Annual Report 2005
LIFETIME BRANDS, INC.
One Merrick Avenue, Westbury, New York 11590
FINANCIAL HIGHLIGHTS
$350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
'05
'04
'03
'02
'01
$15,000
12,000
9,000
6,000
3,000
0
'05
'04
'03
'02
'01
NET SALES
(in thousands)
INCOME FROM
CONTINUING
OPERATIONS
(in thousands)
$1.50
$100,000
1.20
0.90
0.60
0.30
0.00
'05
'04
'03
'02
'01
DILUTED EARNINGS
PER COMMON SHARE
FROM CONTINUING
OPERATIONS
80,000
60,000
40,000
20,000
0
'03
'02
'05
'04
'01
WORKING CAPITAL
(in thousands)
(in thousands, except per share data)
Year Ended December 31,
2005
2004
2003
2002
2001
Net sales
$307,897
$189,458
$160,355
$131,219
$135,068
Income from continuing operations
Diluted earnings per common share from
continuing operations
Working capital
$14,109
$8,472
$8,415
$3,551
$3,612
$1.23
$85,843
$0.75
$50,512
$0.78
$41,554
$0.34
$33,380
$0.34
$30,561
COMPANY PROFILE
Lifetime Brands, Inc. is a leading
designer, developer and marketer of a
broad range of branded consumer
products used in the home, including
Kitchenware, Cutlery and Cutting
Boards, Bakeware and Cookware,
Pantryware and Spices, Dinnerware,
Flatware, Glassware and
Bath Accessories.
DEAR FELLOW SHAREHOLDERS:
It is with great satisfaction that I share with you
our results for 2005. We achieved record levels of
net sales, net income and earnings per share,
accomplished two significant acquisitions and
enhanced our already strong financial position.
These accomplishments are largely due to
initiatives we began to implement several years
ago, which include an unwavering focus on
having the best brands, the most innovative
products and the strongest sourcing capability in
our industry.
Sales and Earnings Reach Record Levels
Net sales increased 63% to $307.9 million from
$189.5 million in 2004. Excluding the results
attributable to the businesses we acquired in
2005, net sales grew by 24% to $235.7 million. For
the year, net income rose 66% to $14.1 million
from $8.5 million and net income per diluted
share increased 64% to $1.23 from $0.75.
Sales of KitchenAid branded products continued
to be a primary growth driver for Lifetime; and we
broadened our partnership with Whirlpool
Corporation by expanding the scope of our
KitchenAid® license to include sinkware,
pantryware and spices. The term of the license
was extended through December 31, 2009.
In our Cutlery category, sales rose 71%, driven by
increases of over 30% in each of our four major
cutlery brands, KitchenAid®, Farberware®,
Cuisinart® and Sabatier®. Cutlery is our most
mature business, which supports our belief that
Lifetime can achieve significant double-digit
growth in each of our major categories.
Our Kitchenware division also turned in an
excellent performance, achieving growth of more
than 19%. We also developed and introduced an
extensive assortment of sinkware under the
KitchenAid® and Farberware® brands, with initial
shipments having commenced late in the fourth
quarter. These lines were very well received by retailers, and further rollouts are planned with several other
major customers in 2006.
In our Bakeware and Cookware division, we continue to see strong growth especially in silicone bakeware,
where Lifetime’s products lead the market. Since cookware is one of the largest categories in the
housewares industry, we renewed our efforts in this area and developed four exciting brands of cookware
that we are now introducing to the trade. We expect to begin shipping cookware lines in mid-2006.
In our Pantryware and Spices division, we achieved substantial growth in our spice rack business, as well as
a solid increase in sales of our patented Perfect Tear® towel holders. We are now introducing a full line of
KitchenAid branded pantryware, which – as with the other categories in which we introduced product
under this great brand – we expect to be very well received.
Acquisitions Expand Lifetime’s Presence in Tabletop
Acquisitions are a key component of Lifetime’s long-term growth strategy. Our acquisitions in 2005 of the
business and certain assets of The Pfaltzgraff Co. and certain businesses and related assets of Salton, Inc.
significantly bolstered our presence in the important tabletop category. Both businesses fit our strategy of
acquiring premier national brands, and brought us such leading names as Pfaltzgraff®, Nautica®, Calvin
Klein®, Block® and Sasaki®. The acquisition of Salton’s tabletop assets also extended our distribution to
fine china and crystal.
As with our previous acquisitions, our goal was to use Lifetime’s product development and sourcing
strengths to become a key resource within the tabletop category and to drive growth across all our brands
and customer base. To that end, we integrated the Pfaltzgraff and Salton businesses with the Excel
tabletop business we acquired in 2004 and put in place a first-class team of dinnerware and glassware
experts who have been charged with the profitable growth of this division. We also began applying
Lifetime’s sourcing and product design expertise to improve the price-value relationship of the Pfaltzgraff
and Salton tabletop lines and to accelerate the introduction of new patterns.
In addition, the acquisition of Pfaltzgraff provided us with many new opportunities in our retail business.
Unlike our Farberware Outlet Stores, which we operated as true factory outlets and which did not have a
material impact on Lifetime’s financial results, the Pfaltzgraff Factory Stores were an important distribution
channel for Pfaltzgraff dinnerware and accessories, offering extensions of their product lines that were not
carried by traditional retailers. As part of their direct-to-consumer business, Pfaltzgraff also sold products
through their own Internet website and mail order catalog operations.
