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2009 and expects to introduce over 5,500 new or redesigned products in 2010. Cuisinart®1.1. BusinessFood Preparation, Tabletopfood preparation, tabletop and Home Déhome décor products. The Company does not sell electric products or appliances. The Company either owns or licenses its brands. The Company’s licenses generally only permit the Company to sell certain products using the licensed brand name. The Company sells its products to retailers and distributors, and directly to consumers through its Internet websites and mail order catalog operations. 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 of “Kitchen Tool, Cutlery and Gadgets” accordingindustry. According to the Home Furnishing News Brand Survey for 2007 -2009, three of the Company’s brands, KitchenAid®, Farberware®Cuisinart®, and Cuisinart®.Farberware®, are among the four most recognized bran ds in the “Kitchen Tool, Cutlery and Gadgets” category. The Company primarily targets moderate to premium price points through every major level of trade and generally markets several lines within each of its product categories under more than one brand. At the heart of the Company is a strong culture of innovation and new product development. The Company introduced over 4,600 new or redesigned products in 2008 and expects to introduce approximately 5,000 new or redesigned products in 2009.the products offered within the product categories are as follows:Food PreparationTabletopHome DécorKitchenwareFlatwarePicture FramesCutlery & Cutting BoardsDinnerwareWall DécorPantryware & SpicesGiftwareNon-electric LightingBakeware & CookwareGlasswareDecorative AccessoriesFondues & Tabletop EntertainingTabletop AccessoriesSeasonal DecorationsFunctional GlasswareCrystalLawn & Garden DécorServewareBarwareThe Company markets several product lines within eachcutlery, Tabletop, consisting primarily of the Company’s product categoriesdinnerware and under eachflatware, and Home Décor, which consists primarily of the Company’s brands. wall décor, picture frames and decorative shelving products.a majorityalmost all of its products from approximately 475 suppliers located outside the United States, primarily in the People’s Republic of China. The Company produces a majority of its sterling silver products at a leased manufacturing facility in San German,Germán, Puerto Rico and fills spices and assembles spice racks at its owned Winchendon, Massachusetts distribution facility.Farberware®Licensed/Owned Product Category Farberware® Licensed* Food Preparation and Tabletop KitchenAid®Food PreparationElements®Home DécorLicensed Food Preparation Mikasa®Mikasa® Owned Tabletop and Home Décor Melannco®Elements® Owned Home Décor Cuisinart®Food Preparation and TabletopPfaltzgraff®Owned Home Décor Pfaltzgraff® Owned Tabletop and Home Décor Kamenstein®Food PreparationLicensed Food Preparation and Tabletop Wallace Silversmiths® Owned Tabletop and Home Décor International® Silver CompanyKamenstein® Owned Food Preparation Towle® Owned Tabletop and Home Décor * The Company has a 185 year royalty free license to utilize the Farberware® brand for kitchenware products.
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ACQUISITIONS
Since 1995 the Company has completed the following 14 acquisitions that have expanded the Company’s product offerings, allowed the Company to enter new product categories, and added brands:
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RECENT ACQUISITION
Mikasa®
In June 2008, the Company acquired the business and certain assets of Mikasa, Inc. (“Mikasa®”) from Arc International SA. Mikasa® is a leading provider of dinnerware, crystal stemware, barware, flatware and decorative accessories. Mikasa® products are distributed through department stores, specialty stores and big box chains, as well as through the Internet.
5
CUSTOMERS
CUSTOMERS
Location |
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Fontana, California | 753,000 | |
| Robbinsville, New Jersey | 700,000 | |
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Winchendon, Massachusetts |
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| Medford, Massachusetts | 5,590 |
The Company’s principal East Coast distribution center is the Robbinsville, New Jersey facility and the Company’s principal West Coast distribution center is the Fontana, California facility. In 2008, the Company consolidated two former West Coast distribution centers into the Fontana, California facility. The Company plans to vacate its York, Pennsylvania distribution center during 2009 and transfer the distribution to the Robbinsville, New Jersey facility and Fontana, California facility.
2009, and could continue to adversely affect the Company’s performance. Unstable economic and political conditions, civil unrest and political activism, particularly in Asia, could adversely impact the Company& #8217;s businesses. Convertible Notes. Company’s operating margin. Interruption of supply from any of the Company’s suppliers, or the loss of one or more key vendors, could have a negative effect on the Company’s business and operating liquidity. business. Location 753,000 Leased 700,000 Leased Winchendon, Massachusetts Owned Leased 69,000 Leased San 55,000 Leased Atlanta, Georgia (a) The Company’s common stock is traded under the symbol “LCUT” on The NASDAQ Global Select Market (“NASDAQ”). 2008 2007 High Low High Low First quarter $13.37 $ 8.51 $20.94 $16.41 Second quarter 9.95 6.70 23.43 20.00 Third quarter 10.86 6.94 21.27 17.77 Fourth quarter 10.02 3.00 21.15 11.95 outstanding at December 31, 2009. Plan category Number of Weighted- Number of Equity compensation plan approved by security holders 2,036,650 $ 20.41 11,031 Equity compensation plan not approved by security holders ― ― ― Total 2,036,650 $ 20.41 11,031 Date Lifetime Hemscott Group Index NASDAQ Market Index 12/31/2003 $100.00 $100.00 $100.00 12/31/2004 95.66 104.52 108.41 12/31/2005 125.96 102.77 110.79 12/31/2006 101.24 127.61 122.16 12/31/2007 81.03 110.73 134.29 12/31/2008 22.88 47.21 79.25 The chart assumes $100 was invested on December 31, Year ended December 31, 2008 2007 2006 2005 2004 STATEMENT OF OPERATIONS DATA (1) (in thousands, except per share data) Net sales $487,935 $493,725 $457,400 $307,897 $189,458 Cost of sales 303,535 288,997 265,749 178,295 111,497 Distribution expenses 57,695 53,493 49,729 34,539 22,830 Selling, general and administrative expenses 131,226 128,527 112,122 69,891 40,282 Goodwill and intangible asset impairment 29,400 ― ― ― ― Restructuring expenses 17,992 1,924 ― ― ― Income (loss) from operations (51,913 ) 20,784 29,800 25,172 14,849 Interest expense (9,142 ) (8,397 ) (4,576 ) (2,489 ) (835 ) Other income, net ― 3,935 31 73 60 Income (loss) before income taxes and equity in earnings of Grupo Vasconia, S.A.B. (61,055 ) 16,322 25,255 22,756 14,074 Income tax benefit (provision) 10,540 (7,430 ) (9,723 ) (8,647 ) (5,602 ) Equity in earnings of Grupo Vasconia, S.A.B., net of taxes 1,486 ― ― ― ― Net income (loss) $ (49,029 ) $ 8,892 $ 15,532 $ 14,109 $ 8,472 Basic income (loss) per common share $ (4.09 ) $ 0.69 $ 1.18 $ 1.25 $ 0.77 Weighted-average shares outstanding – basic 11,976 12,969 13,171 11,283 10,982 Diluted income (loss) per common share $ (4.09 ) $ 0.68 $ 1.14 $ 1.23 $ 0.75 Weighted-average shares outstanding – diluted 11,976 13,099 14,716 11,506 11,226 Cash dividends per common share $ 0.25 $ 0.25 $ 0.25 $ 0.25 $ 0.25 December 31, 2008 2007 2006 2005 2004 BALANCE SHEET DATA (1) (in thousands) Current assets $232,678 $228,078 $231,633 $155,750 $103,425 Current liabilities 149,981 71,283 89,727 69,907 52,913 Working capital 82,697 156,795 141,906 85,843 50,512 Total assets 341,781 371,415 343,064 222,648 157,217 Short-term borrowings 89,300 13,500 21,500 14,500 19,400 Long-term debt ― 55,200 5,000 5,000 5,000 Convertible notes 75,000 75,000 75,000 ― ― Stockholders’ equity 90,373 147,240 161,611 140,487 92,938 The Company acquired the business and certain assets of the following in the respective years noted which affects the comparability of the periods: significant. Year Ended December 31, 2008 2007 2006 Net sales 100.0 % 100.0 % 100.0 % Cost of sales 62.2 58.5 58.1 Distribution expenses 11.8 10.8 10.9 Selling, general and administrative expenses 26.9 26.0 24.5 Goodwill and intangible asset impairment 6.0 ― ― Restructuring expenses 3.7 0.4 ― Income (loss) from operations (10.6 ) 4.3 6.5 Interest expense (1.9 ) (1.7 ) (1.0 ) Other income, net ― 0.8 ― Income (loss) before income taxes and equity (12.5 ) 3.4 5.5 Income tax benefit (provision) 2.2 (1.6 ) (2.1 ) Equity in earnings for Grupo Vasconia, S.A.B., net of taxes 0.3 ― ― Net income (loss) (10.0 )% 1.8 % 3.4 % CRITICAL ACCOUNTING POLICIES AND ESTIMATES debt. 2008. large customer. On March 31, 2009, the Company entered into a waiver and amendment to the Credit Facility (the “Amendment”). Pursuant to the Amendment, the Company’s lenders waived the Company’s non-compliance with the financial covenants required by the Credit Facility at December 31, 2008. The Amendment Consolidated EBITDA: In February 2009, shares. Payment due by period Total Less 1-3 3-5 More Operating leases $ 129,957 $ 12,899 $ 24,035 $ 24,517 $ 68,506 Long-term debt 75,000 ― 75,000 ― ― Minimum royalty payments 14,357 11,252 1,577 312 1,216 Interest on long-term debt 10,689 3,563 7,126 ― ― Post retirement benefits 3,151 148 296 296 2,411 Capitalized leases 516 258 258 ― ― Total $ 233,670 $ 28,120 $ 108,292 $ 25,125 $ 72,133 Year ended December 31, 2008 First Second Third Fourth (in thousands, except per share data) Net sales $ 98,194 $ 92,399 $ 140,624 $ 156,718 Gross profit 38,589 37,111 54,528 54,172 Income (loss) from operations (8,784 ) (6,945 ) 3,365 (39,549 ) Net loss (5,997 ) (3,183 ) (674 ) (39,175 ) Basic and diluted loss per common share $ (0.50 ) $ (0.27 ) $ (0.06 ) $ (3.27 ) Year ended December 31, 2007 First Second Third Fourth (in thousands, except per share data) Net sales $ 103,787 $ 91,371 $ 143,470 $ 155,097 Gross profit 42,690 39,465 58,936 63,637 Income (loss) from operations (552 ) (1,750 ) 13,752 9,334 Net income (loss) (1,283 ) (2,026 ) 6,795 5,406 Basic income (loss) per common share $ (0.10 ) $ (0.15 ) $ 0.52 $ 0.44 Diluted income (loss) per common share $ (0.10 ) $ (0.15 ) $ 0.47 $ 0.40 (1) The Company recognized restructuring and fixed asset impairment expenses of $824,000, $(663,000), $671,000 and $1.8 million in the first, second, third and fourth quarters of 2009, respectively. (b) Changes in Internal Controls criteria. Second Restated Certificate of Incorporation of the Company (incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005)** 3.2 Amended and Restated By-Laws of the Company (incorporated by reference to the Registrant’s Form 8-K dated November 1, 2007)** 4.1 Indenture dated as of June 27, 2006, Lifetime Brands, Inc. as issuer, and HSBC Bank USA, National Association as trustee, $75,000,000 4.75% Convertible Senior Notes due 2011 (incorporated by reference to the Registrant’s registration statement No. 333-137575 on Form S-3)** 10.1 License agreement dated December 14, 1989 between the Company and Farberware, Inc. (incorporated by reference to the Registrant’s registration statement No. 33-40154 on Form S-1)** 10.2 Evan Miller employment agreement dated July 1, 2003 (incorporated by reference to the Registrant’s Form 10-Q dated September 30, 2003)** 10.3 Employment agreement dated May 2, 2006 between Lifetime Brands, Inc. and Jeffrey Siegel (incorporated by reference to the Registrant’s Form 8-K dated May 2, 2006)** Lease agreement dated as of May 10, 2006 between AG Metropolitan Endo, L.L.C and Lifetime Brands, Inc. for the property located at 1000 Stewart Avenue in Garden City, New York (incorporated by reference to the Registrant’s Form 8-K dated May 10, 2006)** Amended 2000 Long-Term Incentive Plan (incorporated by reference to the Registrant’s Form 8-K dated June 8, 2006)** Amended 2000 Incentive Bonus Compensation Plan (incorporated by reference to the Registrant’s Form 8-K dated June 8, 2006)** Second Amended and Restated Credit Agreement among Lifetime Brands, Inc., Lenders party thereto, Citibank, N.A. and Wachovia Bank, National Association, as Co-Documentation Agents, JP Morgan Chase Bank, N.A., as Syndication Agent, and HSBC Bank USA, National Association, as Administrative Agent (incorporated by reference to the Registrant’s Form 8-K dated October 31, 2006)** First Amendment to the Lease Agreement dated as of May 10, 2006 between AG Metropolitan Endo, L.L.C and Lifetime Brands, Inc. for the property located at 1000 Stewart Avenue in Garden City, New York (incorporated by reference to the Registrant’s Form 10-Q dated September 30, 2006)** Employment agreement dated June 28, 2007 between Lifetime Brands, Inc. and Laurence Winoker (incorporated by reference to the Registrant’s Form 8-K dated July 3, 2007)** Shares Subscription Agreement by and among Lifetime Brands, Inc., Ekco, S.A.B. and Mr. José Ramón Elizondo Anaya and Mr. Miguel Ángel Huerta Pando, dated as of June 8, 2007 (incorporated by reference to the Registrant’s Form 8-K dated June 11, 2007)** Lease Agreement between Granite Sierra Park LP and Lifetime Brands, Inc. dated June 29, 2007 (incorporated by reference to the Registrant’s Form 8-K dated June 29, 2007)** Evan Miller Amendment of Employment Agreement dated June 29, 2007 (incorporated