,554 33,380 30,561
Total assets................................... 222,648 157,217 136,980 113,369 124,856
Short-term borrowings ......................... 14,500 19,400 16,800 14,200 22,847
Long-term debt................................. 5,000 5,000 - - -
Stockholders' equity........................... 140,487 92,938 86,081 78,309 78,061
Effective September 2002, the Company sold its 51% controlling interest in
Prestige Italia, Spa and, together with its minority interest shareholder,
caused Prestige Haushaltwaren GmbH (combined, the "Prestige Companies") to sell
all of its receivables and inventory to a European housewares distributor. The
results of operations of the Prestige Companies through the date of disposal are
reflected as discontinued operations and are therefore excluded from the
selected consolidated income statement data presented above.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the consolidated
financial statements for the Company and notes thereto set forth in item 8. This
discussion contains forward-looking statements relating to future events and the
future performance of the Company based on the Company's current expectations,
assumptions, estimates and projections about it and the Company's industry.
These forward-looking statements involve risks and uncertainties. The Company's
actual results and timing of various events could differ materially from those
anticipated in such forward-looking statements as a result of a variety of
factors, as more fully described in this section and elsewhere in this report.
The Company undertakes no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.
OVERVIEW
The Company is a leading designer, developer and marketer of a broad range of
nationally branded consumer products including Kitchenware, Tabletop, Cutlery
and Cutting Boards, Bakeware and Pantryware and Spices. The Company markets its
products under some of the most well-respected and widely-recognized brand names
in the U.S. housewares industry including three of the four most recognized
brands in the "Kitchen Tool, Cutlery and Gadgets" product category according to
the Home Furnishing News Brand Survey for 2005. The Company sells and markets
its products under the following brands and trademarks which are either owned or
licensed: Atlantis, Baker's Advantage(R), Block(R), Calvin Klein(R), CasaModa
(TM), Cuisinart(R), Cuisine de France(R), DBK(TM) Daniel Boulud Kitchen,
Farberware(R), Gemco(R), Hershey(R)'s, Hoan(R), Hoffritz(R), Joseph Abboud
Environments(R), Kamenstein(R), Kathy Ireland Home(R), KitchenAid(R),
NapaStyle(TM), Nautica(R), Pfaltzgraff(R), Retroneu(R), Roshco(R), Sabatier(R),
Sasaki(R), Stiffel(R), :USE(R) and Weir in Your Kitchen(TM). The Company uses
the Farberware(R) brand name for kitchenware, cutlery and cutting boards and
bakeware pursuant to a 200 year royalty-free license and the Company licenses
the KitchenAid(R), Cuisinart(R), Farberware(R) (for flatware and dinnerware),
Sabatier(R), DBK(TM) Daniel Boulud Kitchen(TM) and Joseph Abboud Environments(R)
trade names pursuant to licenses granted by owners of those brands. In addition,
at December 31, 2005 the Company operated 64 outlet stores under the
Farberware(R) brand name and 57 outlet stores using the Pfaltzgraff(R) brand
name. The Company markets several product lines within each of the Company's
product categories and under each of the Company's brands primarily targeting
moderate to premium price points, through every major level of trade. At the
heart of the Company is a strong culture of innovation and new product
development. The Company developed or redesigned over 700 products in 2005 and
expects to develop or redesign approximately 1,400 products in 2006. The Company
has been sourcing its products in Asia for over 40 years and currently sources
its products from approximately 137 suppliers located primarily in China. In
June 2005, the Company changed its name to Lifetime Brands, Inc. from Lifetime
Hoan Corporation to better reflect its business.
Over the last several years, the Company's sales growth has come from: (i)
expanding product offerings within the Company's current categories, (ii)
developing and acquiring new product categories and (iii) entering new channels
of distribution, primarily in the United States. Key factors in the Company's
growth strategy have been and will continue to be, the selective use and
management of the Company's strong brands and the Company's ability to provide a
steady stream of new products and designs. A significant element of this
strategy is the Company's in-house design and development team that currently
consists of 55 professional designers, artists and engineers. This team creates
new products, packaging and merchandising concepts. Utilizing the latest
available design tools, technology and materials, the Company works closely with
its suppliers to enable efficient and timely manufacturing of its products.
31
On November 23, 2005, the Company and certain selling stockholders completed a
public offering pursuant to which they sold 1,733,000 and 1,142,000 shares of
the Company's stock, respectively, at an offering price of $21.50. The net
proceeds to the Company from the sale of its 1,733,000 shares were $34.4 million
and these funds were used to repay outstanding borrowings under the Company's
Credit Facility.
The Company acquired the business and certain assets of The Pfaltzgraff Co.
("Pfaltzgraff") in July 2005 and the tabletop assets and related business of
Salton, Inc. ("Salton") in September 2005. Both of these acquisitions expanded
the Company's tabletop product category and the Pfaltzgraff acquisition also
expanded the Company's retail operations. The Pfaltzgraff product lines include
ceramic dinnerware and tabletop accessories for the home that are distributed to
retailers and directly to the consumer through Company operated outlet stores,
catalog and Internet operations. The Salton business includes the Block(R) and
Sasaki(R) brands and licenses to market Calvin Klein(R) and NapaStyle(TM)
tabletop products, as well as distribution rights for crystal products under the
Atlantis brand. The Company also entered into a license agreement with Salton to
market tabletop products under the Stiffel(R) brand.
With the addition of the Pfaltzgraff retail businesses, the Company determined
that it currently operates in two reportable business segments -- wholesale and
direct-to-consumer. The wholesale segment is comprised of the Company's business
that designs, markets and distributes household products to retailers and
distributors. The direct-to-consumer segment is comprised of the Company's
business that sells household products directly to the consumer through
Company-operated retail outlet stores, catalog and Internet operations. The
Company has segmented its operations in a manner that reflects how management
reviews and evaluates the results of its operations. While both segments
distribute similar products, the segments are distinct due to their different
types of customers and the different methods used to sell, market and distribute
the products in each segment.
For the year ended December 31, 2005, net sales were $307.9 million,
representing 62.5% growth over the previous year. Excluding net sales of
Pfaltzgraff and Salton products of approximately $72.2 million combined, net
sales increased 24.4% over prior year net sales of $189.5 million. This growth
was primarily attributable to significantly higher sales of cutlery products,
particularly sales of the Company's newly introduced lines of KitchenAid(R)
branded cutlery along with higher sales of Farberware(R) cutlery, and strong
growth in sales of KitchenAid(R) and Farberware(R) branded kitchen tools and
gadgets and Roshco(R) and KitchenAid(R) bakeware.
The Company's gross profit margin is subject to fluctuation due primarily to
product mix and, in some instances, customer mix. In 2005, the Company's gross
profit margin increased for both its wholesale and direct-to-consumer segments.
The increase in gross profit margin of the wholesale segment was attributable to
product mix while the improvement in gross profit margin of the
direct-to-consumer segment was attributable to the July 2005 acquisition of
Pfaltzgraff, which included catalog and Internet operations that generate higher
margins than the Company's outlet store operations.
The Company's operating profit increased significantly in 2005 due primarily to
the significant growth in sales.
32
SEASONALITY
The Company's business and working capital needs are highly seasonal, with a
majority of sales occurring in the third and fourth quarters. In 2005, 2004 and
2003, net sales for the third and fourth quarters accounted for 71%, 63% and 66%
of total annual net sales, respectively. Moreover, operating profits earned in
the third and fourth quarters accounted for 83%, 92% and 97% of total annual
operating profits, respectively. Inventory levels increase primarily in the June
through October time period in anticipation of the pre-holiday shipping season.
Net sales and operating profit for the third and fourth quarters of 2005 include
net sales and operating profit from the Pfaltzgraff and Salton businesses from
their respective acquisition dates.
The acquisition of the Pfaltzgraff business will significantly increase the
portion of the Company's sales and operating profits that are generated during
the second half of the year, and will result in the Company reporting lower
earnings in the first and second quarters of 2006, as compared to the first and
second quarters of 2005.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements which have
been prepared in accordance with U.S. generally accepted accounting principles
and with the instructions to Form 10-K and Article 10 of Regulation S-X. The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, management evaluates its estimates and
judgments based on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. The Company evaluates these
estimates including those related to revenue recognition, allowances for
doubtful accounts, reserve for sales returns and allowances returns, inventory
mark-down provisions, impairment of intangible assets including goodwill and
share-based compensation. Actual results may differ from these estimates using
different assumptions and under different conditions. The Company's significant
accounting policies are more fully described Note A to the consolidated
financial statements. The Company believes that the following discussion
addresses its most critical accounting policies, which are those that are most
important to the portrayal of the Company's consolidated financial condition and
results of operations and require management's most difficult, subjective and
complex judgments.
33
Merchandise inventories consist principally of finished goods and are priced by
the Company using the lower-of-cost (first-in, first-out basis) or market.
Management periodically analyzes inventory for excess and obsolescence based on
a number of factors including, but not limited to, future product demand and
estimated profitability of the merchandise. The Company records a markdown
provision based on that assessment. If revenues grow, the investment in
inventory will likely increase. It is possible that the Company would need to
further increase its inventory provisions in the future.
The Company sells products wholesale to retailers and distributors and retail
direct to the consumer through Company-operated outlet stores, catalog and
Internet operations. Wholesale sales are recognized when title passes to and the
risks and rewards of ownership have transferred to the customer. Outlet store
sales are recognized at the time of sale while catalog and Internet sales are
recognized upon receipt by the customer. Shipping and handling fees that are
billed to customers in sales transactions are recorded in net sales.
The Company is required to estimate the collectibility of its accounts
receivable and establish allowances for estimated losses that could result from
the inability of its customers to make required payments. A considerable amount
of judgment is required to assess the ultimate realization of these receivables
including assessing the credit-worthiness of each customer. The Company also
maintains an allowance for sales returns. To evaluate the adequacy of the sales
returns allowance the Company analyzes historical trends and current
information. If the financial conditions of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments, or
the Company's estimate of returns is determined to be inadequate, additional
allowances may be required.
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill
and Other Intangible Assets". SFAS No. 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed at least annually for impairment. In the
Company's most recent assessment of impairment of goodwill, the Company made
estimates of fair value using several approaches. In the Company's ongoing
assessment of impairment of goodwill and other intangible assets, the Company
considers whether events or changes in circumstances such as significant
declines in revenues, earnings or material adverse changes in the business
climate, indicate that the carrying value of assets may be impaired. As of
December 31, 2005, no impairment indicators were noted. Future adverse changes
in market conditions or poor operating results of strategic investments could
result in losses or an inability to recover the carrying value of the
investments, thereby possibly requiring impairment charges in the future.
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires that a
long-lived asset shall be tested for impairment whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable. Based
upon such review, no impairment to the carrying value of any long-lived asset
has been identified at December 31, 2005.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123(R), "Share Based Payment". This statement requires that the cost resulting
from all share-based payment transactions be recognized in the financial
statements. In April 2005, the Securities and Exchange Commission deferred the
implementation of SFAS No. 123(R). SFAS 123(R) will become effective for the
Company on January 1, 2006 and the Company plans to use the modified-prospective
transition method.
34
On December 22, 2005 the Board of Directors of the Company approved the
acceleration of the vesting of all unvested outstanding employee stock options.
As a result, options to purchase 386,920 common shares, which otherwise would
have vested and become exercisable from time to time over the next five years,
became fully vested and immediately exercisable as of December 22, 2005. The
number of shares and the exercise prices of the accelerated options were not
changed. The accelerated options have exercise prices ranging from $7.72 to
$24.23 and include 323,670 options held by directors and executive officers. The
compensation expense related to the modification of the terms of these options
was not material to the Company's consolidated financial statements.
The purpose of accelerating the vesting of the options was to reduce the
non-cash compensation expense that would be recorded in future periods following
the Company's adoption of SFAS 123(R). The aggregate pre-tax compensation
expense associated with the accelerated options that would have been recognized
in future periods is estimated to be approximately $2.4 million.
In order to limit the personal benefit to the optionees of fully vesting their
options, the Board of Directors of the Company imposed restrictions on the sale
or transfer of the shares received by an optionee upon the exercise of an
accelerated option until the earlier of (a) the date on which such options would
have vested and become exercisable, without giving effect to such acceleration,
and (b) the optionee's death.
The Company does not expect the adoption of SFAS 123(R) to have a material
impact on the Company's consolidated financial statements.
RECENT DEVELOPMENT
On March 8, 2006 the Company entered into an agreement to acquire the business
and certain assets of Syratech Corporation ("Syratech"), a designer, importer
and manufacturer of a diverse portfolio of tabletop, home decor and picture
frame products. Founded in 1986, Syratech owns many key brands in home fashion,
including Wallace Silversmiths(R), Towle Silversmiths(R), International Silver
Company(R), Melannco International(R) and Elements(R). In addition, Syratech
licenses the Cuisinart(R) brand for tabletop products and recently secured the
license for Kenneth Cole Reaction Home(R). Syratech's products are broadly
distributed through better department stores, specialty stores, big box
retailers warehouse clubs, and catalogs. The total purchase price subject to
working capital adjustments is approximately $49.5 million, payable $37.0
million in cash and $12.5 million in shares of the Company's common stock. The
Company expects to fund the cash portion of the purchase price through its
Credit Facility.
35
RESULTS OF OPERATIONS
The following table sets forth income statement data of the Company as a
percentage of net sales for the periods indicated below.