To take advantage of these strengths, we consolidated the management of the Farberware stores under
the leadership of the Pfaltzgraff retail team. We rationalized the store count, closing those that were less
successful or would have duplicated our presence in the same or neighboring malls and re-merchandised
both groups of stores, so that each carries the others’ products. We now operate 88 stores, of which 44 are
Farberware Outlets and 44 are Pfaltzgraff Factory Stores.
Increased our Financial Resources
To provide the Company with the financial flexibility to pursue our growth strategy, we increased the size
of our secured credit facility to $100 million and extended its maturity by one year to July 2010. The
amended facility also has a feature that allows it to be expanded by an additional $30 million.
2005
4
We also raised $35 million of capital through the sale of 1.733 million shares of common stock in a public
offering in November 2005.
Continued Expansion in 2006
In March 2006, we entered into an agreement to acquire the business and certain assets of Syratech
Corporation, a major designer, importer and manufacturer of a diverse portfolio of tabletop, home decor
and picture frame products. Syratech’s brands, which include Wallace Silversmiths®, Towle Silversmiths®,
International Silver Company®, Melannco International® and Elements®, are among the most distinctive
and recognized in the industry. In addition to furthering our expansion into the better tabletop business,
the acquisition positions us as a leader in the $500 million market for picture frames and photo albums
and gives us an immediate presence in the home décor market.
Equally important, Syratech shares Lifetime’s strong commitment to innovative design. The acquisition
will enable us to augment our current team of 55 designers with another 20 highly qualified and
experienced professionals. The combined design staff of 75 professionals will enable us to increase the
number of new products Lifetime brings to market each year.
Exciting Prospects for the Future
Although I am very pleased with the profitable growth Lifetime’s business showed in 2005, I am even more
excited about our momentum going into 2006. We expect our impressive organic growth to continue this
year and again be the driver of increased profits for the Company. Much of that growth will continue to be
fueled by new product development – one of the pillars of our Company’s strengths. In total, we expect to
introduce approximately 1,400 new items in 2006, which is double the number Lifetime introduced
last year.
Lifetime’s great brands, our record of design excellence and our sourcing expertise are the foundation
upon which our Company’s success is built. At the same time, we should not forget that the talent and
dedication of our people are an integral part of that success. In this year’s report, we are therefore
featuring Lifetime’s Division Presidents and our Senior Vice President of Product Design and Development,
whose commitment and wealth of industry experience have made our achievements possible.
For the many reasons I have discussed above, 2005 was a great year for Lifetime Brands. We expect even
better things to come.
Sincerely,
Jeffrey Siegel
Chairman of the Board, President and Chief Executive Officer
Jeffrey Siegel, left and
Ronald Shiftan, right.
2005
6
GROWTH BY
STRONG
LEADERSHIP
This year, we would like to
take the opportunity to
introduce certain members of
our leadership team, whose
efforts have contributed to
our recent success. With a
combined 196 years in the housewares
industry, these leaders of our primary
product categories are all experts in
their field.
Each has built a strong team of
category specialists to innovate,
nurture and grow their businesses.
Each brings a wealth of product
manufacturing, sourcing and retail
knowledge to their team.
Each is focused on continuing to build
Lifetime’s brands and bringing to
market innovative and exciting
products that offer appreciable
benefits to the consumer.
2005
8
Category Insights and
Key Competitive Strengths -
Cutlery & Cutting Boards
• $389 million U.S.market*
• Lifetime’s fastest growing category
in 2005
• Lifetime is the second largest
supplier of household cutlery
• Lifetime is the single largest
supplier of cutting boards
• Extensive assortment to
satisfy all retailers
and consumers
CUTLERY & CUTTING BOARDS
AND BAKEWARE
“ I believe our potential for
”
exponential growth in cutlery and
bakeware is enormous. We have
everything in place.
Bob Reichenbach has been
President of Lifetime's Cutlery &
Cutting Boards and Bakeware
products groups since 2001 and an
Executive Vice President of the
Company since 2002. He has
amassed thirty years of experience
in the housewares and retail
industries. Before joining Lifetime,
Bob has held senior positions at
Linens 'n Things and A&S/Jordan
Marsh Department Stores.
Category Insights and
Key Competitive Strengths -
Bakeware
• $471 million U.S.market*
• Lifetime is the single largest supplier of
silicone bakeware
• Bakeware products in all major
materials - metal, ceramics and silicone
• Assortments focused on both core and
niche specialty businesses
2005
10
* HomeWorld Business Magazine, January 2006
Housewares veteran
Bob Reichenbach plays
an important role in
Lifetime’s overall
business as President of
Lifetime’s Cutlery &
Cutting Boards and
Bakeware products
groups. Key accomplishments
in 2005 included the substantial
market share gains of
KitchenAid® and Cuisinart®
cutlery and continued strong
retail performance of
Farberware® cutlery. Sabatier®
cutlery also continued to garner
additional placement with high-
profile retailers, becoming one of
the Company’s cornerstone
brands in 2005.
Across our brands, high piece-
count “mega sets” climbed to the
top of our best seller list, offering
consumers great value while
maintaining excellent quality. The
Japanese style Santoku knife
emerged as our most popular
open stock cutlery item, and we
quickly capitalized on this
growing trend by incorporating it
into many of our cutlery
assortments.
The cutting board category
enjoyed healthy growth in 2005
highlighted by Lifetime’s launch
of many innovative designs
utilizing new materials. We
introduced alternative material
cutting boards in bamboo and
acacia, both prized for their
ecological benefits as well as their
beauty. In addition, we updated
traditional polypropylene cutting
boards with stainless steel
handles, giving a modern twist to
a traditional item.