by reference to the Registrant’s Form 8-K dated June 29, 2007)** Amendment to the Lifetime Brands, Inc. 2000 Long-Term Incentive Plan dated November 1, 2007 (incorporated by reference to the Registrant’s Form 8-K dated November 1, 2007)** Amendment No. 2 to Second Amended and Restated Credit Agreement by and among Lifetime Brands, Inc., Lenders party hereto, Citibank, N.A. and Wachovia Bank, National Association, as Co-Documentation Agents, JP Morgan Chase Bank, N.A., as Syndication Agent, and HSBC Bank USA, National Association, as Administrative Asset Purchase Agreement between Mikasa, Inc. and Lifetime Brands, Inc. dated June, 6 2008 (incorporated by reference to the Registrant’s Form 10-Q dated June 30, Amendment to the Company’s Second Amended and Restated Credit Agreement, Amendment No. 3, dated September 29, 2008 (incorporated by reference to the Registrant’s Form 8-K dated September 29, 2008)** Forbearance Agreement and Amendment No. 4, dated as of February 12, 2009, by and among Lifetime Brands, Inc., the several financial institutions party hereto and HSBC Bank USA, National Association, as Administrative Agent for the Amendment to Forbearance Agreement and Amendment No. 4, dated as of March 6, 2009, by and among Lifetime Brands, Inc., the several financial institutions party hereto and HSBC Bank USA, National Association, as Administrative Agent for the Amendment of the Lifetime Brands, Inc. 2000 Long-Term Incentive Plan dated June 11, 2009 (incorporated by reference to the Registrant’s Form 8-K dated June 11, 2009)** 18.1 Letter from Ernst & Young LLP stating an acceptable change in accounting method for the impairment of goodwill dated October 28, 2008 (incorporated by reference to the Registrant’s Form 10-Q dated September, 30 2008)** * Incorporated by reference. *** Filed herewith. **** This exhibit is being “furnished” pursuant to Item 601(b)(32) of SEC Regulation S-K and is not deemed “filed” with the Securities and Exchange Commission and is not incorporated by reference in any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934. (c) Financial Statement Schedules — the response to this portion of Item 15 is submitted as a separate section of this report. Lifetime Brands, Inc. Signature Title Date March Jeffrey Siegel Chief Executive Officer, President and Director March Ronald Shiftan Chief Operating Officer and Director March Laurence Winoker March Craig Phillips and Director Director David Dangoor Director Michael Jeary Director John Koegel Director Cherrie Nanninga Director William Westerfield Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, F-3 F-4 F-5 F-6 Notes to Consolidated Financial Statements F-7 Schedule II – Valuation and Qualifying Accounts S-1 /s/ ERNST & YOUNG LLP December 31, ASSETS 2008 2007 CURRENT ASSETS Cash and cash equivalents $ 3,478 $ 4,172 Accounts receivable, less allowances of $14,651 at 2008 67,562 65,030 Inventory 141,612 143,684 Deferred income taxes ― 7,925 Income taxes receivable 11,597 ― Prepaid expenses and other current assets 8,429 7,267 TOTAL CURRENT ASSETS 232,678 228,078 PROPERTY AND EQUIPMENT, net 49,908 54,332 GOODWILL ― 27,432 OTHER INTANGIBLES, net 38,420 35,383 INVESTMENT IN GRUPO VASCONIA, S.A.B. 17,784 22,950 OTHER ASSETS 2,991 3,240 TOTAL ASSETS $ 341,781 $ 371,415 Short-term borrowings $ 89,300 $ 13,500 Accounts payable 24,151 21,759 Accrued expenses 35,902 31,504 Deferred income tax liabilities 403 ― Income taxes payable 225 4,520 TOTAL CURRENT LIABILITIES 149,981 71,283 DEFERRED RENT & OTHER LONG-TERM LIABILITIES 23,054 14,481 DEFERRED INCOME TAXES 3,373 8,211 LONG-TERM DEBT — 55,200 CONVERTIBLE NOTES 75,000 75,000 STOCKHOLDERS’ EQUITY Common stock, $.01 par value, shares authorized: 25,000,000; shares 120 120 Paid-in capital 116,869 113,995 Retained earnings (accumulated deficit) (18,023 ) 33,250 Accumulated other comprehensive loss (8,593 ) (125 ) TOTAL STOCKHOLDERS’ EQUITY 90,373 147,240 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 341,781 $ 371,415 Year ended December 31, 2008 2007 2006 Net sales $ 487,935 $ 493,725 $ 457,400 Cost of sales 303,535 288,997 265,749 Distribution expenses 57,695 53,493 49,729 Selling, general and administrative expenses 131,226 128,527 112,122 Goodwill and intangible asset impairment 29,400 ― ― Restructuring expenses 17,992 1,924 ― Income (loss) from operations (51,913 ) 20,784 29,800 Interest expense (9,142 ) (8,397 ) (4,576 ) Other income, net ― 3,935 31 Income (loss) before income taxes and equity in earnings (61,055 ) 16,322 25,255 Income tax benefit (provision) 10,540 (7,430 ) (9,723 ) Equity in earnings of Grupo Vasconia, S.A.B., net of taxes 1,486 ― ― NET INCOME (LOSS) $ (49,029 ) $ 8,892 $ 15,532 BASIC INCOME (LOSS) PER COMMON SHARE $ (4.09 ) $ 0.69 $ 1.18 DILUTED INCOME (LOSS) PER COMMON SHARE $ (4.09 ) $ 0.68 $ 1.14 Common Stock Shares Amount capital deficit) income (loss) Total BALANCE AT DECEMBER 31, 2005 12,922 $ 129 $ 101,468 $ 38,890 $ ― $ 140,487 Comprehensive income: Net income 15,532 15,532 Foreign currency translation adjustment 78 78 Total comprehensive income 15,610 Tax benefit on exercise of stock options 725 725 Stock option expense 1,155 1,155 Costs of public offering (131 ) (131 ) Exercise of stock options 116 2 1,014 (820 ) 196 Stock issued for acquisition 240 2 6,819 6,821 Shares issued to directors 5 115 115 Dividends (3,367 ) (3,367 ) BALANCE AT DECEMBER 31, 2006 13,283 133 111,165 50,235 78 161,611 Comprehensive income: Net income 8,892 8,892 Derivative fair value adjustment, net of (203 ) (203 ) Total comprehensive income 8,689 Tax benefit on exercise of stock options 161 161 Stock option expense 2,197 2,197 Purchase and retirement of common stock (1,363 ) (14 ) (22,658 ) (22,672 ) Exercise of stock options 32 1 244 245 Stock issued for acquisition 5 133 133 Shares issued to directors 7 95 95 Dividends (3,219 ) (3,219 ) BALANCE AT DECEMBER 31, 2007 11,964 120 113,995 33,250 (125 ) 147,240 Comprehensive loss: Net loss (49,029 ) (49,029 ) Grupo Vasconia, S.A.B. translation adjustment (6,587 ) (6,587 ) Derivative fair value adjustment (1,881 ) (1,881 ) Total comprehensive loss (57,497 ) Tax benefit on exercise of stock options 7 7 Stock option expense 2,800 2,800 Exercise of stock options 2 10 10 Shares issued to directors 24 57 57 Dividends (2,244 ) (2,244 ) BALANCE AT DECEMBER 31, 2008 11,990 $ 120 $ 116,869 $ (18,023 ) $ (8,593 ) $ 90,373 Year ended December 31, 2008 2007 2006 OPERATING ACTIVITIES Net income (loss) $ (49,029 ) $ 8,892 $ 15,532 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for doubtful accounts 1,458 79 81 Depreciation and amortization 10,782 9,659 8,380 Deferred rent 1,999 1,060 440 Deferred income taxes 155 2,771 421 Stock compensation expense 2,857 2,292 1,270 Undistributed earnings of Grupo Vasconia, S.A.B. (1,132 ) ― ― Gain on sale of property ― (3,760 ) ― Goodwill and intangible asset impairment 29,400 ― ― Fixed asset impairment 3,912 1,635 ― Changes in operating assets and liabilities (excluding the effects of business acquisitions) Accounts receivable (3,990 ) (4,593 ) 5,336 Inventory 26,154 19,925 (36,410 ) Prepaid expenses, other current assets and other assets (908 ) 1,220 251 Accounts payable, accrued expenses and other liabilities 1,142 (5,270 ) (4,422 ) Income taxes receivable (11,597 ) ― ― Income taxes payable (4,295 ) (2,343 ) (2,330 ) NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 6,908 31,567 (11,451 ) INVESTING ACTIVITIES Purchases of property and equipment, net (8,859 ) (19,023 ) (21,144 ) Business acquisitions (16,312 ) (10,543 ) (43,763 ) Investment in Grupo Vasconia, S.A.B. ― (22,950 ) ― Net proceeds from sale of property 362 8,832 ― NET CASH USED IN INVESTING ACTIVITIES (24,809 ) (43,684 ) (64,907 ) FINANCING ACTIVITIES Proceeds from borrowings, net 20,600 42,200 7,000 Cash dividends paid (2,995 ) (3,303 ) (3,332 ) Payment of capital lease obligations (414 ) (456 ) (387 ) Proceeds from the exercise of stock options 10 245 196 Excess tax benefits from stock option expense 6 125 638 Purchases of common stock ― (22,672 ) ― Proceeds from issuance of convertible notes, net ― ― 71,938 Other ― ― (331 ) NET CASH PROVIDED BY FINANCING ACTIVITIES 17,207 16,139 75,722 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (694 ) 4,022 (636 ) Cash and cash equivalents at beginning of year 4,172 150 786 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,478 $ 4,172 $ 150 2009 Farberware® names. 2009 institutions that, in some cases, is in excess of Federal Deposit Insurance Corporation insurance limits. 2009 2008. Goodwill, As more fully described in Note Stock options 2009 Year Ended Year Ended (in thousands) Store lease obligations $ 2,300 $ ― Consulting fees 393 289 Employee related expenses 141 ― Other related costs 153 ― Total $ 2,987 $ 289 2009. The Balance Charges Payments Balance (in thousands) Store lease obligations $ 2,300 $ ― $ (1,734 ) $ 566 Consulting fees 192 ― (192 ) ― Employee related expenses 141 ― (141 ) ― Other related costs 96 107 (203 ) ― Total $ 2,729 $ 107 $ (2,270 ) $ 566 2007 related to these store closings. No impairment charges were recognized in connection with these store closings during the years ended December 31, 2009 and 2008. Year Ended (in thousands) Store lease obligations $ 7,662 Consulting fees 1,766 Employee related expenses 1,354 Other related costs 318 Total $ 11,100 2009 Balance Charges Payments Balance (in thousands) Store lease obligations $ ― $ 7,662 $ (84 ) $ 7,578 Consulting fees ― 1,766 (1,412 ) 354 Employee related expenses 195 1,159 (186 ) 1,168 Other related costs 142 176 (94 ) 224 Total $ 337 $ 10,763 $ (1,776 ) $ 9,324 2009 Investment $ 16,036 Goodwill 5,166 Customer relationships (estimated life of 16 years) 1,748 Total $ 22,950 for $23.0 million in cash. The Company accounts for its investment in Vasconia using the equity method of accounting. Accordingly, the Company has recorded its proportionate share of Vasconia’s net income (reduced for amortization expense related to the customer relationships acquired) Included in prepaid expenses and other currents assets at December 31, 2009 and 2008, are amounts due from Vasconia of $202,000 and $371,000, respectively. Balance sheet Current assets $ 46,320 Non-current assets 22,371 Current liabilities 17,583 Non-current liabilities 3,981 Income statement Net sales $ 110,026 Gross profit 28,212 Income from operations 11,662 Net income 6,270 2009 AND GOODWILL $2.0 million. Year Ended December 31, 2008 2007 Gross Accumulated Net Gross Accumulated Net Indefinite-lived Trade names $ 25,530 $ ― $ 25,530 $ 21,443 $ ― $ 21,443 Finite-lived intangible assets: Licenses 15,847 (5,123 ) 10,724 15,847 (4,490 ) 11,357 Trade names 2,477 (1,103 ) 1,374 2,477 (1,020 ) 1,457 Customer relationships 586 (321 ) 265 886 (451 ) 435 Designs ― ― ― 460 (330 ) 130 Patents 584 (57 ) 527 584 (23 ) 561 Total $ 45,024 $ (6,604 ) $ 38,420 $ 41,697 $ (6,314 ) $ 35,383 Trade names Licenses Customer relationships Patents Estimated amortization expense for each of the five succeeding fiscal years is as follows (in thousands): Year ending December 31 2009 $779 2010 717 2011 631 2012 591 2013 591 2009 2009 Options Weighted- Weighted- Aggregate Options outstanding, December 31, 2005 875,157 $ 14.51 Grants 695,500 29.96 Exercises (146,157 ) 6.95 Cancellations (13,600 ) 28.12 Options outstanding, December 31, 2006 1,410,900 22.78 Grants 516,500 21.65 Exercises (32,000 ) 7.64 Cancellations (86,500 ) 23.48 Options outstanding, December 31, 2007 1,808,900 22.69 Grants 286,000 7.15 Exercises (1,750 ) 5.50 Cancellations (56,500 ) 26.67 Options outstanding, December 31, 2008 2,036,650 20.41 6.79 — Options exercisable, December 31, 2008 1,179,250 21.68 4.65 — The total intrinsic value of stock options exercised for the years ended December 31, 2009, 2008 and 2007 was $12,000, $10,000, and 2008 2007 2006 Historical volatility 50 % 40 % 41 % Expected term (years) 4.8 5.2 5.2 Risk-free interest rate 2.41 % 4.56 % 5.02 % Expected dividend yield 5.20 % 1.18 % 0.834 % NOTE 2008 2007 2006 (in thousands - except per share amounts) Net income (loss) - Basic $ (49,029 ) $ 8,892 $ 15,532 Interest expense 4.75% Convertible Senior Notes, net of tax ― ― 1,312 Net income (loss) – Diluted $ (49,029 ) $ 8,892 $ 16,844 Weighted- average shares outstanding – Basic 11,976 12,969 13,171 Effect of dilutive securities: Stock options ― 130 183 4.75% Convertible Senior Notes ― ― 1,362 Weighted- average shares outstanding – Diluted 11,976 13,099 14,716 Basic income (loss) per common share $ (4.09 ) $ 0.69 $ 1.18 Diluted income (loss) per common share $ (4.09 ) $ 0.68 $ 1.14 2009 Year Ended December 31, 2008 2007 2006 (in thousands) Current: Federal $ (11,478 ) $ 3,891 $ 7,442 State and local 1,388 768 1,860 Deferred (450 ) 2,771 421 Income tax provision (benefit) $ (10,540 ) $ 7,430 $ 9,723 December 31, 2008 2007 Deferred income tax assets: (in thousands) Inventory $ 1,421 $ 4,347 Grupo Vasconia, S.A.B. translation adjustment 2,553 ― Deferred rent expense 2,117 1,055 Operating loss carry-forward 1,209 ― Stock options 919 390 Accounts receivable allowances 852 1,603 Accrued bonuses 313 469 Other 6,989 61 Total deferred income tax asset 16,373 7,925 Deferred income tax liability: Depreciation and amortization (3,807 ) (8,211 ) Inventory (1,303 ) ― Other (409 ) ― Total deferred income tax liability (5,519 ) (8,211 ) Net deferred income tax asset (liability) 10,854 (286 ) Valuation allowance (14,630 ) ― Net deferred income tax liability $ (3,776 ) $ (286 ) 2009 Year Ended December 31, 2008 2007 2006 Provision (benefit) for Federal income taxes at the statutory rate (35.0 )% 35.0 % 35.0 % Increases (decreases): State and local income taxes, net of Federal income tax benefit (3.3 ) 5.6 4.8 Non-deductible stock options 0.5 2.9 ― Valuation allowance 25.0 ― ― Other (4.5 ) 2.0 (1.3 ) Provision (benefit) for income taxes (17.3 )% 45.5 % 38.5 % Balance as of January 1, 2007 $ 1,704 Increases – tax positions in prior years 9 Decreases – tax positions in prior years (312 ) Increases – tax positions in current year 36 Balance as of January 1, 2008 $ 1,437 Increases – tax positions in prior years 303 Decreases- tax positions in prior years - settled (128 ) Decreases – tax positions in prior years – lapse of statute (1,114 ) Balance as of December 31, 2008 $ 498 2009 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, distribution expenses and selling, general and administrative expenses. Certain general and administrative expenses, such as senior executive salaries and benefits, stock compensation, director fees and accounting, legal and consulting fees, are not allocated to the Year Ended December 31, 2008 2007 2006 (in thousands) Net sales: Wholesale $ 403,591 $ 416,890 $ 374,081 Direct-to-consumer 84,344 76,835 83,319 Total net sales $ 487,935 $ 493,725 $ 457,400 Income (loss) from operations: Wholesale (1) $ (11,979 ) $ 42,968 $ 46,824 Direct-to-consumer (2) (28,998 ) (10,010 ) (8,129 ) Unallocated corporate expenses (10,936 ) (12,174 ) (8,895 ) Total income (loss) from operations $ (51,913 ) $ 20,784 $ 29,800 Depreciation and amortization: Wholesale $ (9,975 ) $ (8,178 ) $ (7,078 ) Direct-to-consumer (807 ) (1,481 ) (1,302 ) Total depreciation and amortization $ (10,782 ) $ (9,659 ) $ (8,380 ) 2009 Year Ended December 31, 2008 2007 2006 (in thousands) Assets: Wholesale $ 321,284 $ 337,156 $ 310,260 Direct-to-consumer 5,422 22,163 24,136 Unallocated/ corporate/ other 15,075 12,096 8,668 Total assets $ 341,781 $ 371,415 $ 343,064 Capital expenditures: Wholesale $ (8,538 ) $ (17,412 ) $ (17,719 ) Direct-to-consumer (321 ) (1,611 ) (3,425 ) Total capital expenditures $ (8,859 ) $ (19,023 ) $ (21,144 ) (1) In 2009, income from operations for the wholesale segment includes $600,000 for restructuring and impairment expenses. In 2008, loss from operations for the wholesale segment (2) In 2009, 2008 and 2007, loss from operations for the direct-to-consumer segment includes $2.0 million, $18.0 million and $1.9 million of restructuring and non-cash fixed asset impairment charges, respectively. See Note B. Year ended December 31, 2008 2007 2006 (in thousands) Food Preparation $ 232,264 $ 247,336 $ 239,200 Tabletop 111,770 97,995 88,466 Home Décor 57,650 68,856 44,040 Other 1,907 2,703 2,375 Total $ 403,591 $ 416,890 $ 374,081 2009 Greenway Tech Center in York, Pennsylvania that had served as the headquarters of the Company’s retail operations. Year ending December 31 2009 $ 12,899 2010 12,047 2011 11,988 2012 12,208 2013 12,309 Thereafter 68,506 Total $ 129,957 Capital leases Year ending December 31 2009 $ 258 2010 166 2011 92 Total minimum lease payments 516 Less: amounts representing interest (47 ) Present value of minimum lease payments $ 469 Year ending December 31 2009 $ 11,252 2010 1,419 2011 158 2012 162 2013 150 Thereafter 1,216 Total $ 14,357 In March 2008, the Environmental Protection Agency (“EPA”) announced that the San 2010. December 31, 2008 2007 (in thousands) Finished goods $ 137,378 $ 139,042 Work in process 2,197 2,412 Raw materials 2,037 2,230 Total $ 141,612 $ 143,684 2009 December 31, 2008 2007 (in thousands) Machinery, furniture and equipment $ 63,868 $ 63,223 Leasehold improvements 24,469 24,878 Building and improvements 1,708 1,708 Construction in progress 1,301 176 Land 115 115 91,461 90,100 Less: accumulated depreciation and amortization (41,553 ) (35,768 ) Total $ 49,908 $ 54,332 and $1.7 million, respectively, related to assets recorded under capital leases. Included in machinery, furniture and equipment and accumulated depreciation at December 31, 2008 are $2.1 million and $1.6 million, respectively, related to assets recorded under capital leases. December 31, 2008 2007 (in thousands) Restructuring costs $ 9,890 $ ― Vendor invoices 6,066 6,572 Customer allowances and rebates 5,956 3,339 Compensation 1,924 6,615 Interest 2,272 2,062 Freight 2,245 992 Royalties 2,021 2,387 Commissions 1,218 686 Contract settlement ― 1,612 Dividends payable ― 748 Other 4,310 6,491 Total $ 35,902 $ 31,504 2009 December 31, 2008 2007 (in thousands) Deferred rent liability $ 11,135 $ 10,442 Mikasa® negative goodwill 6,215 ― Retirement benefit obligations 3,003 2,851 Derivative liability 2,462 731 Long-term portion of capital lease obligations 239 457 Total $ 23,054 $ 14,481 Year Ended December 31, 2008 2007 2006 (in thousands) Supplemental disclosure of cash flow information: Cash paid for interest $ 8,635 $ 6,167 $ 2,500 Cash paid for taxes 6,138 6,392 10,994 Non-cash investing activities: Grupo Vasconia, S.A.B. translation adjustment $ (6,587 ) $ ― $ ― Liabilities assumed in business acquisition 3,264 ― ― Common stock issued in connection with business acquisition ― 133 6,821 Equipment acquired under capital lease obligations ― 34 521 Capitalized tenant improvement allowances ― 7,039 ― COL. A COL. B COL. C COL. D COL. E Description Balance at Additions Deductions Balance Year ended December 31, 2008 Deducted from asset accounts: Allowance for doubtful accounts $ 395 $ 1,614 $ 156 (a) $ 1,853 Reserve for sales returns and allowances 16,005 23,160 (c) 26,367 (b) 12,798 $ 16,400 $ 24,774 $ 26,523 $ 14,651 Year ended December 31, 2007 Deducted from asset accounts: Allowance for doubtful accounts $ 395 $ (79) $ (79) (a) $ 395 Reserve for sales returns and allowances 11,702 19,970 (c) 15,667 (b) 16,005 $ 12,097 $ 19,891 $ 15,588 $ 16,400 Year ended December 31, 2006 Deducted from asset accounts: Allowance for doubtful accounts $ 195 $ (81) $ (281) (a) $ 395 Reserve for sales returns and allowances 7,718 18,996 (c) 15,012 (b) 11,702 $ 7,913 $ 18,915 $ 14,731 $ 12,097 the retailersits wholesale customers to devise marketing strategies and merchandising concepts and to furnish advice on advertising and product promotion. The Company has developed several promotional programs for use in the ordinary course of business to promote sales throughout the year.YorkYork; as well as showrooms in New York, New York; Medford, Massachusetts; Atlanta, Georgia; Bentonville, Arkansas; and Menomonee Falls, Wisconsin. The Company’s sales and marketing staff at December 31, 2008 consisted of 235 salaried employees. The Company also distributes certain products through independent sales representatives who work on a commission basis.The Company’s largest retail customers are each serviced by an in-house team that includes representatives from the Company’s sales, marketing, merchandising and product development departments. retailwholesale customers and in many instances produces specific versions of the Company’s product lines with exclusive designs and packaging for their stores.6approximately 475over 400 suppliers. Most of the Company’s suppliers are located primarily in the People’s Republic of China. The Company also sources products from suppliers in Hong Kong, the United States, Hong Kong, Taiwan, India, Japan, India,Indonesia, Thailand, Italy, Indonesia, Korea, Vietnam, Germany, Czech Republic, United Kingdom, Canada, Poland, Portugal, Switzerland, Malaysia, Portugal, Colombia, Poland, Turkey, and Mexico. The Company’s policy is to maintain several months of supply of inventory. Accordingly, the Company orders products substantially in advance of the anticipated time of their sale. While theThe Company does not have any formal long-term arrangements with any of its suppliers in certain instances the Company places purchase orders for products several months in advance of receipt of orders fromand its customers. The Company’s arrangements with most manufacturers allow for flexibility in modifying the quantity, composition and delivery dates of orders. All purchase orders issued by the Company are cancelable. a majority of its sterling silver products at its leased manufacturing facility in San German,Germán, Puerto Rico and fills spices and assembles spice racks at its owned Winchendon, Massachusetts distribution facility.consumerinnovative products, brand, name recognition, quality, aesthetic appeal to consumers, packaging, breadth of product line, distribution capability, prompt delivery and selling price.131129 design and utility patents on the overall design of some of its products. The Company believes that the expiration of any of its patents would not have a material adverse effect on the Company’s business.2008,2009, the Company had a total of 1,168979 full-time employees, 156147 of whom are located in China. In addition, the Company employed 41472 people on a part-time basis, predominately in its distribution centers.customer service and sales. None of the Company’s employees are represented by a labor union. The Company considers its employee relations to be good.Certain of theU.S. Consumer Product Safety Commission.scrutiny of consumer groups. The Company’s spice container filling operation in Winchendon, Massachusetts is regulated by the Food and Drug Administration. The Company’s sterling silver manufacturing operations are subject to the jurisdiction of the Environmental Protection Agency. The Company’s products are also subject to regulation under certain state laws pertaining to product safety and liability.7Some of theseThe risks areand uncertainties described below in no particular order. This section does not describe all risksare those that may be applicable to the Company considers material.industry, orcontrol. These factors include recession, inflation, deflation, housing markets, consumer credit availability, consumer debt levels, fuel and energy costs, interest rates, tax rates and policy, unemployment trends, the impact of natural disasters and terrorist activities, conditions affecting the retail environment for the home and other matters that influence consumer spending. Unfavorable economic conditions in the United States adversely affected the Company’s business,performance in 2008 and it is intended only as a summary of certain material risk factors.Risks associated with indebtedness.indebtedness. As of December 31, 2008, the Company’s total indebtedness was $164.3 million, including $89.3 million underand depends upon its $150 million secured credit facility which expires in April 2011 (the “Credit Facility”) and $75 million of 4.75% Convertible Senior Notes due 2011 (the “Notes”). 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 requiredlenders to satisfy certain financial covenants. In March 2008 and September 2008, the Company amended the Credit Facility in anticipation offinance its declining financial performance. At December 31, 2008, theliquidity needs. The Company was not in compliance with the financial covenants required byterms of its Credit Facility. On eachFacility as of February 12,December 31, 2008, and, during the first quarter of 2009, and March 6, 2009, the Company entered intooperated under a forbearance agreement and amendment towith its banks. Although the Company has been in compliance with the terms of its Credit Facility. OnFacility since March 31,30, 2009, the interest rate on its borrowings has increased. Such increases in the cost of funding the Company’s operations have adversely affected its performance and will continue to do so. To the extent that the Company’s access to credit was to be restricted, the Company entered into a waiver and amendmentwould not be able to the Credit Facility.Increased financial leverage resulting from borrowings under theoperate normally.or a declinematures in the Company’s financial performance could have a material adverse effect on the Company, including, but not limited to the following: (i) the Company’s ability to obtain additional financing, working capital, capital expenditures,January 2011 and general corporate or other purposes could be impaired, or any such financing may not be available on terms favorable to the Company; (ii) a substantial portion of the Company’s cash flows could be required for debt service and, as a result, might not be available for its operations or other purposes; (iii) any substantial decreaseConvertible Notes mature in net operating cash flows could make it difficult for the Company to meet its debt service requirements or force the Company to modify its operations or sell assets; (iv) the Company’s ability to withstand competitive pressures may be decreased; and (v) the Company’s level of indebtedness may make the Company more vulnerable to economic downturns, and reduce its flexibility in responding to changing business, regulatory and economic conditions.July 2011. The Company’s ability to repay expected borrowings underoperate normally would be severely jeopardized if it were unable to refinance its Credit Facility and the Notes, and to meet its other debt or contractual obligations (including compliance with applicable financial covenants) will depend upon the Company’s future performance and its cash flows from operations, both of which are subject to prevailing economic conditions