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2005 2004 2003
-------------- ---------------- -------------
Net sales....................................... 100.0 % 100.0 % 100.0 %
Cost of sales................................... 57.6 58.9 57.9
Distribution expenses........................... 10.7 12.0 13.1
Selling, general and administrative expenses.... 23.5 21.3 19.8
-------------- ---------------- -------------
Income from operations.......................... 8.2 7.8 9.2
Interest expense................................ 0.8 0.4 0.5
-------------- ---------------- -------------
Income before income taxes...................... 7.4 7.4 8.7
Income taxes.................................... 2.8 3.0 3.5
-------------- ---------------- -------------
Net income...................................... 4.6 % 4.4 % 5.2 %
============== ================ =============
Certain selling, general and administrative expenses have been reclassified to
distribution expenses in 2003 to conform to the 2005 and 2004 presentation.
2005 COMPARED TO 2004
NET SALES
Net sales for 2005 were $307.9 million, representing 62.5% growth over the
previous year. Excluding net sales of Pfaltzgraff and Salton products of
approximately $72.2 million combined, net sales increased 24.4% over prior year
net sales of $189.5 million.
Net sales for the Company's wholesale segment increased to $241.6 million in
2005 compared to net sales of $173.6 million for 2004. Excluding the combined
wholesale net sales of Pfaltzgraff and Salton of $24.2 million, 2005 net sales
were $217.4 million, an increase of 25.2% over 2004. This increase was primarily
attributable to significantly higher sales of cutlery products, particularly the
Company's newly introduced lines of KitchenAid(R) branded cutlery along with
higher sales of Farberware(R) cutlery, and solid growth in sales of
KitchenAid(R) and Farberware(R) branded kitchen tools and gadgets and Roshco(R)
and KitchenAid(R) bakeware.
Net sales for the direct-to-consumer segment for 2005 increased to $66.3 million
compared to net sales of $15.9 million for 2004. The increase was due primarily
to the acquisition of the Pfaltzgraff outlet stores, catalog and Internet
operations, which contributed $48.0 million in sales in 2005.
COST OF SALES
Cost of sales for 2005 was $177.5 million, an increase of 59.2% over 2004. Cost
of sales as a percentage of net sales decreased to 57.6% for 2005 compared to
58.9% for 2004, the result of a higher proportion of sales in the 2005 period
coming from the direct-to-consumer segment where gross profit margins are higher
than the wholesale segment.
Cost of sales as a percentage of sales for the wholesale segment in 2005
remained consistent with 2004 at 59.8%.
Cost of sales as a percentage of net sales for the direct-to-consumer segment
increased to 49.9% for 2005 compared to 48.6% for 2004. The decrease in gross
profit margin was attributable to the addition of the Pfalztgraff stores, the
product mix of which had lower profit margins than the Farberware outlet stores,
offset in part by the higher margins generated by the Pfaltzgraff catalog and
Internet business.
36
DISTRIBUTION EXPENSES
Distribution expenses for 2005 were $33.0 million, an increase of $10.1 million,
or 44.4%, over expenses of $22.8 million for 2004. Distribution expenses as a
percentage of net sales were 10.7% for 2005 compared to 12.1% for 2004. This
improvement is primarily due to the benefit of labor savings and efficiencies
generated by the Company's largest distribution center in Robbinsville, New
Jersey and a higher proportion of the Company's sales in 2005 being generated by
the direct-to-consumer segment which had lower distribution costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for 2005 were $72.3 million, an
increase of $32.0 million, or 79.4%, over 2004 expenses. Excluding selling,
general and administrative expenses for the Pfaltzgraff and Salton businesses of
$24.0 million, selling, general and administrative expenses were $48.3 million,
a 19.9% increase over selling, general and administrative expenses for 2004.
As a percentage of net sales, selling, general and administrative expenses for
2005 were 23.5%, as compared to 21.3% for 2004. The increase in the percentage
relationship of selling, general and administrative expenses to net sales is due
to a higher proportion of sales in 2005 coming from the direct-to-consumer
segment where such expenses are considerably higher than the wholesale segment.
INCOME FROM OPERATIONS
Income from operations for 2005 was $25.2 million, an increase of $10.3 million,
or 69.5%, over income from operations in 2004 and, as a percentage of sales,
increased to 8.2% in 2005 from 7.8% in 2004. Excluding income from operations of
$1.7 million for the Pfaltzgraff and Salton businesses acquired in 2005, income
from operations was $23.5 million, a 58.0% increase over income from operations
for 2004 and as a percentage of sales, income from operations improved to 10.0%
in 2005 compared to 7.8% in 2004.
The Company measures operating income by business segment excluding certain
unallocated corporate expenses. Unallocated corporate expenses were $7.5 million
and $5.6 million for 2005 and 2004, respectively.
Income from operations for the wholesale segment for 2005 was $33.2 million, an
increase of 52.9%, or $11.5 million, over 2004. Excluding income from operations
for the Pfaltzgraff wholesale and Salton businesses of $0.3 million, income from
operations for the wholesale segment was $32.9 million, a 51.6% increase over
income from operations for 2004.
The loss from operations for the direct-to-consumer segment for 2005 was $0.4
million compared to a loss of $1.2 million in 2004. The Pfaltzgraff
direct-to-consumer business generated $1.4 million of income from operations for
2005.
INTEREST EXPENSE
Interest expense for 2005 was $2.5 million compared with $0.8 million for 2004.
The increase in interest expense is due to an increase in average borrowings
outstanding during 2005 under the Company's Credit Facility due primarily to the
acquisitions of Pfaltzgraff and Salton and higher rates of interest.
TAX PROVISION
Income tax expense for 2005 was $8.6 million as compared to $5.6 million in
2004. The increase in income tax expense is primarily related to the growth in
income before taxes from 2004 to 2005. The Company's marginal income tax rate
decreased to approximately 38.0% in 2005 compared to 39.8% in 2004 due to lower
state apportionment factors.
37
2004 COMPARED TO 2003
NET SALES
Net sales in 2004 were $189.5 million, an increase of approximately $29.1
million, or 18.1% higher than 2003. The combined net sales in 2004 for the Gemco
and :USE businesses acquired in the fourth quarter of 2003 and the Excel
business that was acquired in July 2004, totaled approximately $14.3 million
compared to $0.6 million in 2003. Excluding the net sales attributable to the
Gemco, :USE, and Excel businesses, net sales totaled approximately $175.2
million, a 9.6% increase over 2003's net sales of $159.8 million excluding Gemco
and :USE.
Net sales of the wholesale segment were $173.6 million, an increase of
approximately $24.2 million, or 16.2% higher than 2003. The combined net sales
in 2004 for the Gemco and :USE businesses acquired in the fourth quarter of 2003
and the Excel business that was acquired in July 2004, totaled approximately
$14.3 million compared to $0.6 million in 2003. Excluding the 2004 net sales
attributable to the Gemco, :USE, and Excel businesses, net sales of the totaled
approximately $159.3 million, a 7.1% increase over 2003 wholesale net sales of
$148.7 million excluding Gemco and :USE. The increase in net sales of the
wholesale segment was primarily attributable to increased sales of KitchenAid(R)
branded products in the Company's kitchenware, bakeware and cutlery product
lines and, to a lesser extent, higher sales of its pantryware products. These
sales increases were offset primarily by lower sales in 2004 of the Company's
S'mores Maker(TM). Sales of Farberware(R) and Cuisinart(R) branded cutlery and
Roshco(R) bakeware also declined in 2004.
Net sales of the direct-to-consumer segment were $15.9 million in 2004 compared
to $11.0 million in 2003. The sales growth in the direct-to-consumer segment was
principally attributable to the Company assuming responsibility for 70% of the
space in each outlet store, effective October 1, 2003, compared to 50% of the
space in prior periods. The direct-to-consumer segment had an operating loss of
$1.3 million in 2004, compared to an operating loss of $1.0 million in 2003.
COST OF SALES
Cost of sales for 2004 was $111.5 million, an increase of approximately $18.6
million, or 20.0% higher than 2003. Cost of sales as a percentage of net sales
increased to 58.9% in 2004 from 57.9% in 2003, primarily as a result of higher
sales of KitchenAid(R) branded products which generate lower margins due to the
added costs of royalties and an increase in sales of other products that carry
lower gross profit margins, including Gemco(R) functional glassware products and
Excel products.
DISTRIBUTION EXPENSES
Distribution expenses which primarily consist of warehousing expenses, handling
costs of products sold and freight-out expenses were $22.8 million for 2004 as
compared to $21.0 million for 2003. In 2003 these expenses included relocation
charges, duplicate rent and other costs associated with the Company's move into
its Robbinsville, New Jersey warehouse amounting to $0.7 million. No such
expenses were incurred in 2004. Excluding these moving related costs,
distribution expenses were 12.3% higher in 2004 as compared to 2003. As a
percentage to net sales, distribution expenses, excluding the aforementioned
relocation charges, were 12.0% in 2004 as compared to 12.7% in 2003. This
improved relationship reflects primarily the benefits of labor savings and
efficiencies generated by the Company's main distribution center in
Robbinsville, New Jersey.
38
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for 2004 were $40.2 million, an
increase of $8.5 million, or 26.8%, from 2003. The increase in selling, general
and administrative expenses is primarily attributable to the following:
increased direct-to-consumer operating expenses, the result of the Company being
responsible for 70% of the space and expenses of each outlet store since October
1, 2003, including all of 2004 as compared to 50% of the space for the first
nine months of 2003; additional operating expenses of the :USE and Gemco
businesses acquired in the fourth quarter of 2003 and of the Excel business
acquired in July 2004; the higher personnel costs associated with increases in
personnel in the product design group, the overseas sourcing department and the
sales and marketing departments and expenses related to Sarbanes-Oxley
compliance work.
INTEREST EXPENSE
Interest expense for 2004 was $0.8 million, an increase of $0.1 million, or
15.3%, from 2003.
INCOME TAXES
Income taxes for 2004 and 2003 were $5.6 million. Income taxes as a percentage
of income before taxes remained consistent from year-to-year at approximately
40%.
39
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of cash to fund liquidity needs are: (i) cash
provided by operating activities and (ii) borrowings available under its Credit
Facility. The Company's primary uses of funds consist of acquisitions, capital
expenditures, working capital increases, payments of principal and interest for
its debt and payment of cash dividends.
At December 31, 2005, the Company had cash and cash equivalents of $0.8 million,
compared to $1.7 million at December 31, 2004, working capital was $85.8 million
as compared to $50.5 million at December 31, 2004, the current ratio was 2.23 to
1 compared to 1.96 to 1 at December 31, 2004 and borrowings decreased to $19.5
million at December 31, 2005 compared to $24.4 million at December 31, 2004.
Cash provided by operating activities was approximately $28.7 million, primarily
resulting from net income before depreciation and amortization, an increase in
the provision for sales returns and allowances and increases in accounts
payable, trade acceptances and accrued expenses, offset by an increase in
accounts receivable. Cash used in investing activities was approximately $57.3
million, which consisted primarily of cash paid in connection with the
Pfaltzgraff and Salton acquisitions and to a lesser extent purchases of property
and equipment. Cash provided by financing activities was approximately $27.6
million, primarily due to the proceeds the Company received from its sale of
stock in a public offering, offset by the net repayment of short-term borrowings
and cash dividend payments.
Capital expenditures were $5.1 million in 2005 and $2.9 million in 2004. In
2006, the Company's planned capital expenditures are estimated at $12.0 million,
including $4.0 million in expected costs related to the proposed expansion of
the Company's corporate headquarters and showroom in Westbury, New York. These
expenditures are expected to be funded from current operations, cash and cash
equivalents and, if necessary, borrowings under the Company's Credit Facility.
As of December 31, 2005, the Company's contractual obligations were as follows
(in thousands of dollars):
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1-3 YEARS 3-5 YEARS MORE THAN
1 YEAR 5 YEARS
--------------------------------------------------------------
Operating leases................................... $ 70,693 $ 14,061 $ 23,383 $ 13,514 $ 19,735
Capitalized leases................................. 1,186 374 639 173 -
Short-term debt.................................... 14,500 14,500 - - -
Long-term debt..................................... 5,000 - - 5,000 -
Interest on long-term debt......................... 1,216 304 608 304 -
Royalty license agreements......................... 31,939 6,784 15,789 9,366 -
Employment agreements.............................. 4,678 2,715 1,363 600 -
--------------------------------------------------------------
Total.............................................. $129,212 $ 38,738 $ 41,782 $ 28,957 $ 19,735
==============================================================
40
On July 28, 2004, the Company entered into a $50 million five-year, secured
credit facility (the "Credit Facility") with a group of banks and, in
conjunction therewith, canceled its $35 million secured, reducing revolving
credit facility which was due to mature in November 2004. Borrowings under the
Credit Facility are secured by all of the assets of the Company. Under the terms
of the Credit Facility, the Company is required to satisfy certain financial
covenants, including limitations on indebtedness and sale of assets, a minimum
fixed charge ratio, a maximum leverage ratio and maintenance of a minimum net
worth. Borrowings under the credit facility have different interest rate options
that are based on an alternate base rate, the LIBOR rate or the lender's cost of
funds rate, plus in each case a margin based on a leverage ratio.
In July 2005, the Company amended the Credit Facility to increase the size of
the facility to $100 million and to extend its maturity to July 2010.
As of December 31, 2005, the Company had outstanding $0.4 million of letters of
credit and trade acceptances, $14.5 million of short-term borrowings and a $5.0
million term loan under its Credit Facility and, as a result, the availability
under the Credit Facility was $80.1 million. The $5.0 million long-term loan is
non-amortizing, bears interest at 6.07% and matures in August 2009. Interest
rates on short-term borrowings at December 31, 2005 ranged from 6.40% to 6.56%.
At December 31, 2005, the Company was in compliance with the financial covenants
of the Credit Facility.
Products are sold to retailers primarily on 30-day credit terms, and to
distributors primarily on 60-day credit terms.