Silicone bakeware has emerged
as the most dynamic segment of
the bakeware business, and our
KitchenAid® silicone bakeware
line has performed extremely
well in 2005. Silicone baking
mats and specialty shape molds,
in particular, experienced
exceptional sell-through.
Additionally, we introduced our
KitchenAid® ceramic bakeware
collection featuring removable
silicone grips, with great success.
Category Insights and
Key Competitive Strengths -
Kitchenware
• $940 million U.S.market*
• Lifetime is the single largest
supplier of kitchenware
• A vast assortment of over
4,000 SKU’s
• Our KitchenAid® and
Farberware® kitchenware
products are the top two
most recognized brands in
the “Kitchen Tool, Cutlery
and Gadgets”product
category in the U.S.**
KITCHENWARE
“
You can no longer ‘sell’ the
consumer; you have to
understand their needs and give
them what they want.
”
Larry Sklute has been
President of Lifetime’s
Kitchenware
products group since
2001 and is also
a Vice President of
the Company. Before
joining Lifetime, he
worked for more
than 25 years in
the tool &
gadget category,
including being
principal
owner of a
successful
kitchenware
company.
2005
12
* HomeWorld Business Magazine, January, 2006
**Home Furnishings News (“HFN”) Brand Survey, October, 2005
Led by division
president Larry Sklute,
our kitchenware
business continued to
thrive in 2005. Under Larry’s
keen tutelage, the category
expanded to include not only
traditional core kitchenware
products, but also specialty
categories, such as sinkware and
storage & organization.
The Company launched our
KitchenAid® sinkware collection
in late 2005, the first full line of
nationally branded sinkware
available to consumers. The initial
reception to the product line has
been outstanding and we expect
this new category to be a key
contributor to Lifetime’s
continued success in 2006.
Tools and gadgets, which
constitute the foundation of our
KitchenAid® program,
experienced very strong growth
through expanded assortments
and distribution at key retailers.
The KitchenAid® kitchenware
program continues to be one of
the Company’s most successful.
Our Farberware® branded
kitchenware business also
experienced healthy increases for
the year, due in part to the launch
of Farberware® Innovations, an
ingenious line of high
performance kitchenware.
Additionally, Farberware® tools
and gadgets enjoyed expansion
at several of our key retailer
accounts, bolstering sales and
profits for the category and
solidly maintaining Farberware’s
position as a dominant brand
important component of our
growth for 2006.
within the market segment.
In 2005 we designed a dramatic
new line of Hoffritz® products
utilizing a combination of soft
comfortable handles and a
distinctive satin nickel finish. We
expect the introduction to be an
Marsha Everton brings twenty-four years
of consumer-focused experience in the
housewares and tabletop industries to
her role as President of Lifetime’s Direct-
to-Consumer (DTC) division. Lifetime’s DTC
initiatives serve as enhancements to our wholesale
efforts, and include a direct mail catalog program,
e-commerce web site, as well as Pfaltzgraff and
Farberware retail outlet stores.
The Company utilizes the newly formed DTC group to
build on our earlier successes and support Lifetime’s
other business categories. For example, in our stores we
are able to offer extended collections within a particular
dinnerware pattern that traditional retailers do not have
the floor space to carry.
We also deploy our DTC resources to test new product
introductions and marketing programs. By quickly
analyzing performance, we can swiftly adjust our
programs to meet the needs of the ever-changing
retail landscape.
Our state-of-the-art customer service call center employs
approximately 100 associates, who field consumer
communications for product orders and questions. In
addition, our sophisticated DTC fulfillment center
enables us to be a viable direct-to-consumer drop
shipping resource for our wholesale accounts, which is
especially important to our e-commerce retailers.
In the latter half of 2005, the DTC division was charged
with quickly integrating Lifetime’s extensive array of
food prep items into the Pfaltzgraff retail stores and,
conversely, adding our tabletop assortments to the
Farberware stores. Similarly, both the direct mail catalog
and web site assortments are being updated to represent
all of Lifetime’s product categories and brands. The
marriage of the Pfaltzgraff and Lifetime assortments has
been a resounding success and positions our DTC
operations for future growth and
increased profitability.
DIRECT-TO-CONSUMER
“ Our multi-channel business model
allows us to sell our products
wherever consumers choose
to shop.
”
Marsha Everton is President of
Lifetime’s Direct-to-Consumer
division and was Chief Executive
Officer and President of The
Pfaltzgraff Company, which we
acquired in 2005. Prior to joining
Pfaltzgraff in 1983, she held a
series of marketing, manufacturing
and finance positions with Corning
Glass Works.
2005
14
Since Steve Lizak joined
Lifetime Brands in 2004,
one of the Company’s
strategic goals has
been to develop into
a major tabletop
resource. Our 2005
acquisitions of certain
assets and businesses of
both The Pfaltzgraff
Company and Salton, Inc.
are evidence of that
focus, and have given
Lifetime a firm presence
in the casual dinnerware,
fine china and
crystal categories.
The Company immediately
faced two major challenges
related to its new Pfaltzgraff
business - bringing a fresh,
younger identity to the brand
and pricing the product
appropriately within the
marketplace. By October 2005,
we had introduced over 60 new
dinnerware patterns under the
Pfaltzgraff® brand, many of them
designed for the youthful bridal
consumer. We simultaneously
dispatched teams of our sourcing
specialists to make the necessary
adjustments in the brands’ price-
value relationship. For 2006, we
believe we are poised for success,
offering the right product at the
right price under one of the
country’s most recognized casual
dinnerware brands.
In late 2005, we received equally
enthusiastic reactions to
introductions in our Joseph
Abboud, Nautica® and
Farberware® brands.