and financial, business, and other known and unknown risks and uncertainties, certain of which are beyond the Company’s control.Company’s business depends, in part, on factors affecting consumer spending that are out of the Company’s control.The Company’s business depends on consumer demand for its products and, consequently, is sensitive to a number of factors that influence consumer spending, including general economic conditions, disposable consumer income, recession and inflation, incidents and fears relating to national security, terrorism and war, hurricanes, floods and other natural disasters, inclement weather, consumer debt, unemployment rates, interest rates, sales tax rates, fuel and energy prices, consumer confidence in future economic conditions and political conditions, and consumer perceptions of personal well-being and security, generally. Adverse changes in factors affecting discretionary8consumer spending such as those that occurred during 2008, has had a significant adverse effect on, and could continue to reduce consumer demandmarkets for the Company’s products change the mix of productsare intensely competitive and the Company sells to a different mixcompetes with a lower average gross margin, slow inventory turnover and result in greater markdowns on inventory, thus reducing the Company’s sales and harming its business and operating results.Customer risks.During the past several years, various retailers, including some of the Company’s customers, have experienced significant changes and difficulties, including consolidation of ownership, restructurings, bankruptcies and liquidations. Consolidation of retailers ornumerous other events that eliminate the Company’s customers could result in fewer stores selling the Company’s products and could increase the Company’s reliance on a smaller group of customers. In addition, if the Company’s retailer customers experience significant problems in the future, including as a result of general weakness in the retail environment, the Company’s sales may be reduced and the risk of extending credit to these retailers may increase. A significant adverse change in a customer relationship or in a customer’s financial position could cause the Company to limit or discontinue business with that customer, require the Company to assume greater credit risk relating to that customer’s receivables or limit the Company’s ability to collect amounts related to previous purchases by that customer. These or other events related to the Company’s significant customers could have an adverse effect on the Company’s business, results of operations or financial condition.Because most of the Company’s vendors are located in foreign countries, the Company is subject to a variety of additional risks and uncertainties.The Company’s dependence on foreign vendors means, in part, that the Company may be affected by declines in the relative value of the U.S. dollar to other foreign currencies. Although substantially all of the Company’s foreign purchases of products are negotiated and paid for in U.S. dollars, changes in currency exchange rates might negatively affect the profitability and business prospects of the Company’s foreign vendors. This, in turn, might cause such foreign vendors to demand higher prices for products, hold up shipments to the Company, or discontinue selling to the Company, any of which could ultimately reduce the Company’s sales or increase its costs.The Company is also subject to other risks and uncertainties associated with changing economic and political conditions in foreign countries. These risks and uncertainties include import duties and quotas, increases in value added taxes, concerns over anti-dumping, work stoppages, economic uncertainties (including inflation), foreign government regulations, incidents and fears involving security, terrorism and wars, political unrest and other trade restrictions. The Company cannot predict whether any of the countries in which its products are currently manufactured or may be manufactured in the future will be subject to trade restrictions imposed by the U.S. or foreign governments or the likelihood, type or effect of any such restrictions. Any event causing a disruption or delay of imports from foreign vendors, including the imposition of additional import restrictions, restrictions on the transfer of funds and/or increased tariffs or quotas, or both, with respect to products for the home could increase the cost or reduce the supply of products available to the Company and adversely affect the Company’s business, financial condition and operating results. Furthermore, some or all of the Company’s foreign vendors’ operations may be adversely affected by political and financial instability resulting in the disruption of trade from exporting countries, restrictions on the transfer of funds and/or other trade disruptions. Moreover, since the Company’s vendors are typically small privately-owned businesses, the Company does not have access to its vendors’ financial information to assess its vendors’ liquidity. Accordingly, in light of recent economic events in the U.S. and the resulting impact on foreign economies, particularly in China, the Company is subject to the risk that the Company’s vendors may become bankrupt or shut-down operations prior to fulfilling the Company’s purchase requirements.In addition, there is a risk that one or more of the Company’s foreign vendors will not adhere to its compliance standards such as fair labor practices and prohibitions on child labor. Such circumstances might create an unfavorable impression of the Company’s sourcing practices or the practices of some of its vendors that could harm the Company’s image. Additionally, certain of the Company’s major retail customers, including Wal-Mart Stores, Inc., routinely inspect its suppliers’ facilities to determine their compliance with applicable labor laws. A determination by such customers that one or more of the Company’s suppliers, violate such standards could9jeopardize the Company’s sales to such customers if the Company or the suppliers cannot effectively remedy any such violation in a timely manner. If any of these occur, the Company could lose sales, customer goodwill and favorable brand recognition, which could negatively affect the Company’s business and operating results.The Company must successfully anticipate changing consumer preferences and buying trends and manage its product line and inventory commensurate with customer demand.The Company’s success depends upon its ability to anticipate and respond to changing merchandise trends and customer demands in a timely manner. Consumer preferences cannot be predicted with certainty and may change between selling seasons. The Company must make decisions as to design, development, expansion and production of new and existing product lines. If the Company misjudges either the market for its products, the purchasing patterns of the end consumer, or the appeal of the design, functionality or variety of its product lines, the Company’s sales may decline significantly, and it may be required to mark down certain products to sell the resulting excess inventory through liquidation channels at prices which can be significantly lower than the Company’s normal wholesale prices, each of which would harm its business and operating results.In addition, the Company must manage its inventory effectively and commensurate with customer demand. A substantial portion of the Company’s inventory is sourced from vendors located outside the United States. The Company generally commits to purchasing products before it receives firm orders from its retail customers and frequently before trends are known. The extended lead times for many of the Company’s purchases, as well as the development time for design and deployment of new products, may make it difficult for the Company to respond rapidly to new or changing trends. In addition, the seasonal nature of the Company’s business requires it to carry a significant amount of inventory prior to the year-end holiday selling season. As a result, the Company is vulnerable to demand and pricing shifts and to misjudgments in the selection and timing of product purchases. If the Company does not accurately predict its customers’ preferences and acceptance levels of its products, the Company’s inventory levels may not be appropriate, and its business and operating results may be adversely impacted.The Company faces intense competition from companies with similar brands or products and from companies in the retail industry.The markets for food preparation, tabletop, and home décor products are highly competitive and include numerous domestic and foreign competitors, some of which are larger than the Company, have greater financial and other resources or employ brands that are more established, have greater consumer recognition or are more favorably perceived by consumers or retailers than the Company’s brands.and may have more established brand names in somebelieves it possesses certain competitive advantages; however, many factors could erode these competitive advantages or all ofprevent their strengthening. Accordingly, future operating results will depend on the markets the Company serves. Company’s ability to protect or enhance its competitive advantages.primary competitive factors in selling such products toCompany’s wholesale customers include mass merchants, specialty stores, national chains, department stores, warehouse clubs, home centers, supermarkets, off-price retailers are consumer brand name recognition, quality, packaging, breadth of product line, distribution capability, prompt delivery in response to retail customers’ order requirements, and ultimate price to the consumer.The competitive challenges facing the Company include:•anticipating and quickly responding to changing consumer demands better than the Company’s competitors;•maintaining favorable brand recognition and achieving end consumer perception of value;•effectively marketing and competitively pricing the Company’s products to consumers in diverse market segments and price levels; and•developing innovative, high-quality products in designs and styles that appeal to consumers of varying groups, tastes and price level preferences, and in ways that favorably distinguish the Company from its competitors.In addition, the Company operates its catalog and Internet businesses under highly competitive conditions. The Company has numerousretailers. Unanticipated changes in purchasing and varied competitors at the nationalother practices by its customers, including customers’ pricing and local levels. Competition is characterized by many factors, including product assortment, advertising, price, quality, service, location, reputation and credit availability. If the Company does not compete effectively with regard to these factors, its results of operations could be materially and adversely affected.10In light of the many competitive challenges facing the Company, the Company may not be able to compete successfully. Increased competitionother requirements, could adversely affect the Company. In its e-commerce and catalog businesses, the Company sells to individual consumers nationwide.sales,wholesale customers are significantly larger than the Company, have greater financial and other resources and also purchase goods directly from vendors in Asia and elsewhere. Decisions by large customers to increase their purchases directly from overseas vendors could have a materially adverse affect on the Company.results and businessresults. In addition, pressures by forcingWal-Mart Stores, Inc. that would cause the Company to lower its prices or sell fewer units, which couldmaterially reduce the Company’s profitability.The Company depends on key vendors for timely and effective sourcingprice of its products, and the Company is subject to various risks and uncertainties that may affect its vendors’ ability to produce quality merchandise.The Company sources most of its products from third-party suppliers with which the Company may have in many cases established long-term relationships. The Company’s performance depends on its ability to have its products manufactured to the Company’s designs and specificationsproducts could result in sufficient quantities at competitive prices. The Company has no contractual assurancesreductions of continued supply, pricing or access to products, and in general, vendors may discontinue selling to the Company at any time. The Company may not be able to acquire its products in sufficient quantities, with the quality assurance that the Company requires, and on terms acceptable to the Company.approximately 475 suppliers located principally in Asia and, to a lesser extent, in Europe and in the United States. The Company’s Asia vendors are located primarily in the People’s Republic of China. The Company’s three largest suppliers in China provided the Company with approximately 23% of the products it distributed in 2008. This concentration of sourcing is a risk to the Company’s business. Furthermore, because the Company’s product lines cover thousands of products, many products are produced for the Company by only one or two manufacturers. An interruption of supply from any of these manufacturers could also have an adverse impact on the Company’s ability to fill orders on a timely