The Company believes that its cash and cash equivalents plus internally
generated funds and its credit arrangements will be sufficient to finance its
operations for the next twelve months.
The results of operations of the Company for the periods discussed have not been
significantly affected by inflation or foreign currency fluctuations. The
Company negotiates all of its purchase orders with its foreign manufacturers in
United States dollars. Thus, notwithstanding any fluctuations in foreign
currencies, the Company's cost for a purchase order is generally not subject to
change after the time the order is placed. However, the weakening of the United
States dollar against local currencies could lead certain manufacturers to
increase their United States dollar prices for products. The Company believes it
would be able to compensate for any such price increase.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company. The
Company is exposed to market risk associated with changes in interest rates. The
Company's revolving credit facility bears interest at variable rates and,
therefore, the Company is subject to increases and decreases in interest expense
on its variable rate debt resulting from fluctuations in interest rates. There
have been no changes in interest rates that would have a material impact on the
consolidated financial position, results of operations or cash flows of the
Company for the year ended December 31, 2005.
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements as of and for the year ended
December 31, 2005 are included herein commencing on page F-1.
The following table sets forth certain unaudited consolidated quarterly
statement of income data for the eight quarters ended December 31, 2005. This
information is unaudited, but in the opinion of management, it has been prepared
substantially on the same basis as the audited consolidated financial statements
appearing elsewhere in this report and all necessary adjustments, consisting
only of normal recurring adjustments, have been included in the amounts stated
below to present fairly the unaudited consolidated quarterly results of
operations. The consolidated quarterly data should be read in conjunction with
the Company's audited consolidated financial statements and the notes to such
statements appearing elsewhere in this report. The results of operations for any
quarter are not necessarily indicative of the results of operations for any
future period:
YEAR ENDED DECEMBER 31, 2005
-------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
(IN THOUSANDS)
Net sales................................ $ 43,117 $ 46,154 $ 94,245 $ 124,381
Gross profit............................. 18,217 19,195 41,136 51,856
Income from operations................... 1,802 2,448 8,216 12,706
Net income............................... 1,001 1,345 4,537 7,226
Basic earnings per common share.......... $ 0.09 $ 0.12 $ 0.41 $ 0.63
Diluted earnings per common share........ $ 0.09 $ 0.12 $ 0.40 $ 0.60
YEAR ENDED DECEMBER 31, 2004
-------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
(IN THOUSANDS)
Net sales................................ $ 37,129 $ 33,029 $ 51,241 $ 68,059
Gross profit............................. 15,440 13,875 20,688 27,959
Income from operations................... 685 462 4,547 9,155
Net income............................... 345 203 2,584 5,340
Basic earnings per common share.......... $ 0.03 $ 0.02 $ 0.23 $ 0.48
Diluted earnings per common share........ $ 0.03 $ 0.02 $ 0.23 $ 0.47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
42
ITEM 9A. CONTROLS AND PROCEDURES
MANAGEMENT'S EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The term disclosure controls and procedures is defined in the Securities
Exchange Act of 1934, as amended (the "Exchange Act") or Rules 13a-15(e) and
15d-15(e) of the Exchange Act. This term refers to the controls and procedures
of a company that are designed to ensure that information required to be
disclosed by the company in the reports that it files under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
by the Securities and Exchange Commission. An evaluation was performed under the
supervision and with the participation of the Company's management, including
its Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the
effectiveness of the Company's disclosure controls and procedures as of December
31, 2005. Based on that evaluation, the Company's management, including the CEO
and CFO, concluded that the Company's disclosure controls and procedures were
effective as of December 31, 2005. During the quarter ending on December 31,
2005, there was no change in the Company's internal control over financial
reporting that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining
effective internal control over financial reporting, and for performing an
assessment of the effectiveness of internal control over financial reporting as
of December 31, 2005. Internal control over financial reporting is defined in
Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of
1934 as a process designed by, or under the supervision of, the Company's
principle executive and principal financial officers and effected by the
Company's board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles.
Internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the Company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit the preparation of financial statements in accordance with
U.S. generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a
material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Because of the inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate. Accordingly, even
those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation.
43
Management performed an assessment of the effectiveness of the Company's
internal controls over financial reporting as of December 31, 2005 using the
criteria set forth in the Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. In conducting
such assessment, management of the Company has excluded from its assessment of
and conclusion on the effectiveness of internal control over financial
reporting, the internal controls of The Pfaltzgraff, Co. and Salton, Inc., which
were acquired in 2005 and which are included in the Company's 2005 consolidated
financial statements and constituted approximately 24% of total assets as of
December 31, 2005 and approximately 24% and 7% of net sales and income from
operations, respectively, for the year then ended. Refer to Note B to the
consolidated financial statements for further discussion of these acquisitions
and their impact on the Company's consolidated financial statements. Based on
this assessment, management has determined that the Company's internal control
over financial reporting as of December 31, 2005 is effective.
Management's assessment of the effectiveness of the Company's internal control
over financial reporting as of December 31, 2005 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as stated in their
report.
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders
Lifetime Brands, Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Lifetime
Brands, Inc.("Lifetime") maintained effective internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Lifetime's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As indicated in the accompanying Management's Report on Internal Control Over
Financial Reporting, management's assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include the
internal controls of The Pfaltzgraff, Co. and Salton, Inc., which were acquired
in 2005 and which are included in the 2005 consolidated financial statements of
Lifetime Brands, Inc. and constituted approximately 24% of total assets as of
December 31, 2005 and approximately 24% and 7% of net sales and income from
operations, respectively, for the year then ended. Our audit of internal control
over financial reporting of Lifetime also did not include an evaluation of the
internal control over financial reporting of Pfaltzgraff, Co. and Salton, Inc.
45
In our opinion, management's assessment that Lifetime Brands, Inc. maintained
effective internal control over financial reporting as of December 31, 2005, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, Lifetime Brands, Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Lifetime Brands, Inc. as of December 31, 2005 and 2004, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2005 and our report dated
March 8, 2006 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Melville, New York
March 8, 2006
46
ITEM 9B. OTHER INFORMATION
None
PART III
ITEMS 10,11,12,13 AND 14
The information required under these items is contained in the Company's 2005
Proxy Statement which will be filed with the Securities and Exchange Commission
within 120 days after the close of the Company's fiscal year covered by this
Form 10-K and is herein incorporated by reference.
47
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1) and (2) -- see list of Financial Statements and Financial Statement
Schedule on F-1.
(b) Exhibits*:
Exhibit
No. Description
3.1 By-Laws of the Company**
3.2 Second Restated Certificate of Incorporation of the Company***
10.1 License Agreement dated December 14, 1989 between the Company and
Farberware, Inc. **
10.2 Lifetime Hoan 1996 Incentive Stock Option Plan **
10.3 Meyer Operating Agreement dated July 1, 1997 between Lifetime Hoan
Corporation and Meyer Corporation and Amendment to Agreement dated July
1, 1998**
10.4 2000 Long-Term Incentive Plan **
10.5 Employment Agreement dated April 6, 2001 between Jeffrey Siegel and
Lifetime Hoan Corporation**
10.6 Consulting Agreement dated April 7, 2001 between Milton L. Cohen and
Lifetime Hoan Corporation**
10.7 Credit Facility Agreement between Lifetime Hoan Corporation and The
Bank of New York, HSBC Bank USA, Citibank, N.A., Wells Fargo Bank,
N.A., and Bank Leumi USA, dated November 9, 2001**
10.8 Amendment No. 6 to Outlet Store Operating Agreement, dated as of April
30, 2003 (the "Amendment", made by and between Outlet Retail Stores,
Inc. and Cookware Concepts, Inc.) **
10.9 Robert McNally Employment Agreement, dated July 1, 2003**
10.10 Craig Phillips Employment Agreement dated July 1, 2003**
10.11 Bruce Cohen Employment Agreement dated July 1, 2003. **
10.12 Evan Miller Employment Agreement dated July 1, 2003**
10.13 Robert Reichenbach Employment Agreement dated July 1, 2003**
10.14 Amendment and Restated Credit Facility Agreement between Lifetime Hoan
Corporation and the Bank of New York, dated July 28, 2004**
10.15 Amendment No.1 to the Restated Credit Facility Agreement between
Lifetime Hoan Corporation and the Bank of New York, dated July 11,
2005**
10.16 The Asset Purchase Agreement dated as of June 17, 2005 by and among The
Pfaltzgraff Co., The Pfaltzgraff Manufacturing Co., Pfaltzgraff
Investment Co and The Pfaltzgraff Outlet Co. and Lifetime Brands, Inc.,
PFZ Acquisition Corp. and PFZ Outlet Retail, Inc.**
48
10.17 Employment agreement dated October 17, 2005 between Lifetime Brands,
Inc. and Ronald Shiftan**
21 Subsidiaries of the registrant ***
23 Consent of Ernst & Young LLP***
31.1 Certification by Jeffrey Siegel, Chief Executive Officer, pursuant to
Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002***
31.2 Certification by Robert McNally, Chief Financial Officer, pursuant to
Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002***
32 Certification by Jeffrey Siegel, Chief Executive Officer and Robert
McNally, Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002****
Notes:
* The Company will furnish a copy of any of the exhibits listed
above upon payment of $5.00 per exhibit to cover the cost of
the Company furnishing the exhibits.
** Incorporated by reference.
*** Filed herewith.
**** This exhibit is being "furnished" pursuant to Item 601(b)(32)
of SEC Regulation S-K and is not deemed "filed" with the
Securities and Exchange Commission and is not incorporated by
reference in any filing of the Company under the Securities
Act of 1933 or the Securities Exchange Act of 1934.
(c) Financial Statement Schedules -- the response to this portion of Item
15 is submitted as a separate section of this report.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Lifetime Brands, Inc.
/s/ Jeffrey Siegel
------------------------------------
Jeffrey Siegel
Chairman of the Board of Directors,
Chief Executive Officer, President
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Jeffrey Siegel Chairman of the Board of Directors, March 15, 2006
- ------------------ Chief Executive Officer,
Jeffrey Siegel President
and Director
/s/ Ronald Shiftan Vice Chairman, Chief Operating Officer March 15, 2006
- ------------------ and Director
Ronald Shiftan
/s/ Robert McNally Vice-President - Finance March 15, 2006
- ------------------ and Treasurer
Robert McNally
/s/ Craig Phillips Senior Vice-President - Distribution; March 15, 2006
- ------------------ Secretary; and a Director
Craig Phillips
/s/ Howard Bernstein Director March 15, 2006
- --------------------
Howard Bernstein
/s/ Michael Jeary Director March 15, 2006
- -----------------
Michael Jeary
/s/ Cherrie Nanninga Director March 15, 2006
- --------------------
Cherrie Nanninga
/s/ William Westerfield Director March 15, 2006
- -----------------------
William Westerfield
/s/ Sheldon Misher Director March 15, 2006
- ------------------
Sheldon Misher
50
FORM 10-K - ITEM 15(A)(1) AND (2)
LIFETIME BRANDS, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following Financial Statements and Schedule of Lifetime Brands, Inc. are
included in Item 8.
Report of Independent Registered Public Accounting Firm.......................................................F-2
Consolidated Balance Sheets as of December 31, 2005 and 2004 .................................................F-3
Consolidated Statements of Income for the
Years ended December 31, 2005, 2004 and 2003.......................................................F-4
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 2005, 2004 and 2003.......................................................F-5
Consolidated Statements of Cash Flows for the
Years ended December 31, 2005, 2004 and 2003.......................................................F-6
Notes to Consolidated Financial Statements....................................................................F-7
The following financial statement schedule of Lifetime Brands, Inc. is included in Item 15 (a);
Schedule II - Valuation and Qualifying Accounts...............................................................S-1
All other schedules in the applicable accounting regulation of the Securities
and Exchange Commission are not required under the related instructions or are
inapplicable, and therefore have been omitted.
The unaudited supplementary data regarding quarterly results of operations are
incorporated by reference to the information set forth in Item 8, "Financial
Statements and Supplementary Data."
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Lifetime Brands, Inc.
We have audited the accompanying consolidated balance sheets of Lifetime Brands,
Inc. (the "Company") as of December 31, 2005 and 2004 and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2005. Our audits also
included the financial statement schedule listed in the Index at Item 15(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lifetime Brands,
Inc. at December 31, 2005 and 2004, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2005, in conformity with U. S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Lifetime
Brands, Inc.'s internal control over financial reporting as of December 31,
2005, based on the criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 8, 2006, expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Melville, New York
March 8, 2006
F-2
LIFETIME BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31,
-----------------------
ASSETS 2005 2004
--------- ---------
CURRENT ASSETS
Cash and cash equivalents ............................................ $ 786 $ 1,741
Accounts receivable, less allowances of $7,913 in 2005
and $3,477 in 2004 .............................................. 49,158 34,083
Merchandise inventories .............................................. 91,953 58,934
Prepaid expenses ..................................................... 2,668 1,998
Deferred income taxes ................................................ 7,703 4,303
Other current assets ................................................. 3,482 2,366
--------- ---------
TOTAL CURRENT ASSETS ............................................ 155,750 103,425
PROPERTY AND EQUIPMENT, net ................................................ 23,989 20,003
GOODWILL ................................................................... 16,200 16,200
OTHER INTANGIBLES, net ..................................................... 24,064 15,284
OTHER ASSETS ............................................................... 2,645 2,305
--------- ---------
TOTAL ASSETS ......................................... $ 222,648 $ 157,217
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings ................................................ $ 14,500 $ 19,400
Accounts payable and trade acceptances ............................... 17,397 7,892
Accrued expenses ..................................................... 28,694 20,145
Income taxes payable ................................................. 9,316 5,476
--------- ---------
TOTAL CURRENT LIABILITIES ....................................... 69,907 52,913
DEFERRED RENT & OTHER LONG-TERM LIABILITIES ................................ 2,287 2,072
DEFERRED INCOME TAX LIABILITIES ............................................ 4,967 4,294
LONG-TERM DEBT ............................................................. 5,000 5,000
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, shares authorized: 25,000,000; shares
issued and outstanding: 12,921,795 in 2005 and 11,050,349 in 2004 129 111
Paid-in capital ...................................................... 101,468 65,229
Retained earnings .................................................... 38,890 28,077
Notes receivable for shares issued to stockholders ................... -- (479)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ................................... 140,487 92,938
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......... $ 222,648 $ 157,217
========= =========
See notes to consolidated financial statements.