Additionally, in spring 2006 we
will introduce over 200 new
products in fine china, crystal
and decorative glass under the
Sasaki®, Block®, Calvin Klein® and
Atlantis brands. Here our
emphasis will be capitalizing on
the enormous potential of the
bridal segment of the
tabletop business.
Category Insights and Key Competitive Strengths -
Tabletop
• $2.6 billion U.S.market*
• Pfaltzgraff® accounts for 7 out of 10 top bridal registry
housewares (casual) patterns**
• Increased emphasis on modern design and fresh new looks
• Combination of Pfaltzgraff® and designer brands position
Lifetime for growth
* HomeWorld Business Magazine, January 2006
**Tableware Today and Bridal Guide Magazine, 2005
TABLETOP
“ Today’s Pfaltzgraff is on target
to meet the needs and choices
of the modern consumer.
”
Steve Lizak has been
President of Lifetime’s
Tabletop products group
since 2004. He was
previously employed by
Mikasa Inc. for 29 years
working in almost every
division of the company, and
serving most recently as the
Senior Vice President of
Sales and Marketing. While
at Mikasa, Mr. Lizak founded
the housewares division and the
casual dinnerware brand,
Studio Nova.
2005
16
PANTRYWARE & SPICES
“ Inventive products have been our
”
core competency since 1893.
Peter Kamenstein has been
President of Lifetime’s Pantryware
and Spices products group since
the year 2000. Before joining the
Company, he was with the
well-known housewares company,
M. Kamenstein, Inc. for 40 years,
most recently serving as its
President. M. Kamenstein was
acquired by Lifetime in 2000.
Category Insights and
Key Competitive Strengths -
Pantryware
• $150 million U.S.market*
• Largest supplier of filled spice racks
in U.S.
• Largest supplier of pantryware in U.S.
• Only supplier to bottle spices in the U.S.
in a company-owned, FDA-approved
facility
* Industry estimate
2005
18
Lifetime’s Kamenstein
division originated over
a hundred years ago
and has been managed
by four generations of
the Kamenstein family.
Kamenstein’s focus has always
been on innovation. For example,
the founder of the company
invented the step-on garbage
can and the locking handle
mechanism utilized on many
modern trash cans.
This tradition of product
innovation continues today. In
late 2005, we introduced
Kamenstein® Solutions, an
ingenious line of contemporary
stainless steel pantryware, which
features added benefits and
improved function for the
consumer. The line has been an
enormous success and we will
look to add items in this
collection in 2006.
The Perfect Tear® paper towel
holder continues to be a key item
for Lifetime and in 2005 became
the best selling paper towel
holder at several high-profile
retailers. Additionally, we have
continued to update our Perfect
Tear® assortment with new
material finishes and colors.
PRODUCT DEVELOPMENT
“ Excellence in design comes not
only from recruiting talented
people, but also from fostering an
atmosphere of creativity
and innovation.
”
Bill Lazaroff has been Senior Vice
President of Product Development
for Lifetime since 1998 and was
previously Director of
Merchandising for Peter Andrews
Corporation. He has over 20 years
of experience in the housewares
and tabletop industries in a
variety of leadership and
entrepreneurial roles.
Key Competitive Strengths -
Product Development
• Proven track record of innovation
• Lifetime’s state-of-the-art technology
decreases time to market
• Continual training in advanced design
software programs
continuously expand and refresh
our product offerings according
to our customers’ preferences. In
addition to restyling and
designing and updating existing
products, our development team
invents products with entirely
new uses and functions. The
Company has applied for fifty-
four design and utility patents in
the last five years alone
As Senior Vice President
of Product
Development, Bill
Lazaroff plays an
integral part in the
growth of the
Company. We continue to
innovate and introduce hundreds
of new products across all
categories and brands each year.
Our unmatched internal design
and development team,
comprised of 55 professionals at
year-end 2005, utilizes the latest
design tools, technology and
materials available.
Lifetime’s strong in-house
product design and development
capabilities allow us to
MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
SELECTED FINANCIAL DATA
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.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2005
2004
High
$17.34
19.74
27.00
26.61
Low
$14.75
14.55
19.98
19.75
High
$17.65
22.79
22.98
15.90
Low
$13.41
17.78
14.85
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:
Plan category
Equity compensation plans
approved by security holders
Equity compensation plans
not approved by security holders
Total
Number of shares of
Common Stock to be
issued upon exercise
of outstanding options
875,157
—
875,157
Weighted average
exercise price of
outstanding options
Number of shares of
Common Stock remaining
available for future issuance
$14.51
—
$14.51
615,550
—
615,550
The following selected financial data 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.
INCOME STATEMENT DATA:
Net sales
Cost of sales
Distribution expenses
Selling, general and administrative expenses
Income from operations
Interest expense
Other income, net
Income before income taxes
Income taxes
Income from continuing operations
Basic earnings per common share from
continuing operations
Weighted average shares – basic
Diluted earnings per common share from
continuing operations
Weighted average shares and common
share equivalents – diluted
Cash dividends paid per common share
BALANCE SHEET DATA:
Current assets
Current liabilities
Working capital
Total assets
Short-term borrowings
Long-term debt
Stockholders’ equity
2005
2004
(in thousands, except per share data)
Year Ended December 31,
2003
2002
2001
$307,897
177,493
32,966
72,266
25,172
2,489
(73)
22,756
8,647
$14,109
$1.25
11,283
$1.23
11,506
$0.25
$189,458
111,497
22,830
40,282
14,849
835
(60)
14,074
5,602
$8,472
$0.77
10,982
$0.75
11,226
$0.25
$160,355
92,918
21,030
31,762
14,645
724
(68)
13,989
5,574
$8,415
$0.79
10,628
$0.78
10,754
$0.25
$131,219
73,145
22,255
28,923
6,896
1,004
(66)
5,958
2,407
$3,551
$0.34
10,516
$0.34
10,541
$0.25
$135,068
75,626
22,037
30,427
6,978
1,015
(98)
6,061
2,449
$3,612
$0.34
10,492
$0.34
10,537
$0.25
2005
2004
$155,750
69,907
85,843
222,648
14,500
5,000
140,487
$103,425
52,913
50,512
157,217
19,400
5,000
92,938
(in thousands)
December 31,
2003
2002
2001
$88,528
46,974
41,554
136,980
16,800
—
86,081
$66,189
32,809
33,380
113,369
14,200
—
78,309
$75,486
44,925
30,561
124,856
22,847
—
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.