basis.results becauseresults.would be missing products that could be importantand its overseas vendors. The Company does not have access to its assortment orvendors’ financial information and is unable to coordinated branded product lines, unless and until alternative supply arrangements are secured. The Company may not be able to develop relationships with new vendors, and products from alternative sources, if any, may be of a lesser quality and/or more expensive than those the Company currently purchases. Replacement of manufacturing sources would require long lead-times to assure theassess its vendors’ capability to manufacture to the Company’s designs and specifications, maintain quality control and achieve the production levels the Company requires. In addition, some of the Company’s customers demand a certain standard of shipping fulfillment (usually as a percentage of orders placed) and any disruption in the manufacturing of its products could result in the Company’s failure to meet such standards.also subject to certain risks including risks relating to the availability of raw materials, labor disputes, union organizing activity, inclement weather, natural disasters, and generaluncertainties associated with economic and political conditions in foreign countries, including but not limited to, foreign government regulations, taxes, import and export duties and quotas, anti-dumping regulations, incidents and fears involving security, terrorism and wars, political unrest and other restrictions on trade and travel.might limitare to be delivered to its distribution centers, the Company’s vendors’Company arranges for transportation, primarily by sea, from ports in Asia and Europe to ports in the United States, principally Newark/Elizabeth, New Jersey, and Los Angeles/Long Beach, California. Accordingly, the Company is subject to risks incidental to such transportation. These risks include, but are not limited to, increases in fuel costs, the availability of shipping containers, increased security restrictions, work stoppages and carriers’ ability to provide it with quality merchandisedelivery services to meet the Company’s shipping needs. Transportation disruptions and increased transportation costs could adversely af fect the Company’s business.a timely basis. For these or other reasons, one or morethe Company’s ability to deliver goods to its customers.vendors might not adhere to the Company’s quality control standardsbusiness are dependent on trade names, trademarks and the Company might not identify the deficiency before products are shipped to its retail customers. The Company’s vendors’ failure to manufacture or ship quality merchandise in a timely and efficient manner could damage its reputation and that of brands offered by the Company and could lead to a loss or reduction in orders by the Company’s retail customers and an increase in product liability claims or litigation.High costs of raw materials and energy may result in increased operating expenses and adversely affect the Company’s results of operations and cash flow.Significant variations in the costs and availability of raw materials and energy may negatively affect the Company’s results of operations. The Company’s vendors purchase significant amounts of metals and plastics to manufacture the Company’s products. They also purchase significant amounts of electricity to supply the energy required in their production processes. Rising cost of fuel may also increase transportation costs. The Company’s results of operations have been and could in the future be significantly affected by increases in these costs. Price increases increase the Company’s working capital needs and, accordingly, can adversely affect the Company’s liquidity and cash flow.11The Company must successfully manage the complexities associated with a multi-channel and multi-brand business.The Company’s business requires the development, marketing and production of a wide variety of products in its three product categories: Food Preparation, Tabletop and Home Décor. Within each of these categories, it is necessary to market several full lines of branded products targeting different price and prestige levels, and each of these branded lines must contain an assortment of products and accessories with matched designs and packaging which are often sold as sets. The Company’s different product lines are sold under a variety of brand names,patents, some of which are owned and some of which are licensed. Many of the Company’s products are inherently of the type that consumers prefer to purchase as part of a branded, matched line. Accordingly, both for marketing reasons and the requirements of the Company’s license agreements, the Company must maintain breadth of product lines and it must devote significant resources to developing and marketing new designs for the Company’s product lines. The inability to maintain the breadth of the Company’s product lines—whether due to vendor difficulties, design issues, retail orders for less than all of the products in a line, or other problems—could result in competitive disadvantages as well as the potential loss of valuable license arrangements.In addition, the Company sells its products through several different distribution channels (mass merchants, specialty stores, national chains, department stores, warehouse clubs, home centers, supermarkets, off-price retailers, catalogs and the Internet) and the Company must manage the selective deployment of branded lines within these channels so as to achieve maximum revenue and profitability. Failure to properly align brands and product lines to the price and prestige levels associated with particular channels of distribution could result in product line failures, damage to the Company’s reputation, and lost sales and profits.Many of the Company’s leading product lines are manufactured under licensed trademarks and any failure to retain such licenses on acceptable terms may have an adverse effect on the Company’s business.The Company promotes and markets some of its most successful product lines under trademarks the Company licenses from third-parties. Several of these license agreements are subject to termination by the licensor.The Company’s license agreement with Whirlpool Corporation allows it to design, manufacture and market an extensive range of food preparation products under the KitchenAid® brand name. Whirlpool Corporation may terminate this license for cause if the Company is in default or upon the occurrence of a change of control of the Company. In addition, Whirlpool Corporation may terminate the agreement if, based on certain statistical parameters, a customer survey conducted by it shows that customers are dissatisfied with the products the Company markets under the license. Products marketed under the KitchenAid® name accounted for a substantial portion of the Company’s revenues in 2008. The Company may not be successful in maintaining or renewing the KitchenAid® license, which has significant commercial value to the Company, on terms that are acceptable to the Company or at all. The loss of the KitchenAid® license,certain licenses or ana material increase in the royalties the Company pays under such licenselicenses upon renewal could have a material adverse affect on the Company’s results of operations.In addition, any of the licensors of the Company’s trade names may encounter problems that would potentially diminish the prestige of the licensed trade names. In turn, this could negatively reflect on the Company’s line of products that are marketed under the applicable trade name. In the event that this occurs with respect to one of the Company’s leading product lines, the Company’s sales and financial results may be adversely affected. In addition, certain of the Company’s licenses have minimum sales requirements. If theunable to achievesubject in the minimum sales requirements under these licenses, the Company may incur a loss related to these licenses.If the Company fails to adequately protect or enforce its intellectual property rights, competitors may produce and market products similar to the Company’s. In addition, the Company may be subject to intellectual property litigation and infringement claims by third-parties.The success of the Company’s products is inherently dependent on new and original designs that appeal to consumer tastes and trends at various price and prestige levels. The Company’s trademarks, service marks, patents, trade dress rights, trade secrets and other intellectual property are valuable assets that are critical to the Company’s success. Although the Company attempts to protect its proprietary properties through a combination of trademark, patent and12trade secret laws and non-disclosure agreements, these laws and agreements may be insufficient. Although the Company has trademarks and certain patents issued or licensed to it for its products, the Company may not always be able to successfully protect or enforce its trademarks and patents against competitors or against challenges by others. The Company sources substantially allordinary course of its products from foreign vendors, and the ability to protect the Company’s intellectual property rightsbusiness, in foreign countries may be far more difficult than in the United States. Many foreign jurisdictions provide less legal protection of intellectual property rights than the United States and it is difficultelsewhere, to even detect infringing products in such jurisdictions until they are already in widespread distribution. The costs of enforcingmany other statutes, ordinances, rules and regulations that if violated by the Company’s intellectual property may adversely affect its operating results.In addition, the Company may be subject to intellectual property litigation and infringement claims, which could cause it to incur significant expenses or prevent the Company from selling its products. A successful claim of trademark, patent or other intellectual property infringement against the Company could adversely affect the Company’s growth and profitability, in some cases materially. Others may claim that the Company’s proprietary or licensed products are infringing their intellectual property rights, and the Company’s products could be determined to infringe those intellectual property rights. The Company may be unaware of intellectual property rights of others that may cover some of its products. If someone claims that the Company’s products infringe their intellectual property rights, any resulting litigation could be costly and time consuming and would divert the attention of management and key personnel from other business issues. The Company also may be subject to significant damages or injunctions preventing it from manufacturing, selling or using some aspect of the Company’s products in the event of a successful claim of patent or other intellectual property infringement. Any of these adverse consequences could have a material adverse effect on the Company’s business and profitability.The Company has a single customer that accounted for 20% of its net sales in 2008.During the years ended December 31, 2008, 2007 and 2006, Wal-Mart Stores, Inc. (including Sam’s Club) accounted for 20%, 21% and 17% of the Company’s net sales, respectively. Any material reduction of product orders by Wal-Mart Stores, Inc. could have significant adverse effects on the Company’s business and operating results, including the loss of predictability and volume production efficiencies associated with such a large customer. In addition, any pressure by Wal-Mart Stores, Inc. to reduce the price of the Company’s products could result in the reduction of the Company’s operating margin.If the Company’s products are found to be defective, the Company’s credibility and that of its brands may be harmed, market acceptance of the Company’s products may decrease and the Company may be exposed to liability in excess of its product liability insurance coverage.In addition, potentialPotential product liability claims may exceed the amount of the Company’s insurance coverage under the terms of the Company’s policies. In the event that the Company is held liable for a product liability claim for which it is not insured, or for damages exceeding the limits of the Company’s insurance coverage, such claimand could materially damage the Company’s business and its financial condition. Company’s ability to deliver products to its customers in a timely manner and to satisfy its customers’ fulfillment standards is subject to several factors, some of which are beyond the Company’s control.Retailers place great emphasis on timely delivery of the Company’s products for specific selling seasons and to fulfill consumer demand throughout the year. The Company cannot control all of the various factors that might affect product delivery to retailers. Vendor production delays, difficulties encountered in shipping from overseas as well as customs clearance are on-going risks of the Company’s business. The Company also relies upon third-party carriers for its product shipments from the Company’s warehouse facilities to customers, and it relies on the shipping arrangements the Company’s suppliers have made in the case of products shipped directly to retailers from the supplier. Accordingly, the Company is subject to risks, including labor disputes such