F-3
LIFETIME BRANDS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands - except per share data)
YEAR ENDED DECEMBER 31,
---------------------------------------
2005 2004 2003
--------- --------- ---------
Net sales .................................. $ 307,897 $ 189,458 $ 160,355
Cost of sales .............................. 177,493 111,497 92,918
Distribution expenses ...................... 32,966 22,830 21,030
Selling, general and administrative expenses 72,266 40,282 31,762
--------- --------- ---------
Income from operations ..................... 25,172 14,849 14,645
Interest expense ........................... 2,489 835 724
Other income net ........................... (73) (60) (68)
--------- --------- ---------
Income before income taxes ................. 22,756 14,074 13,989
Income taxes ............................... 8,647 5,602 5,574
--------- --------- ---------
NET INCOME ................................. $ 14,109 $ 8,472 $ 8,415
========= ========= =========
BASIC INCOME PER COMMON SHARE .............. $ 1.25 $ 0.77 $ 0.79
========= ========= =========
DILUTED INCOME PER COMMON SHARE ............ $ 1.23 $ 0.75 $ 0.78
========= ========= =========
WEIGHTER AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
BASIC ............................. 11,283 10,982 10,628
========= ========= =========
DILUTED ........................... 11,506 11,226 10,754
========= ========= =========
See notes to consolidated financial statements.
F-4
LIFETIME BRANDS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
NOTES
RECEIVABLE
COMMON STOCK PAID-IN RETAINED FROM
SHARES AMOUNT CAPITAL EARNINGS STOCKHOLDERS TOTAL
------ ---- -------- -------- ------- --------
Balance at December 31, 2002.......... 10,561 $106 $ 61,405 $ 17,277 $ (479) $ 78,309
------ ---- -------- --------- ------- ---------
Net income for 2003................... 8,415 8,415
Tax benefit on exercise of stock
options............................. 302 302
Exercise of stock options............. 282 3 1,702 1,705
Dividends............................. (2,650) (2,650)
------ ---- -------- --------- ------- ---------
Balance at December 31, 2003.......... 10,843 109 63,409 23,042 (479) 86,081
Net income for 2004................... 8,472 8,472
Tax benefit on exercise of stock
options............................. 449 449
Exercise of stock options............. 207 2 1,371 1,373
Dividends............................. (3,437) (3,437)
------ ---- -------- --------- ------- ---------
Balance at December 31, 2004.......... 11,050 111 65,229 28,077 (479) 92,938
Net income for 2005................... 14,109 14,109
Net proceeds from public offering..... 1,733 17 34,402 34,419
Tax benefit on exercise of stock
options............................. 735 735
Exercise of stock options............. 139 1 1,052 (409) 644
Shares issued to directors............ 50 50
Repayment of notes receivable from
stockholders........................ 479 479
Dividends............................. (2,887) (2,887)
------ ---- -------- --------- ------- ---------
Balance at December 31, 2005.......... 12,922 $129 $101,468 $ 38,890 $ - $140,487
====== ==== ======== ========= ======= ========
See notes to consolidated financial statements.
F-5
LIFETIME BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
------------------------------------
2005 2004 2003
-------- -------- --------
OPERATING ACTIVITIES
Net income ............................................................... $ 14,109 $ 8,472 $ 8,415
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ......................................... 5,641 4,074 3,673
Deferred income taxes ................................................. (2,726) (100) 105
Deferred rent ......................................................... 323 479 539
Director compensation .................................................. 50 -- --
Provision for losses on accounts receivable ........................... 132 (68) 8
Reserve for sales returns and allowances .............................. 13,662 9,942 9,297
Changes in operating assets and liabilities, excluding the effects of
acquisitions of Salton, Pfaltzgraff, Excel, :USE and Gemco:
Accounts receivable .................................................... (26,245) (10,658) (21,008)
Merchandise inventories ................................................ 4,942 (4,944) (6,960)
Prepaid expenses, other current assets
and other assets .................................................... (321) (595) 177
Accounts payable, trade acceptances,
accrued expenses and other liabilities .............................. 14,604 (3,485) 8,987
Income taxes ........................................................... 4,574 1,312 2,452
-------- -------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES .......................................... 28,745 4,429 5,685
-------- -------- --------
INVESTING ACTIVITIES
Purchases of property and equipment, net ................................. (5,098) (2,911) (2,213)
Acquisition of Salton ................................................... (13,956) -- --
Acquisition of Pfaltzgraff .............................................. (38,198) -- --
Acquisition of Excel .................................................... -- (7,000) --
Acquisitions of :USE and Gemco ........................................... -- -- (3,964)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES ............................... (57,252) (9,911) (6,177)
-------- -------- --------
FINANCING ACTIVITIES
(Repayments) proceeds of short-term borrowings, net ...................... (4,900) 7,600 2,600
Net proceeds from public offering ........................................ 34,419 -- --
Proceeds from the exercise of stock options .............................. 644 1,373 1,705
Repayment of note receivable ............................................. 479 -- --
Payment of capital lease obligations ..................................... (320) (179) (50)
Cash dividends paid ...................................................... (2,770) (2,746) (2,650)
-------- -------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES ............................................. 27,552 6,048 1,605
-------- -------- --------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ............................................ (955) 566 1,113
Cash and cash equivalents at beginning of year ........................... 1,741 1,175 62
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR .................................. $ 786 $ 1,741 $ 1,175
======== ======== ========
See notes to consolidated financial statements.
F-6
LIFETIME BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
Organization and Business: The accompanying consolidated financial statements
include the accounts of Lifetime Brands, Inc. and its wholly owned subsidiaries:
Outlet Retail Stores, Inc., Roshco, Inc. M. Kamenstein Corp. The Pfaltzgraff
Co., Pfaltzgraff Factory Stores, Inc. and Luxury Tabletop, Inc., (collectively,
the "Company"). Significant intercompany accounts and transactions have been
eliminated in consolidation.
The Company designs, markets and distributes a broad range of consumer products
used in the home, including kitchenware, tabletop, cutlery and cutting boards,
bakeware and cookware, pantryware and spices, and decorative bath accessories
and markets its products under a number of brand names and trademarks, some of
which are licensed. The Company sells its products wholesale to retailers
throughout the United States and directly to the consumer through Company-owned
outlet stores, mail order catalogs, and the Internet.
At December 31, 2005, the Company operated approximately 64 retail outlet stores
in 34 states under the Farberware(R) name. Under an agreement with the Meyer
Corporation, Meyer Corporation assumed responsibility for merchandising and for
stocking Farberware(R) cookware products in the stores, receives all revenue
from sales of Farberware(R) cookware and, since October 31, 2003, occupies 30%
of the space in each store and reimburses the Company for 30% of the operating
expenses of the stores. For the periods prior to October 1, 2003, Meyer was
responsible for 50% of the space in each store and 50% of the operating expenses
of the stores.
As a result of the Pfaltzgraff acquisition in July 2005, at December 31, 2005
the Company also operated 57 Pfaltzgraff(R) retail outlet stores in 31 states
and a catalog and Internet business. The Pfaltzgraff(R) outlet stores, mail
order catalogs and Internet website all sell first-run Pfaltzgraff(R) brand
products through a dedicated direct-to-consumer channel.
In January 2006, the Company closed 20 Farberware(R) stores and 13
Pfaltzgraff(R) stores in order to consolidate certain Farberware(R) and
Pfaltzgraff(R) stores that coexisted within the same geographic area and to
eliminate certain unprofitable stores. Certain costs associated with the closure
of the Pfaltzgraff Stores will be reimbursed pursuant to the Pfaltzgraff
acquisition agreement. The cost of the store closings was not material to the
Company's consolidated financial statements.
The significant accounting policies used in the preparation of the consolidated
financial statements of the Company are as follows:
Revenue Recognition: The Company sells products wholesale to retailers and
distributors and retail direct to the consumer through Company-operated outlet
stores, catalog and Internet operations. Wholesale sales are recognized when
title passes to and the risks and rewards of ownership have transferred to the
customer. Outlet store sales are recognized at the time of sale, while catalog
and Internet sales are recognized upon receipt by the customer. Shipping and
handling fees that are billed to customers in sales transactions are recorded in
net sales. Included in net sales for year ended December 31, 2005 is shipping
and handling fee income of approximately $3.2 million. The Company did not
recognize any shipping and handling fee income for the years ended December 31,
2004 and 2003.
F-7
LIFETIME BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Distribution Expenses: Distribution expenses primarily consist of warehousing
expenses, handling costs of products sold and freight-out. Freight-out costs
included in distribution expenses amounted to $4.3 million, $3.3 million and
$2.7 million for 2005, 2004 and 2003, respectively. In 2003 these expenses
included relocation charges, duplicate rent and other costs associated with the
Company's move into its Robbinsville, New Jersey warehouse, amounting to $0.7
million. No such expenses were incurred in 2005 and 2004.
Inventories: Merchandise inventories consist principally of finished goods and
are priced by the lower of cost (first-in, first-out basis) or market method.
Management periodically analyzes inventory for excess and obsolescence based on
a number of factors including, but not limited to, future product demand and
estimated profitability of the merchandise.
Accounts Receivable: The Company is required to estimate the collectibility of
its accounts receivable. A considerable amount of judgment is required in
assessing the ultimate realization of these receivables including the current
credit-worthiness of each customer. The Company maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. The Company also maintains allowances for
sales returns. To evaluate the adequacy of the sales return allowance, the
Company analyzes historical trends and current information. If the financial
conditions of the Company's customers were to deteriorate, resulting in an
impairment of their ability to make payments, or the Company's estimate of
returns is determined to be inadequate, additional allowances may be required.
Property and Equipment: Property and equipment is stated at cost. Property and
equipment, other than leasehold improvements, is depreciated under the
straight-line method over the estimated useful lives of the assets. Building and
improvements are being depreciated over 30 years and machinery, furniture, and
equipment over 3 to 10 years. Leasehold improvements are amortized over the term
of the lease or the estimated useful lives of the improvements whichever is
shorter.
Cash Equivalents: The Company considers highly liquid instruments with a
maturity of three months or less when purchased to be cash equivalents.
Use of Estimates: The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Fair Value of Financial Instruments: The carrying amounts of the Company's
financial instruments, including cash and cash equivalents, accounts receivable,
accounts payable and trade acceptances approximate their fair values because of
the short-term nature of these items. The carrying value of short-term
borrowings outstanding under the Company's revolving credit facility approximate
fair value as such borrowings bear interest at variable market rates.
F-8
LIFETIME BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill and Other Intangible Assets: Effective January 1, 2002, the Company
adopted Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No.
141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under SFAS No. 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are reviewed
at least annually for impairment. The Company completed its annual assessment of
goodwill impairment in the fourth quarters of 2005, 2004 and 2003. Based upon
such reviews, no impairment to the carrying value of goodwill was identified in
either period.
Other intangibles consist of licenses, trademarks/trade names, customer
relationships and product designs acquired pursuant to acquisitions and are
being amortized by the straight-line method over periods ranging from 4 to 40
years. Accumulated amortization at December 31, 2005 and 2004 was $4.5 million
and $3.7 million, respectively.
Estimated amortization expense for each of the five succeeding fiscal years is
as follows (in thousands):
YEARS ENDING DECEMBER 31,
2006........................................................ $ 938
2007........................................................ 938
2008........................................................ 926
2009........................................................ 876
2010........................................................ 807
Amortization expense for the years ended December 31, 2005, 2004 and 2003 was
$814,000, $602,000 and $410,000, respectively.
Long-Lived Assets: The Company periodically reviews the carrying value of
intangibles and other long-lived assets for recoverability or whenever events or
changes in circumstances indicate that such amounts have been impaired.
Impairment indicators include among other conditions, cash flow deficits,
historic or anticipated declines in revenue or operating profit and a material
decrease in the fair value of some or all of the Company's long-lived assets.
When indicators are present, the Company compares the carrying value of the
asset to the estimated undiscounted future cash flows expected to be generated
from the use of the asset. If these estimated future cash flows are less than
the carrying value of the asset, the Company recognizes impairment to the extent
the carrying value of the asset exceeds its fair value determined generally
through an analysis of discounted cash flows. Such a review has been performed
by management and does not indicate an impairment of such assets.
Income Taxes: The Company accounts for income taxes using the asset and
liability method. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax rates and laws
that are expected to be in effect when the differences are expected to reverse.
Earnings Per Share: Basic earnings per share has been computed by dividing net
income by the weighted average number of common shares outstanding. Diluted
earnings per share adjusts basic earnings per share for the effect of stock
options. For the years ended December 31, 2005, 2004 and 2003 the weighted
average number of shares used in calculating diluted earnings per share include
the dilutive effect of stock options of 223,027, 243,269 and 126,170 shares,
respectively.
F-9
LIFETIME BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting for Stock Option Plan: At December 31, 2005, the Company has a stock
option plan, which is more fully described in Note D. The Company accounts for
the plan under the recognition and measurement principles of Accounting
Principle Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations and the Company complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation"
as amended by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition
and Disclosure". Accordingly, the Company only records compensation expense for
any stock options granted with an exercise price that is less than the fair
market value of the underlying stock at the date of grant. No stock-based
employee compensation cost is reflected in net income, as each option granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No.