2005
20
2005
21
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.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®, Block®, Calvin Klein®, CasaModa™,
Cuisinart®, Cuisine de France®, DBK™ Daniel Boulud Kitchen, Farberware®,
Gemco®, Hershey®’s, Hoan®, Hoffritz®, Joseph Abboud Environments®,
Kamenstein®, Kathy Ireland Home®, KitchenAid®, NapaStyle™, Nautica®,
Pfaltzgraff®, Retroneu®, Roshco®, Sabatier®, Sasaki®, Stiffel®, :USE® and
Weir in Your Kitchen™.The Company uses the Farberware® brand name for
kitchenware, cutlery and cutting boards and bakeware pursuant to a 200
year royalty-free license and the Company licenses the KitchenAid®,
Cuisinart®, Farberware® (for flatware and dinnerware), Sabatier®, DBK™
Daniel Boulud Kitchen and Joseph Abboud Environments® 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® brand name and 57 outlet stores using the Pfaltzgraff® 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.
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® and Sasaki® brands and licenses to
market Calvin Klein® and NapaStyle™ 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® 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® branded cutlery along with higher sales of Farberware®
cutlery, and strong growth in sales of KitchenAid® and Farberware®
branded kitchen tools and gadgets and Roshco® and
KitchenAid® 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.
2005
22
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.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 in 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.
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.
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.
2005
23
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, or (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 décor
and picture frame products.Founded in 1986, Syratech owns many key
brands in home fashion, including Wallace Silversmiths®,Towle
Silversmiths®, International Silver Company®, Melannco International®
and Elements®.In addition, Syratech licenses the Cuisinart® brand for
tabletop products and recently secured the license for Kenneth Cole
Reaction Home®.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.
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.
Net sales
Cost of sales
Distribution expenses
Selling, general and administrative expenses
Income from operations
Interest expense
Income before income taxes
Income taxes
Net income
2005
100.0 %
57.6
10.7
23.5
8.2
0.8
7.4
2.8
4.6%
Year Ended December 31,
2004
100.0 %
58.9
12.0
21.3
7.8
0.4
7.4
3.0
4.4%
2003
100.0 %
57.9
13.1
19.8
9.2
0.5
8.7
3.5
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®
branded cutlery along with higher sales of Farberware® cutlery, and solid
growth in sales of KitchenAid® and Farberware® branded kitchen tools and
gadgets and Roshco® and KitchenAid® 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
Pfaltzgraff 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.
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
2005
24
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.
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 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® 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™.
Sales of Farberware® and Cuisinart® branded cutlery and Roshco®
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® 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®
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.
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
2005
25
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%.
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:
Contractual Obligations
Operating Leases
Capitalized Leases
Short-term debt
Long-term debt
Interest on long-term debt
Royalty License Agreements
Employment Agreements
Total
Total
$70,693
1,186
14,500
5,000
1,216
31,939
4,678
$129,212
Less Than
1 Year
$14,061
374
14,500
—
304
6,784
2,715
$38,738
(in thousands)
Payments Due by Period
1-3 Years
3-5 Years
$23,383
639
—
—
608
15,789
1,363
$41,782
$13,514
173
—
5,000
304
9,366
600
$28,957
More Than
5 Years
$19,735
—
—
—
—
—
—
$19,735
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.
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.
2005
26
2005
27
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTROLS AND PROCEDURES
The following table sets forth certain unaudited consolidated quarterly statement of income data for the eight quarters ended December 31, 2005. The
consolidated quarterly data should be read in conjunction with the Company’s audited consolidated financial statements and the notes to such statements.The
results of operations for any quarter are not necessarily indicative of the results of operations for any future period:
Net sales
Gross profit
Income from operations
Net income
Basic earnings per common share
Diluted earnings per common share
Net sales
Gross profit
Income from operations
Net income
Basic earnings per common share
Diluted earnings per common share
First
Quarter
$43,117
18,217
1,802
1,001
$0.09
$0.09
First
Quarter
$37,129
15,440
685
345
$0.03
$0.03
(in thousands)
Year Ended December 31, 2005
Second
Quarter
$46,154
19,195
2,448
1,345
$0.12
$0.12
Third
Quarter
$94,245
41,136
8,216
4,537
$0.41
$0.40
(in thousands)
Year Ended December 31, 2004
Second
Quarter
$33,029
13,875
462
203
$0.02
$0.02
Third
Quarter
$51,241
20,688
4,547
2,584
$0.23
$0.23
Fourth
Quarter
$124,381
51,856
12,706
7,226
$0.63
$0.60
Fourth
Quarter
$68,059
27,959
9,155
5,340
$0.48
$0.47
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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 principal 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.