as the West Coast port13strike of 2002; union organizing activity; inclement weather; natural disasters such as earthquakes, particularly with respect to the Company’s West Coast distribution center; possible acts of terrorism; availability of shipping containers and increased security restrictions, associated with such carriers’ ability to provide delivery services to meet the Company’s shipping needs. Failure to deliver products in a timely and effective manner to retailers could damage the Company’s reputation and brands and result in a loss of customers or reduced orders. In addition, any substantial increase in fuel costs would likely result in increased shipping expenses. Increased transportation costs and any disruption in the Company’s distribution process, especially during the second half of the year, which is the Company’s busiest selling period, could adversely affect the Company’s business and operating results.The Company’s inability to attract and retain skilled personnel may negatively impact the Company’s success.The Company’s success depends on its ability to identify, hire and retain skilled personnel. The Company’s industry is characterized by a high level of employee mobility and aggressive recruiting among competitors for personnel with successful track records. The Company may not be able to attract and retain skilled personnel or may incur significant costs in order to do so. If Jeffrey Siegel, the Company’s Chairman, President and Chief Executive Officer, were to leave the Company, it would have a material adverse effect on the Company.The Company’s customers’ internal efforts to design and manufacture products may compete with similar products of the Company.Some of the Company’s existing and potential customers continuously evaluate whether to design and manufacture their own products or purchase them directly from outside vendors and distribute them under their own brand names. Although, based on the Company’s past experience, such products usually target the lower price point portion of the market, if any of the Company’s customers or potential customers pursue such options it may adversely affect the Company’s business.The Company’s corporate compliance program cannot assure that it will be in complete compliance with all potentially applicable regulations, including the Sarbanes-Oxley Act of 2002.As a publicly traded company, the Company is subject to significant regulations, including the Sarbanes-Oxley Act of 2002. In connection with the Company’s and the Company’s independent registered public accounting firm’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008, neither the Company nor its independent registered public accounting firm identified any deficiencies in the Company’s internal control over financial reporting that constituted a “material weakness” as defined by the Public Company Accounting Oversight Board. The Company cannot assure that it will not find material weaknesses in the future or that the Company’s independent registered public accounting firm will conclude that the Company’s internal control over financial reporting is operating effectively.The Company experiences business risks as a result of the Company’s Internet business.The Company competes with Internet businesses that handle similar lines of merchandise. These competitors have certain advantages, including the inapplicability of sales tax. As a result, increased Internet sales by the Company’s competitors could result in increased price competition and decreased margins adversely affecting the Company’s Internet business as well as the Company’s wholesale business. The Company’s Internet operations are subject to numerous risks, including reliance on third-party providers and online security breaches and/or credit card fraud. The Company’s inability to effectively address these risks and any other risks that it faces in connection with its Internet business could adversely affect the profitability of the Company’s Internet business.The Company may not be able to successfully identify, manage or integrate future acquisitions.Since 1995 the Company has completed fourteen acquisitions. Although the Company has grown significantly through acquisitions and intends to continue to pursue additional selective acquisitions in the future, the Company may not be able to identify appropriate acquisition candidates or, if it does, it may not be able to successfully negotiate the terms of an acquisition, finance the acquisition or integrate the acquired business effectively and profitably into the Company’s existing operations. Integration of an acquired business could disrupt the Company’s business by diverting management away from day-to-day operations. Furthermore, failure to successfully integrate any acquisition may cause significant operating inefficiencies and could adversely affect the Company’s profitability.14The Company may not be able to adapt quickly enough to changing customer requirements and e-commerce industry standards.Technology in the e-commerce industry changes rapidly. The Company may not be able to adapt quickly enough to changing customer requirements and preferences and e-commerce industry standards. These changes and the emergence of new e-commerce industry standards and practices could render the Company’s existing websites obsolete.Government regulation of the Internet and e-commerce is evolving and unfavorable changes could harm the Company’s business.ini n turn, diminish the demand for the Company’s products on the Internet and increase the Company’s cost of doing business.The Company’s business is subject to technological risks.The Company’s business may be adversely affected if the Company’s network security is compromised. Although,meet thefully comply with Payment Card Industry (“PCI”) data security standards, failure by the Company to maintain compliance with the PCI data security requirements or rectify a security issue maycould result in fines and the imposition of restrictions on the Company’s ability to accept paymentcredit cards.quarterly resultssuccess depends on its ability to identify, hire and retain skilled personnel. The Company’s industry is characterized by a high level of operations might fluctuate dueemployee mobility and aggressive recruiting among competitors for personnel with successful track records. The Company may not be able to a variety of factors, including ordering patterns ofattract and retain skilled personnel or may incur significant costs in order to do so. If Jeffrey Siegel, the Company’s customersChairman, President and the seasonality of the Company’s business.The Company’s quarterly results have fluctuated in the past and may fluctuate in the future, depending upon a variety of factors, including, but not limitedChief Executive Officer, were to the ordering patterns and timing of promotions of the Company’s major retail customers, which may differ significantly from period to period or from the Company’s original forecasts. A significant portion of the Company’s revenues and net earnings historically have been realized during the second half of the calendar year, as order volume from the Company’s retail customer base reaches its peak as the Company’s customers increase their inventories for the end of year holiday season. If, for any reason,leave the Company, were to realize significantly lower-than-expected sales duringit would have a material adverse effect on the September through December selling season, the Company’s business and results of operations would be materially adversely affected.152.2. Propertiesdescribeslists the principal properties at which the Company operatedoperates its business at December 31, 2008:2009:DescriptionDescription Size(square feet)Fontana, California Principal West Coast warehouse and distribution facility Robbinsville, New Jersey Principal East Coast warehouse and distribution facility York, Pennsylvania (1)Warehouse and distribution facility473,000LeasedWarehouse and distribution facility, and spice packing line 210,000Garden City, New York Corporate headquarters/main showroom 114,000Medford, Massachusetts Offices, showroom, warehouse and distribution facility York, PennsylvaniaOffices60,000LeasedGerman,Germán, Puerto RicoSterling silver manufacturing facility York, Pennsylvania Offices 26,000 Leased Guangzhou, China Offices 18,000 Leased New York, New York (2)ShowroomsShowrooms 37,000 11,000 Leased Guangdong, ChinaOffices18,000LeasedShowroomsShowrooms 11,000 11,000 Leased Shanghai, ChinaOffices11,000LeasedBentonville, ArkansasShowroom & officesOffices 7,000 11,000 Leased Note:(1)The Company plans to vacate this facility in 2009.(2)In early 2009, the Company vacated a New York showroom consisting of 26,000 square feet.been involved in variousother legal proceedings. The Company believes that allother current litigation is routine in nature and incidental to the conduct of itsthe Company’s 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.16 2009 2008 High Low High Low First quarter $ 3.96 $ 0.97 $ 13.37 $ 8.51 Second quarter 4.59 1.38 9.95 6.70 Third quarter 5.95 3.33 10.86 6.94 Fourth quarter 7.40 5.34 10.02 3.00 2008,2009 the Company estimates that there wereare approximately 2,2902,200 beneficial holders of the Company’s common stock.iswere issued or outstanding.2008 and 2007.2008. In February 2009, in light of current economic conditions, the Company suspended paying a cash dividenddividends on its outstanding common shares. The Company will review this decision as circumstances may warrant.2008:2009:
shares of
common stock
to be issued
upon exercise
of outstanding
options
average
exercise
price of
outstanding
options
shares of
common
stock
remaining
available for
future
issuance17Plan category Number of shares of common stock to be issued upon exercise of outstanding options Weighted- average exercise price of outstanding options Number of shares of common stock remaining available for future issuance Equity compensation plan approved by security holders 1,786,667 $12.14 1,215,729 Equity compensation plan not approved by security holders ― ― ― Total 1,786,667 $12.14 1,215,729 COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG LIFETIME BRANDS, INC.,NASDAQ MARKET INDEX AND HEMSCOTT GROUP INDEX(1)
Date Hemscott
Group Index NASDAQ
Market Index12/31/2004 $100.00 $100.00 $100.00 12/31/2005 131.75 98.33 102.20 12/31/2006 105.91 122.09 112.68 12/31/2007 84.78 105.94 124.57 12/31/2008 24.01 45.17 74.71 12/31/2009 48.49 84.09 108.56
Brands, Inc.Note:Note: (1) (1)20032004 and dividends were reinvested. Measurement points are at the last trading day of each of the fiscal years ended December 31, 2009, 2008, 2007, 2006 2005 and 2004.2005. The material in this chart is not soliciting material, is not deemed filed with the Securities and Exchange Commission and is not incorporated by reference in any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether or not made before or after the date of this Annual Report on Form 10-K and irrespective of any general incorporation language in such filing. A list of the companies included in the Hemscott Group Index will be furnished by the Company to any stockholder upon written request to the Chief Financial Officer of the Company.(c)In 2007, the Board of Directors of the Company authorized a program to repurchase up to $40.0 million of the Company’s common stock through open market purchases or privately-negotiated transactions. As of December 31, 2008, the Company had purchased in the open market and retired a total of 1,362,505 shares of its common stock for a total cost of $22.7 million under the program. There were no purchases during 2008. In March 2009, the Board of Directors of the Company terminated the program.182007 and 2006,2007, and the selected consolidated balance sheet data as of December 31, 20082009 and 2007,2008, have been derived from the Company’s audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of incomeoperations data for the years ended December 31, 20052006 and 2004,2005, and the selected consolidated balance sheet data at December 31, 2007, 2006 2005 and 2004,2005, have been derived from the Company’s audited consolidated financial statements included in the Company’s Annual Reports on Form 10-K for those respective years, which are not included in this Annual Report on Form 10-K. 19 Year ended December 31, 2009 2005 (in thousands, except per share data) Net sales $ 415,040 $ 487,935 $ 493,725 $ 457,400 $ 307,897 Cost of sales 257,839 303,535 288,997 265,749 178,295 Distribution expenses 43,329 57,695 53,493 49,729 34,539 Selling, general and administrative expenses 95,647 131,226 128,527 112,122 69,891 Goodwill and intangible asset impairment ― 29,400 ― ― ― Restructuring expenses 2,616 17,992 1,924 ― ― Income (loss) from operations 15,609 (51,913 ) 20,784 29,800 25,172 Interest expense (13,185 ) (11,577 ) (10,623 ) (5,616 ) (2,489 ) Other income, net ― ― 3,935 31 73 Income (loss) before income taxes and equity in earnings of Grupo Vasconia, S.A.B. 2,424 (63,490 ) 14,096 24,215 22,756 Income tax benefit (provision) (1,880 ) 14,249 (6,567 ) (9,320 ) (8,647 ) Equity in earnings of Grupo Vasconia, S.A.B., net of taxes 2,171 1,486 ― ― ― Net income (loss) $ 2,715 $ (47,755 ) $ 7,529 $ 14,895 $ 14,109 Basic income (loss) per common share $ 0.23 $ (3.99 ) $ 0.58 $ 1.13 $ 1.25 Weighted-average shares outstanding – basic 12,009 11,976 12,969 13,171 11,283 Diluted income (loss) per common share $ 0.22 $ (3.99 ) $ 0.57 $ 1.10 $ 1.23 Weighted-average shares outstanding – diluted 12,075 11,976 13,099 14,716 11,506 Cash dividends per common share $ ― $ 0.25 $ 0.25 $ 0.25 $ 0.25 Note: December31, 2009 2005 (in thousands) Current assets $ 173,850 $ 232,678 $ 228,078 $ 231,633 $ 155,750 Current liabilities 77,210 149,981 71,283 89,727 69,907 Working capital 96,640 82,697 156,795 141,906 85,843 Total assets 276,723 341,781 371,415 343,064 222,648 Short-term borrowings 24,601 89,300 13,500 21,500 14,500 Long-term debt ― ― 55,200 5,000 5,000 Convertible notes 70,527 67,864 65,428 63,203 ― Stockholders’ equity 104,012 97,509 153,102 168,836 140,487 (1) (1) Excel Importing Corp. in July 2004, Pfaltzgraff® in July 2005, Salton in September 2005, Syratech in April 2006, Pomerantz® and Design for Living® in April 2007, Gorham® in July 2007, 29.99%a 30% interest in Grupo Vasconia, S.A.B. in December 2007 and Mikasa® in June 2008.