123.
YEAR ENDED DECEMBER 31,
---------- --------- ---------
2005 2004 2003
---------- --------- ---------
(in thousands, except per share data)
Net income as reported .................... $14,109 $8,472 $8,415
Deduct: Total stock option employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects ............ (2,109) (172) (215)
---------- --------- ---------
Pro forma net income ...................... $12,000 $8,300 $8,200
========== ========= =========
Earnings per share:
Basic - as reported ................... $1.25 $0.77 $0.79
Basic - pro forma .................... $1.06 $0.76 $0.77
Diluted - as reported ................. $1.23 $0.75 $0.78
Diluted - pro forma .................. $1.04 $0.74 $0.76
The weighted average fair values of options granted during the years ended
December 31, 2005, 2004 and 2003 were $7.45, $5.90 and $2.57, respectively. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rates of 4.26%, 3.73% and 3.37% for 2005, 2004
and 2003, respectively; 1.04% dividend yield in 2005, 1.55% dividend yield in
2004 and 2.53% dividend yield in 2003; volatility factor of the expected market
price of the Company's common stock of 42% in 2005, 37% in 2004 and 41% in 2003;
and a weighted-average expected life of the options of 3.1, 6.0 and 6.0 years in
2005, 2004 and 2003, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-10
LIFETIME BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Pronouncements: In December 2004, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 123(R), "Share Based Payment". This
statement requires that the cost resulting from all share-based payment
transactions be recognized in the financial statements. In April 2005, the
Securities and Exchange Commission deferred the implementation of SFAS No.
123(R). SFAS 123(R) will become effective for the Company on January 1, 2006 and
the Company plans to use the modified-prospective transition method.
On December 22, 2005, the Board of Directors of the Company approved the
acceleration of the vesting of all unvested outstanding employee stock options.
As a result, options to purchase 386,920 common shares, which otherwise would
have vested and become exercisable from time to time over the next five years,
became fully vested and immediately exercisable as of December 22, 2005. The
number of shares and the exercise prices of the accelerated options were not
changed. The accelerated options have exercise prices ranging from $7.72 to
$24.23 and include 323,670 options held by directors and executive officers. The
compensation expense related to the modification of the terms of these options
was not material to the Company's consolidated financial statements.
The purpose of accelerating the vesting of the options was to reduce the
non-cash compensation expense that would be recorded in future periods following
the Company's adoption of SFAS 123(R). The aggregate pre-tax compensation
expense associated with the accelerated options that would have been recognized
in future periods is estimated to be approximately $2.4 million.
In order to limit the personal benefit to the optionees of fully vesting their
shares, the Board of Directors of the Company imposed restrictions on the sale
or transfer of the shares received by an optionee upon the exercise of an
accelerated option until the earlier of (a) the date on which such options would
have vested and become exercisable, without giving effect to such acceleration,
and (b) the optionee's death.
As a result of the acceleration of the unvested options, the Company does not
expect the adoption of SFAS 123(R) to have a material impact on the Company's
consolidated financial statements.
Reclassifications: Certain 2003 selling, general and administrative expenses
have been reclassified to distribution expenses to conform to the 2004 and 2005
presentation.
NOTE B -- ACQUISITIONS AND LICENSES
Gemco Ware, Inc. and :USE Acquisitions: In November 2003, the Company acquired
the assets of Gemco Ware, Inc. ("Gemco"), a distributor of functional glassware
products for storing and dispensing food and condiments. This acquisition
enabled the Company to broaden its product lines to include glassware. In
October 2003, the Company acquired the business and certain assets of the :USE -
Tools for Civilization Division of DX Design Express, Inc. (":USE"), which was a
company focused on creating contemporary lifestyle products for the home,
including decorative hardware, mirrors and lighting for the bath, as well as
decorative window accessories which enabled the Company to expand its product
assortment from the kitchen into the bathroom .
F-11
LIFETIME BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005
NOTE B -- ACQUISITIONS, DISPOSALS AND LICENSES (CONTINUED)
In connection with the Gemco and :USE acquisitions, the aggregate purchase price
paid in cash, including associated expenses, amounted to approximately $4.0
million. The Company is also required to pay minimum contingent consideration of
$300,000 ($100,000 in each of the years 2004 - 2006) based upon a percentage of
net sales of the :USE product line up to a maximum of $1,500,000 ($500,000 in
each of the years 2004 - 2006). The acquisitions were accounted for under the
purchase method in accordance with SFAS No. 141 "Business Combinations" (the
"Purchase Method") and, accordingly, the acquired assets and liabilities were
recorded at their fair values.
The purchase price allocation of the acquired businesses resulted in the
following balance of assets acquired (in thousands):
PURCHASE PRICE
ALLOCATION
------
Accounts receivable ... $1,131
Merchandise Inventories 944
Intangibles ........... 940
Goodwill .............. 1,248
------
Total assets acquired . $4,263
======
The 2003 acquisitions of Gemco and :USE were not material to the Company.
Accordingly, pro forma results of operations have not been presented.
Excel Importing Corp. acquisition: On July 23, 2004, the Company acquired the
business and certain assets of Excel Importing Corp., ("Excel"), a wholly-owned
subsidiary of Mickelberry Communications Incorporated ("Mickelberry"). Excel
marketed and distributed cutlery, tabletop, cookware and barware products under
brand names, including Sabatier(R), Farberware(R), Retroneu(R), Joseph Abboud
Environments(R) and DBK(TM)-Daniel Boulud Kitchen.
The purchase price, subject to post closing adjustments, was approximately $8.5
million, of which $7.0 million was paid in cash at the closing. The Company has
not paid the balance of the purchase price of $1.5 million since it believes the
total of certain estimated post closing inventory adjustments and certain
indemnification claims are in excess of this amount. The Company has been
unsuccessful in its attempts to obtain resolution of these matters with Excel
and Mickelberry and commenced a lawsuit against these parties on June 8, 2005,
claiming breach of contract, fraud and unjust enrichment. The lawsuit is in its
preliminary stages and a settlement has not been reached nor has any been
proposed. Due to the uncertainty regarding the ultimate outcome of the matter,
the Company believes that the amount, if any, that the Company will ultimately
be required to pay cannot be reasonably estimated at December 31, 2005.
Accordingly, no amount has been included in the purchase price for this
contingency. Upon final resolution of the matter, the Company will reflect any
further amounts due as part of the purchase price and will re-allocate the
purchase price to the net assets acquired.
F-12
LIFETIME BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005
NOTE B -- ACQUISITIONS, DISPOSALS AND LICENSES (CONTINUED)
The total purchase price has currently been determined as follows (in
thousands):
Cash paid at closing ............ $7,000
Professional fees and other costs 83
------
Total purchase price ......... $7,083
======
The purchase price was funded by borrowings under the Company's Credit Facility.
The Company has allocated the purchase price as follows (in thousands):
PURCHASE PRICE
ALLOCATION
-------
Assets acquired:
Accounts receivable ... $483
Merchandise inventories 4,769
Other assets .......... 20
Intangibles ........... 7,248
Liabilities assumed ..... (5,437)
-------
Total assets acquired $7,083
=======
The 2004 Excel acquisition was not material to the Company. Accordingly, pro
forma results of operations have not been presented.
Pfaltzgraff Acquisition: On July 11, 2005, the Company acquired the business and
certain assets of The Pfaltzgraff Co. ("Pfaltzgraff"). Pfaltzgraff designed
ceramic dinnerware and tabletop accessories for the home and distributed these
products through retail chains, company-operated outlet stores and through their
catalog and Internet operations. The acquisition was accounted for by the
Company under the Purchase Method.
The total purchase price has been determined as follows (in thousands):
Cash paid at closing ............ $32,500
Post closing working capital
adjustment .................... 4,742
Professional fees and other costs 956
-------
Total purchase price ......... $38,198
=======
F-13
LIFETIME BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005
NOTE B -- ACQUISITIONS, DISPOSALS AND LICENSES (CONTINUED)
The purchase price was funded by borrowings under the Company's Credit Facility.
On a preliminary basis the purchase price has been allocated based on
management's estimate of the fair value of the assets acquired and liabilities
assumed as follows (in thousands):
PRELIMINARY
PURCHASE
PRICE
ALLOCATION
--------
Assets acquired:
Accounts receivable .... $2,623
Merchandise inventories 26,314
Other current assets ... 1,489
Property and equipment . 3,328
Intangibles ............ 6,779
Liabilities assumed ...... (2,335)
--------
Total assets acquired $38,198
========
The following unaudited pro forma financial information is for illustrative
purposes only and presents the results of operations for the years ended
December 31, 2005 and 2004, as though the acquisition of Pfaltzgraff occurred at
the beginning of the respective periods.
The unaudited pro forma financial information is not intended to be indicative
of the operating results that actually would have occurred if the transaction
had been consummated on the dates indicated, nor is the information intended to
be indicative of future operating results. The unaudited pro forma financial
information does not reflect any synergies that may be achieved from the
combination of the entities by i) lowering the cost of products sold by sourcing
a significant majority of production overseas, ii) closing unprofitable
Pfaltzgraff outlet stores, iii) consolidating the Pfaltzgraff outlet store
operations with the Company's existing Farberware outlet store operations and
iv) eliminating redundant staffing, operations and executive management. The
unaudited pro forma financial information reflects adjustments for additional
interest expense on acquisition-related borrowings, amortization expense related
to the acquired intangibles and the income tax effect on the pro forma
adjustments. The pro forma adjustments are based on preliminary purchase price
allocations. Differences between the preliminary and final purchase price
allocations could have a significant impact on the unaudited pro forma financial
information presented.
(In thousands, except per share amounts) YEAR ENDED DECEMBER 31,
-------- ------------
2005 2004
-------- --------
Net sales ..................... $360,463 $337,479
Net income (loss) ............. 4,811 (4,555)
Diluted income (loss) per share 0.42 (0.41)
F-14
LIFETIME BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005
NOTE B -- ACQUISITIONS, DISPOSALS AND LICENSES (CONTINUED)
Salton, Inc. Acquisition: On September 19, 2005, the Company acquired certain
components of the tabletop business and related assets from Salton, Inc.
("Salton"). The assets acquired include Salton's Block(R) and Sasaki(R) brands,
licenses to market Calvin Klein(R) and NapaStyle(TM) tabletop products and
distribution rights for upscale crystal products under the Atlantis(R) brand. In
addition, the Company entered into a new license with Salton to market tabletop
products under the Stiffel(R) brand. The acquisition was accounted for under the
Purchase Method. The total purchase price has been determined as follows (in
thousands):
Cash paid at closing ............ $13,442
Professional fees and other costs 514
-------
Total purchase price ......... $13,956
=======
The purchase price was funded by borrowings under the Company's Credit
Facility. On a preliminary basis the purchase price has been allocated based on
management's estimate of the fair value of the assets acquired and liabilities
assumed as follows (in thousands):
PRELIMINARY
PURCHASE PRICE
ALLOCATION
-------
Merchandise inventories ......................................... $11,647
Other current assets ............................................ 316
Property and equipment .......................................... 70
Intangibles ..................................................... 1,923
-------
Total assets acquired ...................................... $13,956
=======
Pro forma information is not presented by the Company related to the acquisition
of Salton because discrete financial information relating to the historical
results of operations of the component of the Salton business acquired was not
available and not determinable.
The results of operations of the aforementioned acquisitions are included in the
Company's consolidated statements of income from the date of acquisition.
KitchenAid License Agreement: In October 2000, the Company entered into a
licensing agreement with Whirlpool Corporation. This agreement allows the
Company to design, manufacture and market an extensive range of kitchen
utensils, barbecue items and pantryware products under the KitchenAid(R) brand
name. On January 1, 2002, the licensing agreement between the Company and
KitchenAid was amended, expanding the covered products to include bakeware and
baking related products. A second amendment to the licensing agreement was
signed effective August 1, 2003, between the Company and KitchenAid. The second
amendment extended the term of the agreement through December 31, 2007 and
further expanded the covered products to include kitchen cutlery. A third
amendment to the licensing agreement entered into effective August 1, 2005,
extended the term of the agreement through December 31, 2009 and further
expanded the covered products to include sinkware, pantryware and spices.
Shipments of KitchenAid products began in the second quarter of 2001.
F-15
LIFETIME BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005
NOTE B -- ACQUISITIONS, DISPOSALS AND LICENSES (CONTINUED)
Cuisinart License Agreement: On March 19, 2002, the Company entered into a
licensing agreement with Conair Corporation. This agreement allows the Company
to design, manufacture and market a wide variety of cutlery products under the
Cuisinart(R) brand name. Shipments of products under the Cuisinart(R) name began
in the fourth quarter of 2002. On April 8, 2004, the licensing agreement between
the Company and Conair Corporation was amended, expanding the covered products
to include cutting boards. The license for kitchen cutlery products expires on
June 30, 2006 and the license for cutting board products expires on June 30,
2007. Each license renews automatically for successive one year terms provided
the agreement is not earlier terminated by either party and certain minimum
royalty requirements are met. Shipments of products by us under the Cuisinart
name began in the fourth quarter of 2002.