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.
2005
28
2005
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Lifetime Brands, Inc.
To the Board of Directors and Stockholders of 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.
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.
Melville, New York
March 8, 2006
2005
30
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.These financial
statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements 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.
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.
Melville, New York
March 8, 2006
2005
31
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME
Net sales
Cost of sales
Distribution expenses
Selling, general and administrative expenses
Income from operations
Interest expense
Other income, net
Income before income taxes
Income taxes
NET INCOME
BASIC INCOME PER COMMON SHARE
DILUTED INCOME PER COMMON SHARE
WEIGHTER AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
BASIC
DILUTED
(in thousands, except per share data)
Year Ended December 31,
2004
2005
2003
$307,897
177,493
32,966
72,266
25,172
2,489
(73)
22,756
8,647
$14,109
$1.25
$1.23
11,283
11,506
$189,458
111,497
22,830
40,282
14,849
835
(60)
14,074
5,602
$8,472
$0.77
$0.75
10,982
11,226
$160,355
92,918
21,030
31,762
14,645
724
(68)
13,989
5,574
$8,415
$0.79
$0.78
10,628
10,754
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Accounts receivable, less allowances of $7,913 in 2005
and $3,477 in 2004
Merchandise inventories
Prepaid expenses
Deferred income taxes
Other current assets
TOTAL CURRENT ASSETS
PROPERTY AND EQUIPMENT, net
GOODWILL
OTHER INTANGIBLES, net
OTHER ASSETS
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Short-term borrowings
Accounts payable and trade acceptances
Accrued expenses
Income taxes payable
TOTAL CURRENT LIABILITIES
DEFERRED RENT & OTHER LONG-TERM LIABILITIES
DEFERRED INCOME TAX LIABILITIES
LONG-TERM DEBT
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
Paid-in capital
Retained earnings
Notes receivable for shares issued to stockholders
TOTAL STOCKHOLDERS’ EQUITY
(in thousands, except share data)
December 31,
2005
2004
$786
49,158
91,953
2,668
7,703
3,482
155,750
23,989
16,200
24,064
2,645
$222,648
$14,500
17,397
28,694
9,316
69,907
2,287
4,967
5,000
129
101,468
38,890
—
140,487
$1,741
34,083
58,934
1,998
4,303
2,366
103,425
20,003
16,200
15,284
2,305
$157,217
$19,400
7,892
20,145
5,476
52,913
2,072
4,294
5,000
111
65,229
28,077
(479)
92,938
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$222,648
$157,217
2005
32
See notes to consolidated financial statements.
See notes to consolidated financial statements.
2005
33
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Balance at December 31, 2002
Net income for 2003
Tax benefit on exercise of stock options
Exercise of stock options
Dividends
Balance at December 31, 2003
Net income for 2004
Tax benefit on exercise of stock options
Exercise of stock options
Dividends
Balance at December 31, 2004
Net income for 2005
Net proceeds from public offering
Tax benefit on exercise of stock options
Exercise of stock options
Shares issued to directors
Repayment of notes receivable from stockholders
Dividends
Balance at December 31, 2005
Common Stock
Amount
Shares
Paid-in
Capital
Notes
Receivable
From
Retained
Earnings Stockholders
Total
10,561
$106
$61,405
$17,277
$(479)
$78,309
282
3
302
1,702
10,843
109
63,409
207
2
449
1,371
11,050
111
65,229
1,733
17
34,402
139
1
735
1,052
50
8,415
(2,650)
23,042
8,472
(3,437)
28,077
14,109
(409)
8,415
302
1,705
(2,650)
86,081
8,472
449
1,373
(3,437)
92,938
14,109
34,419
735
644
50
479
(479)
(479)
479
12,922
$129
$101,468
$38,890
$— $140,487
(2,887)
(2,887)
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Deferred income taxes
Deferred rent
Director compensation
Provision for losses on accounts receivable
Reserve for sales returns and allowances
Changes in operating assets and liabilities, excluding the effects
of acquisitions of Salton, Pfaltzgraff, Excel, :USE and Gemco:
Accounts receivable
Merchandise inventories
Prepaid expenses, other current assets and other assets
Accounts payable, trade acceptance, accrued expenses
and other liabilities
Income taxes
NET CASH PROVIDED BY OPERATING ACTIVITIES
INVESTING ACTIVITIES
Purchases of property and equipment, net
Acquisition of Salton
Acquisition of Pfaltzgraff
Acquisition of Excel
Acquisitions of :USE and Gemco
NET CASH USED IN INVESTING ACTIVITIES
FINANCING ACTIVITIES
(Repayments) proceeds of short term borrowings, net
Net proceeds from public offering
Proceeds from the exercise of stock options
Repayment of note receivable
Payment of capital lease obligations
Cash dividends paid
NET CASH PROVIDED BY FINANCING ACTIVITIES
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
Cash and cash equivalents at beginning of year
CASH AND CASH EQUIVALENTS AT END OF YEAR
(in thousands)
Year Ended December 31,
2004
2005
2003
$14,109
$8,472
$8,415
5,641
(2,726)
323
50
132
13,662
(26,245)
4,942
(321)
14,604
4,574
28,745
(5,098)
(13,956)
(38,198)
—
—
(57,252)
(4,900)
34,419
644
479
(320)
(2,770)
27,552
(955)
1,741
$786
4,074
(100)
479
—
(68)
9,942
(10,658)
(4,944)
(595)
(3,485)
1,312
4,429
(2,911)
—
—
(7,000)
—
(9,911)
7,600
—
1,373
—
(179)
(2,746)
6,048
566
1,175
$1,741
3,673
105
539
—
8
9,297
(21,008)
(6,960)
177
8,987
2,452
5,685
(2,213)
—
—
—
(3,964)
(6,177)
2,600
—
1,705
—
(50)
(2,650)
1,605
1,113
62
$1,175
2005
34
See notes to consolidated financial statements.