NOTE C --CREDIT FACILITY
On July 28, 2004, the Company entered into a $50 million five-year, secured
credit facility (the "Credit Facility") with a group of banks and, in
conjunction therewith, canceled its $35 million secured, reducing revolving
credit facility which was due to mature in November 2004. Borrowings under the
Credit Facility are secured by all of the assets of the Company. Under the terms
of the Credit Facility, the Company is required to satisfy certain financial
covenants, including limitations on indebtedness and sale of assets; a minimum
fixed charge ratio, a maximum leverage ratio and maintenance of a minimum net
worth. Borrowings under the Credit Facility have different interest rate options
that are based on an alternate base rate, the LIBOR rate or the lender's cost of
funds rate, plus in each case a margin based on a leverage ratio. In July 2005,
the Company amended the Credit Facility, to increase the size of the facility to
$100 million and to extend its maturity to July 2010. At December 31, 2005, the
Company was in compliance with the financial covenants of the Credit Facility.
As of December 31, 2005, the Company had outstanding $0.4 million of letters of
credit and trade acceptances, $14.5 million of short-term borrowings and a $5.0
million term loan under its Credit Facility and, as a result, the availability
under the Credit Facility was $80.1 million. The $5.0 million long-term loan is
non-amortizing, bears interest at 6.07% and matures in August 2009. Interest
rates on short-term borrowings at December 31, 2005 ranged from 6.40% to 6.56%.
The Company paid interest of approximately $2.4 million, $0.8 million and $0.7
million during the years ended December 31, 2005, 2004 and 2003, respectively.
NOTE D -- CAPITAL STOCK
Public Offering : On November 23, 2005, the Company and certain selling
stockholders completed a public offering pursuant to which they sold 1,733,000
and 1,142,000 shares of the Company's stock, respectively, at an offering price
of $21.50. The net proceeds to the Company from the sale of its 1,733,000 shares
were $34.4 million and these funds were used to repay outstanding borrowings
under the Company's Credit Facility.
F-16
LIFETIME BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005
NOTE D -- CAPITAL STOCK (CONTINUED)
Cash Dividends: The Company paid regular quarterly cash dividends of $0.0625 per
share on its Common Stock, or a total annual cash dividend of $0.25 per share,
in 2005, 2004 and 2003. The Board of Directors currently intends to maintain a
quarterly cash dividend of $0.0625 per share of Common Stock for the foreseeable
future, although the Board may in its discretion determine to modify or
eliminate such dividend at any time.
Common Stock Repurchase and Retirement: During the years ended December 31, 1999
and 2000, the Board of Directors of the Company authorized the repurchase of up
to 3,000,000 shares of the outstanding Common Stock in the open market. Through
December 31, 2005, 2,128,000 shares were repurchased for approximately $15.2
million (none in 2005, 2004 and 2003).
Preferred Stock: The Company is authorized to issue 100 shares of Series A
Preferred Stock and 2,000,000 shares of Series B Preferred Stock, none of which
is outstanding.
Stock Option Plans: In June 2000, the stockholders of the Company approved the
2000 Long-Term Incentive Plan (the "Plan"), whereby up to 1,750,000 shares of
common stock may be granted in the form of stock options or other equity-based
awards to directors, officers, employees, consultants and service providers to
the Company and its affiliates. The Plan authorizes the Board of Directors of
the Company, or a duly appointed committee thereof, to issue incentive stock
options as defined in Section 422 of the Internal Revenue Code, stock-based
awards that do not conform to the requirements of Section 422 of the Code, and
other stock-based awards. Options that have been granted under the 2000
Long-Term Incentive Plan expire over a range of ten years from the date of the
grant and vest over a range of up to five years from the date of grant.
During 2005 the Company issued 2,950 shares to its directors for payment of
directors fees. The total fair value of the shares issued was $50,000.
As of December 31, 2005, approximately 616,000 shares were available for grant
under the Company's stock option plans and all options granted through December
31, 2005 under the plan have exercise prices equal to the market value of the
Company's stock on the date of grant.
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
2005 2004 2003
---------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ----- ------- ----- ------- -----
Balance--Jan 1, 694,807 $7.59 966,610 $7.27 919,291 $6.98
Grants ......... 362,000 $24.12 49,000 $16.68 370,000 $7.37
Exercised ...... (150,650) $7.00 (217,041) $6.76 (298,232) $6.50
Canceled ....... (31,000) $8.25 (103,762) $10.60 (24,449) $7.44
------- ----- ------- ------ ------- -----
Balance--Dec 31, 875,157 $14.51 694,807 $7.59 966,610 $7.27
======= ===== ======= ====== ======= =====
F-17
LIFETIME BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005
NOTE D -- CAPITAL STOCK (CONTINUED)
The following table summarizes information about employees' stock options
outstanding at December 31, 2005:
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE WEIGHTED-AVERAGE
REMAINING EXERCISE PRICE-- EXERCISE
EXERCISE OPTIONS OPTIONS CONTRACTUAL OPTIONS PRICE--OPTIONS
PRICE OUTSTANDING EXERCISABLE LIFE OUTSTANDING EXERCISABLE
------------------- ---------------- --------------- --------------- ---------------------- -----------------------
$ 4.14 - $ 5.51.... 161,650 161,650 6.44 years $ 5.31 $ 5.31
$ 6.00 - $ 8.55.... 280,757 280,757 6.04 years $ 7.22 $ 7.22
$ 8.64 - $ 13.84... 47,750 47,750 8.19 years $ 13.16 $ 13.16
$ 15.60 -$ 22.46... 385,000 385,000 5.41 years $ 23.85 $ 23.85
---------------- --------------- --------------- ---------------------- -----------------------
875,157 875,157 5.95 years $ 14.51 $ 14.51
================ =============== =============== ====================== =======================
At December 31, 2004 and 2003, there were 461,932 and 699,610 options
exercisable, respectively, at weighted-average exercise prices per share of
$6.79 and $6.94, respectively.
In 1985, in connection with the exercise of options under a stock option plan
that has since expired, the Company received cash of $255,968 and notes in the
amount of $908,000 from certain stockholders of the Company. The notes bore
interest at 9% and were due no later than December 31, 2005 (see Note H).
During 2001, one of the above notes in the amount of $422,000 that was issued by
Milton L. Cohen, a former director of the Company, was canceled and a new note
in the amount of $855,000 was received by the Company that consolidated all
remaining amounts due from him. The new note bears interest at 4.85% and
payments of $48,000 (inclusive of principal and interest) are due quarterly. The
note matures on March 31, 2006. (see Note H)
NOTE E -- INCOME TAXES
The provision for income taxes consists of (in thousands):
YEAR ENDED DECEMBER 31,
---------------------------------
2005 2004 2003
------- ------- -------
Current:
Federal ....... $9,755 $4,861 $4,451
State and local 1,618 841 1,018
Deferred ............. (2,726) (100) 105
------- ------- -------
Income tax provision . $8,647 $5,602 $5,574
======= ======= =======
F-18
LIFETIME BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005
NOTE E -- INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax asset (liability) are as follows (in thousands):
DECEMBER 31,
--------------------
2005 2004
------- -------
Deferred tax assets:
Merchandise inventories....................... $3,266 $2,063
Accounts receivable allowances ............... 3,121 964
Deferred rent expense ........................ 552 --
Accrued bonuses .............................. 764 395
------- -------
Total deferred tax asset .......................... $7,703 $3,422
======= =======
Deferred tax liability:
Depreciation and amortization ................ $(4,967) $(3,413)
======= =======
The provision for income taxes differs from the amounts computed by applying the
applicable federal statutory rates as follows (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------
2005 2004 2003
------- ------- -------
Provision for Federal income taxes at
the statutory rate .............. $7,965 $4,926 $4,896
Increases (decreases):
State and local income taxes, net of
Federal income tax benefit ...... 1,052 547 662
Other ............................ (370) 129 16
------- ------- -------
Provision for income taxes .............. $8,647 $5,602 $5,574
======= ======= =======
The Company paid income taxes of approximately $6.8 million,$4.2 million and
$3.1 million during the years ended 2005, 2004 and 2003, respectively.
The Company and its subsidiaries' income tax returns are routinely examined by
various tax authorities. In management's opinion, adequate provisions for income
taxes have been made for all open years in accordance with SFAS No. 5,
Accounting for Contingencies.
F-19
LIFETIME BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005
NOTE F - BUSINESS SEGMENTS
As discussed in Note B, in July 2005 the Company acquired the wholesale, retail
outlet store, catalog and Internet businesses of Pfaltzgraff. With the addition
of the Pfaltzgraff retail businesses, the Company determined that it operates in
two reportable business segments -- wholesale and direct-to-consumer. The
wholesale segment includes the Company's business that designs, markets and
distributes household products to retailers and distributors. The
direct-to-consumer segment includes the Company's business that sells household
products directly to the consumer through Company-operated retail outlet stores,
catalog and Internet operations. The Company has segmented its operations in a
manner that reflects how management reviews and evaluates the results of its
operations. The distinction between these segments is that, while the products
distributed are similar, the type of customer for the products and the methods
used to market, sell and distribute the products are very different.
Management evaluates the performance of the wholesale and direct-to-consumer
segments based on "Net Sales" and "Income (Loss) From Operations". Such measures
give recognition to specifically identifiable operating costs such as cost of
sales, marketing, selling and distribution expenses and general and
administrative expenses. Certain general and administrative expenses such as
executive salaries and benefits, director fees and accounting, legal and
consulting fees are not allocated to the specific segments and, accordingly, are
reflected as unallocated corporate expenses. Assets in each segment consist of
assets used in its operations, acquired intangible assets and goodwill. Assets
in the unallocated corporate category consist of cash and tax related assets
that are not allocated to the segments.
F-20
LIFETIME BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005
NOTE F - BUSINESS SEGMENTS (CONTINUED)
YEAR ENDED DECEMBER 31,
---------------------------------------
(in thousands) 2005 2004 2003
--------- --------- ---------
NET SALES
Wholesale ..................... $241,618 $173,559 $149,368
Direct-to-Consumer ............ 66,279 15,899 10,987
--------- --------- ---------
Total net sales ............ $307,897 $189,458 $160,355
========= ========= =========
INCOME (LOSS) FROM OPERATIONS
Wholesale ..................... $33,150 $21,677 $19,827
Direct-to-Consumer ............ (444) (1,224) (990)
Unallocated corporate expenses (7,534) (5,604) (4,192)
--------- --------- ---------
Total income from operations $25,172 $14,849 $14,645
========= ========= =========
DEPRECIATION AND AMORTIZATION
Wholesale ..................... $4,558 $3,694 $3,393
Direct-to-Consumer ............ 1,083 380 280
--------- --------- ---------
Total depreciation and
amortization ............ $5,641 $4,074 $3,673
========= ========= =========
ASSETS
Wholesale ..................... $190,967 $145,542 $128,402
Direct-to-Consumer ............ 23,191 6,513 5,405
Unallocated corporate ......... 8,490 5,162 3,173
--------- --------- ---------
Total assets ............... $222,648 $157,217 $136,980
========= ========= =========
CAPITAL EXPENDITURES
Wholesale ..................... $3,872 $1,629 $1,468
Direct-to-Consumer ............ 1,226 1,282 745
--------- --------- ---------
Total capital expenditures . $5,098 $2,911 $2,213
========= ========= =========
F-21
LIFETIME BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005
NOTE G -- COMMITMENTS
Operating Leases: The Company has lease agreements for its warehouses, showroom
facilities, sales offices and outlet stores that expire through 2016. These
leases provide for, among other matters, annual base rent escalations and
additional rent for real estate taxes and other costs. Leases for certain retail
outlet stores provide for rent based upon a percentage of monthly gross sales.
Future minimum payments under non-cancelable operating leases are as follows (in
thousands):
YEAR ENDED DECEMBER 31:
-----------------------
2006 ................. $14,061
2007 ................. 12,894
2008 ................. 10,489
2009 ................. 7,742
2010 ................. 5,772
2011 and thereafter .. 19,735
-------
$70,693
=======
Under an agreement with the Meyer Corporation ("Meyer"), Meyer assumed
responsibility for merchandising and for stocking Farberware cookware products
in the Farberware outlet stores and receives all revenue from store sales of
Farberware(R) cookware. Since October 31, 2003, Meyer has occupied 30% of the
space in each store and reimbursed the Company for 30% of the operating expenses
of the stores. For that part of 2003 prior to October 1, 2003, Meyer occupied
50% of the space in each store and 50% of the operating expenses of the stores.
In 2005, 2004 and 2003, Meyer reimbursed the Company approximately $1.4 million,
$1.2 million and $1.5 million, respectively, for operating expenses.
Rental and related expenses under operating leases were approximately $13.0
million, $7.0 million and $6.9 million for the years ended December 31, 2005,
2004 and 2003, respectively. Such amounts are prior to the Meyer reimbursements
described above.
Capital Leases: The Company has entered into various capital lease arrangements
for the leasing of equipment that is utilized in its Robbinsville, New Jersey
warehouse. These leases expire in 2010 and the future minimum lease payments due
under the leases as of December 31, 2005 are as follows (in thousands):
YEAR ENDED DECEMBER 31:
-----------------------
2006 .................................. $374
2007 .................................. 347
2008 .................................. 292
2009 .................................. 132
2010 .................................. 41
------
Total minimum lease payments .......... 1,186
Less: amounts representing interest ... 118
------
Present value of minimum lease payments $1,068
======
F-22
LIFETIME BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005
NOTE G -- COMMITMENTS (CONTINUED)
The current and non-current portions of the Company's capital lease obligations
at December 31, 2005 of approximately $310,000 and $758,000 and at December 31,
2004 of approximately $262,000 and $819,000, respectively, are included in the
accompanying consolidated balance sheets within accrued expenses and deferred
rent and other long-term liabilities, respectively.
Royalties: The Company has royalty licensing agreements that require payments of
royalties on sales of licensed products which expire through December 31, 2009.