See notes to consolidated financial statements.
2005
35
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® name.Under an
agreement with the Meyer Corporation, Meyer Corporation assumed
responsibility for merchandising and for stocking Farberware® cookware
products in the stores, receives all revenue from sales of Farberware®
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® retail outlet stores in 31 states
and a catalog and Internet business.The Pfaltzgraff® outlet stores, mail
order catalogs and Internet website all sell first-run Pfaltzgraff® brand
products through a dedicated direct-to-consumer channel.
In January 2006, the Company closed 20 Farberware® stores and 13
Pfaltzgraff® stores in order to consolidate certain Farberware® and
Pfaltzgraff® 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 the
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.
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.
2005
36
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.
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):
Year ending December 31:
2006
2007
2008
2009
2010
$938
938
926
876
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.
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.
Net income, as reported
Deduct:Total stock option employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects
Pro forma net income
Earnings per share:
Basic – as reported
Basic – pro forma
Diluted – as reported
Diluted – pro forma
(in thousands, except per share data)
Year ended December 31,
2004
2005
$14,109
$8,472
(2,109)
$12,000
$1.25
$1.06
$1.23
$1.04
(172)
$8,300
$0.77
$0.76
$0.75
$0.74
2003
$8,415
(215)
$8,200
$0.79
$0.77
$0.78
$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.
2005
37
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.
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, or (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.
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):
Accounts receivable
Merchandise Inventories
Intangibles
Goodwill
Total assets acquired
Purchase Price
Allocation
$1,131
944
940
1,248
$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®,
Farberware®, Retroneu®, Joseph Abboud Environments® and DBK™ 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.
The total purchase price has currently been determined as follows (in
thousands):
Cash paid at closing
Professional fees and other costs
Total purchase price
$7,000
83
$7,083
2005
38
The purchase price was funded by borrowings under the Company’s Credit
Facility.The Company has allocated the purchase price as follows
(in thousands):
Assets acquired:
Accounts receivable
Merchandise inventories
Other assets
Intangibles
Liabilities assumed
Total assets acquired
Purchase Price
Allocation
$ 483
4,769
20
7,248
(5,437)
$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
Post closing working capital adjustment
Professional fees and other costs
Total purchase price
$32,500
4,742
956
$38,198
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):
Assets acquired:
Accounts receivable
Merchandise inventories
Other current assets
Property and equipment
Intangibles
Liabilities assumed
Total assets acquired
Preliminary
Purchase Price
Allocation
$ 2,623
26,314
1,489
3,328
6,779
(2,335)
$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
$360,463
$337,479
4,811
$0.42
(4,555)
$(0.41)
Net sales
Net income (loss)
Diluted income (loss) per share
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® and
Sasaki® brands, licenses to market Calvin Klein® and NapaStyle™ tabletop
products and distribution rights for upscale crystal products under the
Atlantis® brand.In addition, the Company entered into a new license with
Salton to market tabletop products under the Stiffel® 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
Professional fees and other costs
Total purchase price
$ 13,442
514
$ 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):
Merchandise inventories
Other current assets
Property and equipment
Intangibles
Total assets acquired
Preliminary
Purchase Price
Allocation
$11,647
316
70
1,923
$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® 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
2005
39
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.
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® brand name.Shipments of products under
the Cuisinart® 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 the Company 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.
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 is as follows:
Balance – Jan 1,
Grants
Exercised
Canceled
Balance–Dec 31,
Options
694,807
362,000
(150,650)
(31,000)
875,157
2005
2004
2003
Weighted-
Average
Exercise
Price
$7.59
$24.12
$7.00
$8.25
$14.51
Weighted-
Average
Exercise
Price
$7.27
$16.68
$6.76
$10.60
$7.59
Options
966,610
49,000
(217,041)
(103,762)
694,807
Weighted-
Average
Exercise
Price
$6.98
$7.37
$6.50
$7.44
$7.27
Options
919,291
370,000
(298,232)
(24,449)
966,610
The following table summarizes information about employees’stock options outstanding at December 31, 2005:
Exercise
Price –
$4.14 - $5.51
$6.00 - $8.55
$8.64 - $13.84
$15.60 -$24.23
Options
Outstanding
161,650
280,757
47,750
385,000
875,157
Options
Exercisable
161,650
280,757
47,750
385,000
875,157
Weighted- Average
Remaining
Contractual Life
Weighted- Average
Exercise Price –
Options Outstanding
Weighted- Average
Exercise Price –
Options Exercisable
6.44 years
6.04 years
8.19 years
5.41 years
5.95 years
$5.31
$7.22
$13.16
$23.85
$14.51
$5.31
$7.22
$13.16
$23.85
$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)
2005
40
2005
41
NOTE E - INCOME TAXES
The provision for income taxes consists of (in thousands):
Current:
Federal
State and local
Deferred
Income tax provision
Year Ended December 31,
2004
2003
2005
$9,755
1,618
(2,726)
$8,647
$4,861
841
(100)
$5,602
$4,451
1,018
105
$5,574
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):
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.