Future minimum royalties payable under these agreements are as follows (in
thousands):
YEAR ENDED DECEMBER 31:
-----------------------
2006 .................. $6,784
2007 .................. 7,487
2008 .................. 8,302
2009 .................. 9,366
-------
$31,939
=======
Legal Proceedings: The Company has, from time to time, been involved in various
legal proceedings. The Company believes that all current litigation is routine
in nature and incidental to the conduct of its business, and that none of this
litigation, if determined adversely to it, would have a material adverse effect
on the Company's consolidated financial position, results of operations or cash
flows.
Employment Agreements: Effective as of April 6, 2001, Mr. Jeffrey Siegel entered
into a new employment agreement with the Company that provides that the Company
will employ him as its President, Chief Executive Officer and Chairman of the
Board for a term commencing on April 6, 2001, and continuing until April 6, 2006
and thereafter for additional consecutive one year periods unless terminated by
either the Company or Mr. Siegel as provided in the agreement. The agreement
provides for an annual salary of $700,000 with annual increments based on
changes in the Consumer Price Index and for the payment to him of bonuses
pursuant to the Company's Incentive Bonus Compensation Plan. The agreement also
provides for, among other things, certain standard fringe benefit arrangements,
such as disability benefits, medical insurance, life insurance and an
accountable expense allowance. The agreement further provides that if the
Company is merged or otherwise consolidated with any other organization or
substantially all of the assets of the Company are sold or control of the
Company has changed (the transfer of 50% or more of the outstanding stock of the
Company) which is followed by: (i) the termination of his employment agreement,
other than for cause; (ii) the diminution of his duties or change in executive
position; (iii) the diminution of his compensation (other than a general
reduction in the compensation of all employees); or (iv) the relocation of his
principal place of employment to other than the New York Metropolitan Area, the
Company would be obligated to pay to Mr. Siegel or his estate the base salary
required pursuant to the employment agreement for the balance of the term. The
employment agreement also contains restrictive covenants preventing Mr. Siegel
from competing with us during the term of his employment and for a period of
five years thereafter.
F-23
LIFETIME BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005
NOTE G -- COMMITMENTS (CONTINUED)
On October 17, 2005 the Company entered into an employment agreement with Ronald
Shiftan that provides that the Company will employ Mr. Shiftan as Vice Chairman
and Chief Operating Officer for a term that commenced on July 1, 2005 and
continues until June 30, 2010, and thereafter for additional one year periods
unless terminated by either the Company or Mr. Shiftan as provided in the
agreement. The agreement provides for an initial annual salary of $400,000 with
annual increases based on changes in the Bureau of Labor Statistics Consumer
Price Index for All Urban Consumers. Commencing with the year ending December
31, 2005, Mr. Shiftan will receive an annual cash bonus equal to six-percent of
the annual increase in the Company's income before taxes (excluding items that
appear on the audited financial statements as extraordinary items and items that
the Board of Directors, in its sole discretion, determines are outside of the
ordinary course of business) over the prior year. In accordance with the terms
of the agreement, the Board of Directors granted to Mr. Shiftan an option to
purchase 350,000 shares of the Company's common stock pursuant to its 2000
Long-Term Incentive Plan at an exercise price of $24.23 per share.
The agreement also provides for certain fringe benefits and a severance benefit
equal to the lesser of (x) his base salary or (y) his salary remaining to the
end of the term plus his pro-rated bonus if (i) Mr. Shiftan resigns for Good
Reason (as defined in the agreement) or (ii) the Company terminates Mr.
Shiftan's employment for any reason other than Disability (as defined in the
agreement) or Cause (as defined in the agreement) (such a resignation or
termination is referred to in the agreement as an "Involuntary Termination")
after July 1, 2006. In the event of Mr. Shiftan's Involuntary Termination before
July 1, 2006, he will receive as severance his salary remaining to the end of
the term plus his pro-rated bonus. The agreement further provides that if the
Company undergoes a Change of Control (as defined in the agreement) and (i) Mr.
Shiftan's employment is thereafter terminated under circumstances that would
constitute an Involuntary Termination or (ii) Mr. Shiftan undergoes an
Involuntary Termination and within 90 days the Company executes a definitive
agreement to enter into a transaction the consummation of which would constitute
a Change of Control and such transaction is actually consummated, the Company
would be obligated to pay to him or his estate the lesser of (x) 2.99 times the
average of his base salary and bonus for the three years immediately preceding
the change of control or (y) 1% of the Company's market capitalization in excess
of $220,000,000, up to a maximum payment of $2,500,000. The employment agreement
also contains restrictive covenants preventing Mr. Shiftan from competing with
the Company during the term of his employment and for a period of five years
thereafter
During 2005 and 2004, several members of senior management entered into
employment agreements with the Company. The employment agreements termination
dates range from June 30, 2006 through June 30, 2007. The agreements provide for
annual salaries and bonuses, certain standard fringe benefit arrangements, such
as disability benefits, medical insurance, life insurance and auto allowances.
NOTE H -- RELATED PARTY TRANSACTIONS
Effective April 6, 2001, Milton L. Cohen, then a director of the Company, and
the Company entered into a 5-year consulting agreement with an annual fee of
$440,800.
As of December 31, 2005 and December 31, 2004, Milton L. Cohen a former director
of the Company owed the Company approximately $48,000 and $278,000, respectively
(see Note D). The loan due is included within other current assets in the
accompanying December 31, 2005 consolidated balance sheet and in other current
and non-current assets in the accompanying December 31, 2004 consolidated
balance sheet.
F-24
LIFETIME BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005
NOTE H -- RELATED PARTY TRANSACTIONS (CONTINUED)
As of December 31, 2004, Jeffrey Siegel, Chairman of the Board, President and
Chief Executive Officer of the Company, owed the Company approximately $344,000
with respect to an outstanding loan related to the exercise of stock options
under a stock option plan which has since been terminated. The loan was repaid
as of December 31, 2005.
As of December 31, 2004, Craig Phillips, a vice president of the Company, owed
the Company approximately $135,000 with respect to an outstanding loan related
to the exercise of stock options under a stock option plan which has since been
terminated. The loan was repaid as of December 31, 2005.
The loans receivable from Jeffrey Siegel and Craig Phillips are included in
stockholders' equity in the accompanying December 31, 2004 balance sheet.
NOTE I -- RETIREMENT PLAN
The Company maintains a defined contribution retirement plan ("the Plan") for
eligible employees under Section 401(k) of the Internal Revenue Code.
Participants can make voluntary contributions up to a maximum of 15% of their
respective salaries. The Company matches 50% of the first 4% of employee
contributions. The Company made matching contributions to the Plan of
approximately $372,000, $257,000 and $206,000 in 2005, 2004 and 2003,
respectively.
NOTE J -- CONCENTRATION OF CREDIT RISK
The Company maintains cash equivalents with various financial institutions.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of entities comprising the Company's customer
base and their dispersion across the United States. The Company periodically
reviews the status of its accounts receivable and, where considered necessary,
establishes an allowance for doubtful accounts.
During the years ended December 31, 2005, 2004 and 2003, Wal-Mart Stores, Inc.
(including Sam's Clubs) accounted for approximately 20%, 24% and 29% of net
sales, respectively. No other customer accounted for 10% or more of the
Company's net sales during 2005, 2004 or 2003. For the years ended December 31,
2005, 2004 and 2003, the Company's ten largest customers accounted for
approximately 51%, 59% and 62% of net sales, respectively.
F-25
LIFETIME BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005
NOTE K -- OTHER
Property and Equipment:
Property and equipment consist of (in thousands):
DECEMBER 31,
-------------------
2005 2004
------- -------
Land ........................................... $ 932 $ 932
Building and improvements ...................... 7,378 6,379
Machinery, furniture and equipment ............. 37,550 29,681
Leasehold improvements ......................... 2,076 1,810
------- -------
47,936 38,802
Less: accumulated depreciation and amortization 23,947 18,799
------- -------
$23,989 $20,003
======= =======
Depreciation and amortization expense on property and equipment for the years
ended December 31, 2005, 2004 and 2003 was $4.8 million, $3.5 million and $3.3
million, respectively. Included in machinery, furniture and equipment and
related accumulated depreciation as of December 31, 2005 are approximately
$1,649,000 and $569,000, respectively, and as of December 31, 2004 are
approximately $1,332,000 and $281,000, respectively, related to assets recorded
under capital leases.
Accrued Expenses:
Accrued expenses consist of (in thousands):
DECEMBER 31,
-------------------
2005 2004
------- -------
Commissions ........................................... $ 1,381 $ 887
Accrued customer allowances and rebates ............... 3,755 5,407
Amounts due to Meyer Corporation ...................... 981 1,621
Officer and employee bonuses .......................... 3,714 1,203
Accrued royalties ..................................... 2,186 2,249
Accrued salaries, vacation and temporary labor billings 3,139 2,075
Accrued foreign purchases ............................. 3,923 1,035
Accrued freight-out ................................... 1,275 495
Dividends payable ..................................... 808 691
Other ................................................. 7,532 4,482
------- -------
$28,694 $20,145
======= =======
Sources of Supply: The Company sources its products from approximately 137
suppliers located primarily in the People's Republic of China, and to a lesser
extent in the United States, Taiwan, Thailand, Malaysia, Indonesia, Germany,
France, Korea, Czech Republic, Italy, India and Hong Kong. The Company has been
sourcing products in Asia for over 40 years. The Company does not own or operate
any manufacturing facilities (other than its spice packing line within its
Winchendon, Massachusetts facility), but instead relies on established long-term
relationships with its major suppliers. The Company collaborates with its major
suppliers during the product development process and on manufacturing technology
to achieve efficient and timely production. The Company's three largest
suppliers provided it with approximately 54% of the products the Company
distributed in 2005 and 2004.
F-26
LIFETIME BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2005
NOTE L -- SUBSEQUENT EVENT
On March 8, 2006 the Company entered into an agreement to acquire the business
and certain assets of Syratech Corporation ("Syratech"), a designer, importer
and manufacturer of a diverse portfolio of tabletop, home decor and picture
frame products. Founded in 1986, Syratech owns many key brands in home fashion,
including Wallace Silversmiths(R), Towle Silversmiths(R), International Silver
Company(R), Melannco International(R) and Elements(R). In addition, Syratech
licenses the Cuisinart(R) brand for tabletop products and recently secured the
license for Kenneth Cole Reaction Home(R). Syratech's products are broadly
distributed through better department stores, specialty stores, big box
retailers warehouse clubs, and catalogs. The total purchase price subject to
working capital adjustments is approximately $49.5 million, payable $37.0
million in cash and $12.5 million in shares of the Company's common stock. The
Company expects to fund the cash portion of the purchase price through its
Credit Facility.
F-27
LIFETIME BRANDS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
COL. A COL. B COL. C COL. D COL. E
- ------ ----------------- ---------------- ---------------- ------------------
Additions
Balance at Charged to
Beginning of Costs and Deductions Balance at
Description Period Expenses (Describe) End of Period
- ----------- ----------------- ---------------- ---------------- ------------------
Year ended December 31, 2005
Deducted from asset accounts:
Allowance for doubtful
Accounts.......................... $ 195 $ 132 $ 132 (a) $ 195
Reserve for sales
returns and allowances............ 3,282 13,662 (c) 9,226 (b) 7,718
----------------- ---------------- ---------------- ------------------
$ 3,477 $ 13,794 $ 9,358 $ 7,913
================= ================ ================ ==================
Year ended December 31, 2004
Deducted from asset accounts:
Allowance for doubtful
Accounts.......................... $ 195 $ (67) $ (67) (a) $ 195
Reserve for sales
returns and allowances............ 3,154 9,942 (c) 9,814 (b) 3,282
----------------- ---------------- ---------------- ------------------
$ 3,349 $ 9,875 $ 9,747 $ 3,477
================= ================ ================ ==================
Year ended December 31, 2003
Deducted from asset accounts:
Allowance for doubtful
Accounts.......................... $ 612 $ 8 $ 425 (a) $ 195
Reserve for sales
returns and allowances............ 3,276 9,297 (c) 9,419 (b) 3,154
----------------- ---------------- ---------------- ------------------
$ 3,888 $ 9,305 $ 9,844 $ 3,349
================= ================ ================ ==================
(a) Uncollectible accounts written off, net of recoveries.
(b) Allowances granted.
(c) Charged to net sales.
S-1
EXHIBIT 3.2
SECOND RESTATED CERTIFICATE OF INCORPORATION
of
LIFETIME BRANDS, INC.
Pursuant to Section 245 of the Delaware
General Corporation Law
LIFETIME BRANDS, INC., a Delaware Corporation, hereby certifies as
follows:
1. The name of the Corporation is LIFETIME BRANDS, INC. The date of
filing of the original Certificate of Incorporation of the Corporation with the
Secretary of State of the State of Delaware was December 22, 1983. The name
under which the Corporation was originally incorporated is L C Acquisition Corp.
2. The original Certificate of Incorporation as amended or supplemented
was further amended and restated by the filing on April 23, 1991 with the
Secretary of State of a Restated Certificate of Incorporation (the "First
Restated Certificate of Incorporation").
3. This Second Restated Certificate of Incorporation merely restates
and integrates and does not further amend the First Restated Certificate of
Incorporation of the Corporation as heretofore amended or supplemented.
4. The First Certificate of Incorporation of the Corporation as
heretofore amended or supplemented is hereby restated to read as follows:
SECOND RESTATED CERTIFICATE OF INCORPORATION
of
LIFETIME BRANDS, INC.
FIRST: The name of the Corporation is LIFETIME BRANDS, INC.
SECOND: The address of its registered office in the State of Delaware
is 2711 Centerville Road, Suite 400, Wilmington, Delaware 19808 in New Castle
County. The name of its registered agent at such address is The Prentice-Hall
Corporation System Inc.
THIRD: The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which Corporations may
be organized under the General Corporation Law of the State of Delaware.
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is twenty-seven million one hundred (27,000,100) shares,
of which one hundred (100) shares, of the par value of One Dollar ($1.00) each,
are to be of a class designated Series A Preferred Stock, two million
(2,000,000) shares, of the par value of One Dollar ($1.00) each, are to be of a
class designated Series B Preferred Stock and twenty-five million (25,000,000)
shares, of the par value of One Cent ($.0l) each, are to be of a class
designated Common Stock.
The designation, relative rights, preferences and limitations of the
shares of each class of stock of the Corporation are as follows:
1. Dividend Rights.
(a) The holders of the Series A Preferred Stock shall be entitled to
receive when, as, and if declared by the Board of Directors and out of the
assets of the Corporation which are legally available for the payment of
dividends, cumulative preferential cash dividends in the amount of $700 per
annum for each share of Series A Preferred Stock held, and no more, payable
quarterly in arrears on the last day of March, June, September and December of
each year (each such date being hereinafter referred to as a "Dividend Payment
Date") commencing June 30, 1984. Dividends upon shares of the Series A Preferred
Stock shall accrue on a daily basis commencing on the date of issuance and
accrued dividends for each dividend period shall accumulate, to the extent not
paid, on the Dividend Payment Date on which they shall first become payable.
Such dividends shall accrue whether or not the Corporation shall have earnings,
whether or not there shall be funds legally available for the payment of
dividends and whether or not such dividends are declared. Accumulated dividends
on shares of Series A Preferred Stock shall not bear interest.
(b) Whenever full dividends upon the issued and outstanding Series A
Preferred Stock as aforesaid for all past quarterly dividend periods shall have
been paid without interest and whenever full dividends upon the issued and
outstanding Series A Preferred Stock as aforesaid for the then current quarterly
dividend period shall have been declared and either paid or a sum sufficient for
the payment set aside in full without interest, the Board of Directors may
declare, set aside or pay additional cash dividends which if declared shall be
payable on or set apart for the Series B Preferred shares as follows: Each
issued and outstanding Series B Preferred share shall entitle the holder of
record thereof to receive dividends in cash at the rate to be established by a
Board of Directors of the Corporation at the time of issuance of such Series B
Preferred shares on such dates in each calendar year as the Board of Directors
shall deem advisable and which will be declared and set apart or paid before
dividends of any kind may be declared upon the common shares and before
distributions of any kind may be made upon the issued and outstanding common
shares. The right as aforesaid to dividends upon issued and outstanding Series B
Preferred shares and whether same shall be cumulative or non-cumulative and
shall or shall not be deemed to accrue whether dividends are earned or whether
there be funds weekly available therefor shall be determined by the Board of
Directors at the time of issuance of Preferred B shares.
(c) Whenever any full dividends have been declared upon the issued and
outstanding Series B Preferred shares as aforesaid for all past dividend periods
shall have been paid without interest and whenever full dividends upon the
issued and outstanding Series B Preferred shares aforesaid for the then current
dividend period shall have been declared and either paid or a sum sufficient for
the payment thereof set aside without interest, the Board of Directors may
declare, set aside or pay additional cash dividends and/or may make share
distributions of unissued common shares of the Corporation and/or of its
treasury common shares, if any, and/or may make distributions of bonds or
property of the Corporation, including the shares or bonds of other
Corporations. The holders of record of the issued and outstanding common shares
shall be entitled in respect of said common shares exclusively to receive any
such additional cash dividends which may be declared and/or any such
distributions which may be made, each issued and outstanding common share
entitling the holder of record thereof to receive an equal proportion of said
dividends and/or distributions. Any reference to "distributions" in this
paragraph contained shall not be deemed to include any distributions made in
connection with any liquidation, dissolution, or winding up of the Corporation,
whether voluntary or involuntary; nor shall any such reference to
"distributions" in relation to issued and outstanding shares be deemed to limit,
curtail, or divest the authority of the Board of Directors to make any proper
distributions, including distributions of authorized but unissued common shares,
in relation to its treasury common shares, if any.
2. Redemption Rights
(a) The Corporation may, through its Board of Directors and in
conformity with the provisions of the General Corporation Law, at any time or
from time to time, redeem all or any part of the issued and outstanding Series A
Preferred shares by paying the holders of record thereof, out of funds legally
available therefor, the sum of Ten Thousand ($10,000) dollars for each such
share to be redeemed plus an amount equivalent to all unpaid quarterly
dividends, whether or not earned or declared, which have accrued to the date
fixed for redemption and/or redeem all or any part of the issued and outstanding
Series B Preferred shares by paying the holders of record thereof, out of funds
legally available therefor, the par value sum of dollars for each such share to
be redeemed plus an amount equivalent to all dividends, if any, which have been
declared but not paid, to the date fixed for redemption. In the event that less
than all of the issued and outstanding Series A Preferred shares and/or Series B
Preferred shares are to be redeemed, the shares to be redeemed shall be chosen
by lot, pro rata, or by such equitable method as the Board of Directors may
determine. On and after the date fixed for such redemption, the holders of the
shares so called for redemption shall not be entitled to any dividends and shall
not have any rights or interests as holders of said shares except to receive the
payment or payments herein designated, without interest thereon, upon
presentation and surrender of their certificates therefor.
(b) Notwithstanding anything to the contrary contained in subparagraph
(a) above, all shares of Series A Preferred Stock which are outstanding on the
eighth (8th) anniversary of the date of original issuance of such shares shall
be redeemed by the Corporation at the Redemption Price set forth in subparagraph
(a) above. Such required redemption shall be made by the Corporation within
sixty (60) days after such eighth anniversary.
(c) Notice of every proposed redemption of Series A Preferred Stock and
Series B Preferred Stock shall be mailed by or on behalf of the Corporation, by
first class registered or certified mail, postage prepaid, sent to the holders
of record of the shares to be redeemed at their respective addresses as they
shall appear on the records of the Corporation, not less than thirty (30) days
nor more than sixty (60) days prior to the date fixed for redemption, such
notice to state the Redemption Price and the place at which and the date on
which the shares called for redemption will, upon presentation and surrender of
the certificates of stock evidencing such shares, be redeemed and the Redemption
Price therefor paid.
(d) If notice of redemption shall have been given as hereinbefore
provided, then, from and after the date fixed for redemption (unless the
Corporation shall default in making payment of the Redemption Price), the shares
called for redemption shall no longer be deemed to be outstanding, and all
rights of holders of such shares shall cease and terminate, except the right of
the holders of such shares, upon surrender of certificates therefor, to receive
the Redemption Price thereof, without interest.
(e) All shares of Series A Preferred Stock and Series B Preferred Stock
issued and thereafter redeemed, purchased or otherwise acquired by the
Corporation shall be retired.
(f) Common Stock is not redeemable by the Corporation. Subject to the
requirements of the Corporation's By-Laws, the Corporation shall have the right
to acquire shares of Common Stock and Class A Preferred Stock and Class B
Preferred Stock from any person.
3. Liquidation and Dissolution Rights
(a) In the event of any liquidation, dissolution, or winding up the
affairs of the Corporation, whether voluntary or involuntary, each issued and
outstanding Series A Preferred share shall entitle the holder of record thereof
to payment at the rate of Ten Thousand ($10,000) dollars for each share plus an
amount equal to all unpaid quarterly dividends, without interest, whether or not
earned or declared, which have accrued thereon to the date of payment before any
payment or distribution of the net assets of the Corporation (whether stated
capital or surplus) shall be made to or set apart for the holders of record of
the issued and outstanding Series B Preferred shares in respect of said Series B
Preferred shares and of the common shares in respect of said common shares.
(b) After setting part or paying in full the preferential amounts
aforesaid to the holders of record of the issued and outstanding Series A
Preferred shares, each issued and outstanding Series B Preferred share shall
entitle the holder of record thereof to payment at the rate of the par value
thereof plus an amount equal to all dividends, if any, which have been declared
but not paid, without interest, before any payment or distribution of the net
assets of the Corporation (whether stated capital or surplus) shall be made to
or set apart for the holders of record of the issued and outstanding common
shares in respect of said common shares.
(c) After setting apart or paying in full the preferential amounts
aforesaid to the holders of record of the issued and outstanding Series B
Preferred shares, the remaining net assets (whether stated capital or surplus),
if any, shall be distributed exclusively to the holders of record of the issued
and outstanding common shares, each issued and outstanding common share
entitling the holder of record thereof to receive an equal proportion of said
remaining net assets.
(d) If the net assets of the Corporation shall be insufficient to pay
in full the preferential amounts among the holders of the Series A Preferred
shares as aforesaid, then each issued and outstanding Series A Preferred share
shall entitle the holder of record thereof to an equal proportion of said net
assets, and the holders of the Series B Preferred shares and of the common
shares shall in no event be entitled to participate in the distribution of said
net assets in respect of
their Series B Preferred shares and their common shares, as the case may be. If,
after any payment in full of the full preferential amounts among the holders of
Series A Preferred shares as aforesaid, the net assets of the Corporation shall
be insufficient to pay in full the preferential amount among the holders of the
Series B Preferred shares as aforesaid, then each issued and outstanding Series
B Preferred share shall entitle the holder of record thereof to an equal
proportion of said net assets, and the holders of the common shares shall in no
event be entitled to participate in the distribution of said net assets in
respect of their common shares.
(e) Without excluding any other proceeding which does not in fact
effect a liquidation, dissolution, or winding up of the Corporation, a merger or
consolidation of the Corporation, a merger or consolidation of the Corporation
into or with any other Corporation, a merger of any other Corporation into the
Corporation, participation by the Corporation in a plan for share exchanges with
another Corporation, or a sale, lease, mortgage, pledge, exchange, transfer, or
other disposition by the Corporation of all or substantially all of its assets
shall not be deemed, for the purposes of this paragraph, to be a liquidation,
dissolution, or winding up of the Corporation.
4. Voting Rights
Each issued and outstanding Common share shall entitle the holder
thereof to full voting power. Except as any provision of law may otherwise
require, no Series A or Series B Preferred share shall entitle the holder
thereof to any voting power, to participate in any meeting of shareholders, or
to have notice of any meeting of shareholders.
FIFTH: No director shall be liable to the Corporation or its
stockholders for monetary damages for breach of his fiduciary duty as a
director, except for liability: (i) for any breach of the director's duty of
loyalty to the Company or its stockholders; (ii) for acts or omissions not in
good faith which involve intentional misconduct or a knowing violation of law;
(iii) under section 174 of the Delaware General Corporation Law; or (iv) for any
transaction in which the director derived an improper personal benefit.
SIXTH: Members of the Board of Directors may be elected either by
written ballot or by voice vote, unless otherwise provided in the By-Laws of the
Corporation.
SEVENTH: The Board of Directors of the Corporation may make By-Laws and
from time to time may alter, amend or repeal By-Laws.
5. This Second Restated Certificate of Incorporation was duly adopted
by the Board of Directors of the Corporation in accordance with Section 245 of
the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Second Restated
Certificate of Incorporation of the Corporation to be executed by its President
this 7th day of June, 2005.
LIFETIME BRANDS, INC.
By: /s/ Jeffrey Siegel
----------------------------------
Name: Jeffrey Siegel
Title: President
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Outlet Retail Stores, Inc.
Incorporated in the state of Delaware
Roshco, Inc.
Incorporated in the state of Illinois
M. Kamenstein Corp. Incorporated in the state of Delaware
The Pfaltzgraff Co.
Incorporated in the state of Delaware
Pfaltzgraff Factory Stores, Inc.
Incorporated in the state of Delaware
Luxury Tabletop, Inc.
Incorporated in the state of Delaware
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-51774) pertaining to the Lifetime Brands, Inc. (formerly Lifetime
Hoan Corporation) 2000 Stock Option Plan of our report dated March 8, 2006, with
respect to the consolidated financial statements and schedule of Lifetime
Brands, Inc. and its consolidated subsidiaries included in the Annual Report
(Form 10-K) for the year ended December 31, 2005.
/s/ Ernst & Young LLP
Melville, New York
March 15, 2006
EXHIBIT 31.1
CERTIFICATION
I, Jeffrey Siegel, certify that:
1. I have reviewed this annual report on Form 10-K of Lifetime Brands,
Inc. ("the registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-14 and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f))) for the registrant and have:
a. designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this annual report is being
prepared;
b. designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d. disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter that has
materially affected or is reasonably likely to materially
affect the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design or operation of
internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 15, 2006
/s/ Jeffrey Siegel
- -------------------------------------
Jeffrey Siegel
President and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATIONS
I, Robert McNally, certify that:
1. I have reviewed this annual report on Form 10-K of Lifetime Brands,
Inc. ("the registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-14 and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f))) for the registrant and have:
a. designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this annual report is being
prepared;
b. designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d. disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter that has
materially affected or is reasonably likely to materially
affect the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design or operation of
internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 15, 2006
/s/ Robert McNally
- ---------------------------
Robert McNally
Vice President and Chief Financial Officer
EXHIBIT 32 Certification by Jeffrey Siegel, Chief Executive Officer and Robert McNally, Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. I, Jeffrey Siegel, Chief Executive Officer, and I, Robert McNally, Chief Financial Officer, of Lifetime Brands, Inc., a Delaware corporation (the "Company"), each hereby certifies that: (1) the Company's Annual Report on Form 10-K for the annual period ended December 31, 2005 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Jeffrey Siegel /s/ Robert McNally - ------------------ ------------------ Jeffrey Siegel Robert McNally Chief Executive Officer Chief Financial Officer Date: March 15, 2006 Date: March 15, 2006 A signed original of this written statement required by Section 1350 has been provided to Lifetime Brands, Inc. and will be retained by Lifetime Brands, Inc. and furnished to the Securities and Exchange Commission or its staff, upon request.