Deferred tax assets:
Merchandise inventories
Accounts receivable allowances
Deferred rent expense
Accrued bonuses
Total deferred tax asset
Deferred tax liability:
December 31,
2005
2004
$3,266
3,121
552
764
$7,703
$2,063
964
—
395
$3,422
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):
Provision for Federal income taxes
at the statutory rate
Increases (decreases):
State and local income taxes,
net of Federal income tax benefit
Other
Provision for income taxes
Year Ended December 31,
2004
2003
2005
$7,965
$4,926
$4,896
1,052
(370)
$8,647
547
129
$5,602
662
16
$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”.
Net sales
Wholesale
Direct-to-Consumer
Total net sales
Income (loss) from operations
Wholesale
Direct-to-Consumer
Unallocated corporate expenses
Total income from operations
Depreciation and amortization
Wholesale
Direct-to-Consumer
Total depreciation and amortization
Assets
Wholesale
Direct-to-Consumer
Unallocated corporate
Total assets
Capital expenditures
Wholesale
Direct-to-Consumer
Total capital expenditures
(in thousands)
Year Ended December 31,
2004
2003
2005
$241,618
66,279
$307,897
$173,559
15,899
$189,458
$149,368
10,987
$160,355
$33,150
(444)
(7,534)
$25,172
$4,558
1,083
$5,641
$190,967
23,191
8,490
$222,648
$3,872
1,226
$5,098
$21,677
(1,224)
(5,604)
$14,849
$3,694
380
$4,074
$145,542
6,513
5,162
$157,217
$1,629
1,282
$2,911
$19,827
(990)
(4,192)
$14,645
$3,393
280
$3,673
$128,402
5,405
3,173
$136,980
$1,468
745
$2,213
2005
42
2005
43
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 ending December 31:
2006
2007
2008
2009
2010
2011 and thereafter
$14,061
12,894
10,489
7,742
5,772
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® 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 ending December 31:
2006
2007
2008
2009
2010
Total minimum lease payments
Less: amounts representing interest
Present value of minimum lease payments
$ 374
347
292
132
41
1,186
118
$ 1,068
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
2005
44
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 ending December 31:
2006
2007
2008
2009
$6,784
7,487
8,302
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.
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.
In the event of Mr.Shiftan’s Involuntary
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.
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.
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.
2005
45
NOTE K - OTHER
Property and Equipment:
Property and equipment consist of (in thousands):
Land
Building and improvements
Machinery, furniture and equipment
Leasehold improvements
Less: accumulated depreciation
December 31,
2005
$932
7,378
37,550
2,076
47,936
23,947
$23,989
2004
$932
6,379
29,681
1,810
38,802
18,799
$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):
Commissions
Accrued customer allowances and rebates
Amounts due to Meyer Corporation
Officer and employee bonuses
Accrued royalties
Accrued salaries, vacation and temporary labor billings
Accrued foreign purchases
Accrued freight-out
Dividends payable
Other
December 31,
2005
$ 1,381
3,755
981
3,714
2,186
3,139
3,923
1,275
808
7,532
$28,694
2004
$ 887
5,407
1,621
1,203
2,249
2,075
1,035
495
691
4,482
$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.
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 décor
and picture frame products. Founded in 1986, Syratech owns many key
brands in home fashion, including Wallace Silversmiths®,Towle
Silversmiths®, International Silver Company®, Melannco International®
and Elements®. In addition, Syratech licenses the Cuisinart® brand for
tabletop products and recently secured the license for Kenneth Cole
Reaction Home®. 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.
2005
46
OFFICERS AND DIRECTORS
Jeffrey Siegel
Chairman of the Board,
Chief Executive Officer and President
Ronald Shiftan
Vice Chairman, Chief Operating Officer
and a Director
Evan Miller
President of Sales and
Executive Vice President
Robert Reichenbach
President- Cutlery, Cutting Boards, and Bakeware
Products Groups and Executive Vice President
Larry Sklute
President- Kitchenware Products Group and
Vice President
Craig Phillips
Senior Vice President- Distribution,
Secretary and a Director
Robert McNally
Chief Financial Officer,Vice President- Finance
and Treasurer
Sara Shindel
Associate General Counsel and Assistant Secretary
Howard Bernstein
Director
Michael Jeary
Director
Sheldon Misher
Director
Cherrie Nanninga
Director
William Westerfield
Director
Joseph Abboud is a trademark of JA Apparel Corp.
Cuisinart® is a registered trademark of Conair Corporation
Farberware® is a registered trademark of Farberware Inc.
KitchenAid® is a registered trademark of Whirlpool Corporation
Sabatier® is a registered trademark of Rousselon Frères et Cie.
Atlantis is a trademark of Crisal-Cristais de Alcobaca, S.A.R.L.
Nautica® is a registered trademark of Nautica Apparel, Inc.
Calvin Klein home is a trademark of Calvin Klein, Inc.
OFFICES
Corporate Headquarters
One Merrick Avenue
Westbury, NY 11590
(516)683-6000
CORPORATE INFORMATION
Corporate Counsel
Samuel B.Fortenbaugh III
New York, NY
Independent Auditors
Ernst & Young LLP
Melville, NY
Transfer Agent & Registrar
The Bank of New York
101 Barclay Street
New York, NY 10286
Form 10-K
Shareholders may obtain, without charge, a copy of
the Company’s annual report on Form 10-K for the
year ended December 31, 2005 as filed with the
Securities and Exchange Commission.
Request should be sent to:
Investor Relations
Lifetime Brands, Inc.
One Merrick Avenue
Westbury, NY 11590
Annual Meeting
The Annual Meeting of Shareholders
will be held at 10:30AM,Thursday,
June 8, 2006 at the Corporate Headquarters.
This annual report was designed and prepared by our Marketing and
Graphics Departments.