(2) Certain amounts have been adjusted in these years to reflect the provisions of ASC Topic No. 470-20 on a retrospective basis. See Note F of the Notes to the Consolidated Financial Statements included in Item 15 for further information regarding the provisions of ASC Topic No. 470-20. 8.15. 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 Annual Report. The Company undertakes no obligation to update publicly any forward-looking statementsstateme nts for any reason, even if new information becomes available or other events occur in the future.strongavailability and use of its brands, an emphasis on innovation and new product development and excellent sourcing capabilities. The Company owns or licenses a number of the leading brands in its industry including Farberware®, KitchenAid®, Cuisinart®, Pfaltzgraff® and Mikasa®. Historically, the Company’sCompany&# 8217;s sales growth has come from expanding product offerings within the Company’s current categories by developing existing brands, and acquiring new brands and product categories. 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 creates new products, packaging and merchandising concepts.Thefinancial performanceproducts declined in 2008 was negatively affected by unfavorableand 2009 as a result of the global economic conditions. Continued or further deterioratingrecession that began in late 2007. In addition, in 2009, retailers generally decreased overall stock-keeping levels, resulting in lower inventory replenishment. While there are signs that a moderate economic recovery currently is underway, the Company believes that sustainable increases in the demand for its products will not occur until employment levels improve from current levels. A deterioration of economic conditions likely would likely have an adverse impact on the Company’s sales volumes, pricing levels and profitability in 2009. As economic conditions change, trends in discretionary consumer spending also become unpredictable and subject to reductions due to uncertainties about the future. If consumers reduce discretionary spending, purchases of the Company’s products may also decline. A general reduction in consumer discretionary spending due to the recession or uncertainties regarding future economic prospects could continue to have a material adverse effect on the Company’s financial condition and results of operations.20Mikasa®Lifetime Sterling™ Internet websites and the Company’s Pfaltzgraff® mail-order catalogs. During 2008, the Company also operated retail outlet stores utilizing the Pfaltzgraff® and Farberware® names that were included in the direct-to-consumer segment. However, the Company ceased operating these retail stores by December 31, 2008.ACTIVITIESIn 2008,EXPENSES$18.0 million in pre-tax charges in connection with the retail store closingsrestructuring and other restructuring activities consisting of non-cash fixed asset impairment charges storeof $2.6 million. The restructuring charges consisted of lease obligations, employee related expenses and other related costs.GOODWILL AND INTANGIBLE ASSET IMPAIRMENTrecognized a non-cash goodwill impairment charge of $27.4 million and a non-cash impairment charge relatedhas not accounted for the retail outlet store operations as discontinued operations pursuant to certain intangible assets of $2.0 million at December 31, 2008 in accordance with Statementthe Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 205-20, Presentation of Financial Accounting Standard (“SFAS”) No.142, Statements- Discontinued OperationsGoodwill and Other Intangible Assets.MIKASA® ACQUISITIONIn June 2008,, since the Company acquireddetermined that the businessoperations and certain assetscash flows of Mikasa, Inc. (“Mikasa®”)the retail outlet store operations would not be eliminated from Arc International SA. Mikasa® is a leading providerthe on-going operations of dinnerware, crystal stemware, barware, flatwarethe Company. Specifically, the Company also determined that the migration of customers from the Company’s retail outlet stores to the Company’s Internet, catalog and decorative accessories. Mikasa® products are distributed through department stores, specialty stores and big box chains, as well as throughwholesale businesses would not be insignificant. For this purpose, the Internet. NetCompany concluded that the migration of sales from Mikasa® in 2008 were $35.0 million.DEBT COVENANTSAt December 31, 2008, the Company was not in compliance with the financial covenants required by the Credit Facility. On each of February 12, 2009 and March 6, 2009, the Company entered into a forbearance agreement and amendmentretail outlet stores to the Credit Facility whereby the lenders agreed to forbear from taking actions they would otherwise have been permitted to take as a resultInternet, catalog and wholesale businesses of the non-compliance. In consideration thereof, the Company agreed to further restrictions on its borrowings and an increase in the applicable margin rates.On March 31, 2009, the Company entered into a waiver and amendment to the Credit Facility (the “Amendment”). Pursuant to the Amendment, the Company’s lenders waived the Company’s non-compliance with the financial covenants required by the Credit Facility at December 31, 2008. The Amendment modifies the Credit Facility in certain ways including, as follows: (i) changes the maturity date to January 31, 2011, (ii) adds certain asset categories to the borrowing base, (iii) increases the applicable margin rates (including a minimum LIBOR of 1.75%), (iv) revises the minimum EBITDA and fixed charge coverage covenants and adds both a minimum net sales and maximum capital expenditures covenant, (v) eliminates the requirement of maximum leverage and minimum interest coverage ratios, (vi) eliminates the $50 million accordion feature, (vii) revises the minimum excess availability rates and (viii) places restrictions on dividends and acquisitions.The Company believes that availability under the Credit Facility will be sufficient to fund the Company’s operations for fiscal 2009. However, if circumstances were to change, the Company may need to refinance the Credit Facility or otherwise amend the terms of the Credit Facility. In addition, the Company would seek to engage in further activities, including efforts to lower its inventory and to reduce expenses. However, there can be no assurance that any such actionsgreater than 5% would be successful or that the results of any such actions would be adequate.2007 and 2006,2007, net sales for the third and fourth quarters accounted for 58%, 61%, 61% and 65%61% of total annual net sales, respectively. In anticipation of the pre-holiday shipping season, inventory levels increase primarily in the June through October time period.21
in earnings for Grupo Vasconia, S.A.B. Year Ended December 31, 2009 Net sales 100.0 % 100.0 % 100.0 % Cost of sales 62.1 62.2 58.5 Distribution expenses 10.4 11.8 10.8 Selling, general and administrative expenses 23.0 26.9 26.0 Goodwill and intangible asset impairment ― 6.0 ― Restructuring expenses 0.6 3.7 0.4 Income (loss) from operations 3.9 (10.6 ) 4.3 Interest expense (3.2 ) (2.4 ) (2.1 ) Other income, net ― ― 0.8 Income (loss) before income taxes and equity in earnings for Grupo Vasconia, S.A.B. 0.7 (13.0 ) 3.0 Income tax benefit (provision) (0.5 ) 2.9 (1.3 ) Equity in earnings for Grupo Vasconia, S.A.B., net of taxes 0.5 0.3 ― Net income (loss) 0.7 % (9.8 ) % 1.7 % all closed by December 31, 2008 and, to a lesser extent, an increase in Internet sales as a result of the acquisition of Mikasa®.22agreement in 2007.23SFASASC Topic No. 142, 350, Intangibles- Goodwill and Other Intangible Assets.$9.1$11.6 million compared to $8.4$10.6 million for 2007. The increase in interest expense was attributable to higher average borrowings outstanding under the Company’s Credit Facility during 2008. The increase was offset in part by lower average interest rates in 2008.$10.5$14.2 million compared to a provision of $7.4$6.6 million for 2007. The Company’s effective income tax rate was 17.3%22.4% for 2008 and 45.5%46.6% for 2007. The decrease in the effective tax rate in 2008 was due to valuation allowances the Company recorded against certain deferred tax assets.2007 COMPARED TO 2006Net SalesNet sales for the year were $493.7 million, an increase of 7.9% over net sales of $457.4 million in 2006.Net sales for the wholesale segment in 2007 were $416.9 million, an increase of $42.8 million or 11.4% over net sales of $374.1 million for 2006. The increase was primarily due to the 2007 full year inclusion of Syratech which was acquired in April 2006. Excluding Syratech, net sales were $289.2 million in 2007 and $280.8 million in 2006, an increase of 3.0%. The increase was attributable to growth in the Food Preparation product category, particularly with respect to Farberware® brand products and new retail programs.Net sales for the direct-to-consumer segment in 2007 were $76.8 million compared to $83.3 million for 2006. The decrease was primarily due to a decline in outlet store sales, slightly offset by a modest improvement in catalog and Internet volume. The decrease in outlet stores sales was due to the planned reductions in promotional events that occurred in 2006 and a reduction in the number of stores from 83 stores at year end 2006 to 78 stores at year end 2007.24Cost of salesCost of sales for 2007 was $289.0 million compared to $265.7 million for 2006. Cost of sales as a percentage of net sales was 58.5% for 2007 compared to 58.1% for 2006.Cost of sales as a percentage of net sales for the wholesale segment was 62.1% for 2007 compared to 61.4% for 2006. The wholesale segment’s cost of sales, excluding Syratech, was 59.0% for 2007 compared to 58.3% for 2006. The increase in cost of sales as a percentage of net sales was primarily attributable to changes in product mix and distribution strategy.Cost of sales as a percentage of net sales for the direct-to-consumer segment decreased to 39.1% in 2007 from 43.7% in 2006. The decrease was primarily due to the planned reductions in promotional events that occurred in 2006.Distribution expensesDistribution expenses for 2007 were $53.5 million compared to $49.7 million for 2006. Distribution expenses as a percentage of net sales were 10.8% in 2007 and 10.9% for 2006.Distribution expenses as a percentage of net sales for the wholesale segment improved to 9.5% in 2007 from 10.2% for 2006. The improvement resulted, in part, from the full year inclusion of Syratech which had a higher proportion of its sales shipped directly from overseas suppliers than the Company’s other major product lines. The improvement also came from improved labor management and an improved warehouse management system.Distribution expenses for the direct-to-consumer segment were approximately $13.7 million for the year ended December 31, 2007 compared to $11.7 million for 2006. The increase in distribution expenses was primarily attributable to the higher receiving and storage costs associated with higher inventory levels.Selling, general and administrative expensesSelling, general and administrative expenses for 2007 were $128.5 million, an increase of 14.6% over the $112.1 million in 2006.Selling, general and administrative expenses for 2007 for the wholesale segment were $75.2 million, an increase of $15.3 million or 25.5% over the $59.9 million in 2006. As a percentage of net sales, selling, general and administrative expenses were 18.0% for 2007 compared to 16.0% for 2006. The increase resulted from the inclusion of Syratech for a full year in 2007, occupancy costs for the new leased headquarters and showroom in Garden City, consulting and depreciation expense for the new SAP business enterprise system, the costs of maintaining the Company’s former headquarters until its sale in November 2007, compensation expense and additional selling expenses.Selling, general and administrative expenses for 2007 for the direct-to-consumer segment were $41.2 million compared to $43.3 million for 2006. The decrease is primarily due to Farberware® store closings during 2007 and reductions in divisional staffing. Selling, general and administrative expenses as a percentage of net sales was 53.6% for 2007 compared to 52.0% for 2006. The increased percentage results from the decline in net sales.Unallocated corporate expenses for 2007 and 2006 were $12.2 million and $8.9 million, respectively. The increase was primarily due to a one-time charge related to the termination of a licensing agreement, higher stock option expense and professional expenses.RestructuringIn December 2007, the Company commenced a plan to close 30 underperforming outlet stores by the end of the first quarter of 2008. In connection with this plan, the Company recorded an asset impairment charge of $1.6 million for fixed assets in the stores to be closed and a restructuring charge of $289,000 for liquidation expenses.25Interest expenseInterest expense for 2007 was $8.4 million compared to $4.6 million for 2006. The increase in interest expense was primarily attributable to an increase in the amount outstanding under the Company’s Credit Facility in 2007 compared to 2006 and interest on the Company’s 4.75% Convertible Senior Notes issued in June 2006. The additional borrowings under the Company’s Credit Facility were in support of capital expenditures, repurchases of the Company’s common stock and business acquisitions. The Company used the proceeds from the 4.75% Convertible Senior Notes to repay outstanding borrowings under the Company’s Credit Facility.Other income, netOther income, net for 2007 was $3.9 million compared to $31,000 for 2006. The increase in other income, net was primarily attributable to the gain that the Company recognized on the sale of its former corporate headquarters and to a lesser extent the gain on the sale of a foreign currency forward during 2007.Income tax provisionThe income tax provision for 2007 was $7.4 million, compared to $9.7 million for 2006. The Company’s effective income tax rate was 45.5% for 2007 and 38.5% for 2006. The increase is attributable principally to stock option expense that is not deductible for income tax purposes.factorsfac tors 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, reserves for sales returns and allowances and customer chargebacks, inventory mark-down provisions, impairment of tangible and intangible assets, including goodwill, stock option expense, derivative valuation and accruals related to the Company’s tax positions. 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 of the Notes to the consolidated financial statements.Consolidated Financial Statements included in Item 15. 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.Consistent withThe Company estimates the seasonalityselling price of its inventory on a product by product basis based on the current selling environment and considering the various available channels of distribution (e.g. wholesale: specialty store, off-price retailers etc. or the Internet and catalog). If the estimated selling price is lower than the inventory’s cost, the Company reduces the value of inventory to the estimated selling price. If the Company is inaccurate in its estimates of selling prices, it could repor t material fluctuations in gross margin. Historically, the Company’s business,adjustments to inventory generally increases, beginning latehave been appropriate and have not resulted in the second quarter of the year, and reaches a peak at the end of the third quarter or early in the fourth quarter, and declines thereafter. The Company periodically reviews and analyzes inventory based on a number of factors including, but not limited to, future product demand for items and estimated profitability of merchandise. When appropriate, the Company writes down inventory to net realizable value.26Revenue recognitionThe Company sells products wholesale to retailers and distributors and retail, direct to the consumer through the Company’s factory and outlet store, catalog and Internet operations. Wholesale sales are recognized when title passes and the risks and rewards of ownership have transferred to the customer. Store sales are recognized at the time of sale. 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. Net sales exclude taxes that are collected from customers and remitted to the taxing authorities.credit-worthinessinitial and on-going creditworthiness of each wholesale customer.the Company’s customers. The Company also maintains an allowance for sales returns andanticipated customer chargebacks.deductions. The allowances for deductions are primarily based on contracts the Company has with its customers. However, in certain cases the Company does not have a formal contract and/or customer deductions are non-contractual. To evaluate the adequacyreasonableness of the sales returns andnon-contractual customer chargeback allowancesdeductions, the Company analyzes currently available informationin formation and historical trends.trends of deductions. If the financial conditions of the Company’s customers or economic conditions were to deteriorate, resulting in an impairment of their ability to make payments or sell the Company’s products at reasonable sales prices, or the Company’s estimate of sales returnsnon-contractual deductions was determined to be inadequate, additionalinaccurate, revisions to allowances may be required.Goodwill, other intangiblerequired, which could adversely affect the Company’s financial condition. Historically, the Company’s allowances have been appropriate and have not resulted in material unexpected charges.Goodwill and intangibleIntangible assets deemed to have indefinite lives are not amortized but instead are subject to an annual impairment testsassessment in accordance with the provisions of SFASASC Topic No. 142, 350, Intangibles- Goodwill and Other Intangible Assets. Based on the results of the Company’s 2009 assessment, no impairment of the Company’s indefinite-lived intangible assets was identified for the year ended December 31, 2009.SFASASC Topic No. 144, 360, Property, Plant and EquipmentAccounting for the Impairment or Disposal of Long-lived Assets,, whenever events or changes in circumstances indicate that such assets may have been impaired. Impairment indicators include, among other conditions, cash flow deficits, historic or anticipated declines in revenue or operating profit or material adverse changes in the business climate that indicate that the carrying amount of an asset may be impaired. When impairment indicators are present, the Company compares the carrying value of the assets to the estimated undiscounted future cash flows expected to be generated by the assets. If the assets are considered to be impaired, the impairment to be recognizedrecog nized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company considered indicators of impairment of its long-lived assets and determined that no such indicators were present at December 31, 2009.SFASASC Topic No. 123(R), 718-20, Awards Classified as Equity,Share-Based Payment. SFAS 123(R) which requires the measurement of compensation expense for all share-based compensation granted to employees and non-employee directors at fair value on the date of grant and recognition of compensation expense over the related service period for awards expected to vest. The Company uses the Black-Scholes option valuation model to estimate the fair value of its stock options. The Black-Scholes option valuation model requires the input of highly subjective assumptions including the expected stock price volatility of the Company’s common stock. Changes in these subjective input assumptions can materially affect the fair value estimate of the Company’sC ompany’s stock options.Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”)ASC Topic No. 48, 740, Accounting for Uncertainty in Income Taxes, for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the Company’s financial statements in accordance with FASB Statement No. 109,. Accounting for Income Taxes.Tax positions must meet a more-likely-than-not recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken upon the adoption of FIN No. 48 or in subsequent periods. The Company adopted FIN No. 48 on January 1, 2007.taken.27SFASASC Topic No. 133, 815, Accounting for Derivative InstrumentsDerivatives and Hedging, Activities, and subsequent amendments. SFAS No. 133 which requires that all derivative instruments be recognized on the balance sheet at fair value as either an asset or a liability. Changes in the fair value of derivatives that qualify as hedges and have been designated as part of a hedging relationship for accounting purposes have no net impact on earnings to the extent the derivative is considered perfectly effective in achieving offsetting changes in fair value or cash flows attributable to the risk being hedged, until the hedged item is recognized in earnings. For derivatives that do not qualify or are not designated as hedging instruments for accounting purposes, changes in fair value are recorded in current period earnings.operations.itsthe Credit Facility. The Company’s primary uses of funds consist of working capital requirements, capital expenditures and payment of principal and interest on its debt, payment of cash dividends and business acquisitions.2008,2009, the Company had cash and cash equivalents of $3.5 million,$682,000 compared to $4.2$3.5 million at December 31, 2007,2008, working capital was $96.6 million at December 31, 2009 compared to $82.7 million at December 31, 2008 compared to $156.8 million at December 31, 2007 and the current ratio was 2.25 to 1 at December 31, 2009 compared to 1.55 to 1 at December 31, 2008 compared to 3.20 to 1 at December 31, 2007.increaseddecreased to $24.6 million at December 31, 2009 compared to $89.3 million at December 31, 2008 compared2008. The decrease was primarily attributable to $68.7 million at December 31, 2007. Thean increase in cash from operations that was primarilyused to pay down the amounts outstanding under the Credit Facility due to the acquisitionCompany’s inventory reduction efforts, receipt of Mikasa®. an income tax refund, reduction of discretionary expenses and other expense reduction efforts.its cashavailability under the Credit Facility and cash equivalents plus internally generated funds and its new credit arrangement will beflows from operations is sufficient to finance its operations forfund the next twelve months.Share repurchase programIn 2007,Company’s operations. However, due to the Board of Directorstightening of the credit markets, the Company authorizedbelieves that if needed other available sources of liquidity could be limited. If circumstances were to adversely change, the Company would seek to improve its liquidity by taking actions such as to further lower its inventory and reduce expenses. However, there can be no assurance that any such efforts would be successful or that the results of any such efforts would be adequate. Finally, the combined effects of the economic downturn and credit crisis have had a programsignificant impact on the Company’s retail partners and in certain cases resulted in bankruptcies and eventual liquidation. The Company closely monitors the creditworthiness of its customers. Based upon the evaluation of changes in customers’ creditworthiness, the Company may modify credit limits and/or terms of sale. The Company has not been materially affected by the bankruptcy or liquidation of any of its customers to repurchase update. However, notwithstanding the Company’s efforts to $40.0 millionmonitor its customers’ financial condition, the Company may be materially affected in the future.common stock through open market purchases or privately-negotiated transactions. Assales. A material reduction of December 31, 2008,product orders by Wal-Mart Stores, Inc. could have significant adverse effects on the Company had purchased inCompany’s business and operating results and ultimately the open marketCompany’s liquidity, including the loss of predictability and retiredvolume production efficiencies associated with such a total of 1,362,505 shares of its common stock for a total cost of $22.7 million under the program. There were no purchases during 2008. In March 2009, the Board of Directors of the Company terminated the program.$150$130.0 million secured credit facility which until Marchthat matures on January 31, 2009, had an accordion feature for an additional $50 million and matures in April 2011 (the “Credit Facility”). Borrowings under the Credit Facility are secured by all assets of the Company. Under the terms of the Credit Facility (until March 31, 2009), the Company was required to satisfy certain financial covenants, including maximum leverage and capital expenditures and a minimum interest coverage ratio. Borrowings under the Credit Facility have different interest rate options that are based either on, (i) an alternate base rate, (ii) LIBOR, or (iii) the lender’s cost of funds rate, plus in each case a margin based on the applicable leverage ratio.In March 2008, the Credit Facility was amended to: (i) establish a borrowing base (comprised of a percentage of each of eligible accounts receivable, inventory and trademarks) calculation to determine availability under the Credit Facility, (ii) increase the applicable margin rates and (iii) revise certain financial covenants. In September 2008, the Credit Facility was further amended to: (i) establish a minimum excess availability amount, (ii) include a minimum fixed charge ratio and a minimum EBITDA covenants, (iii) revised the leverage and interest coverage covenants and (iv) increased the applicable margin rates.28At December 31, 2008, the Company was not in compliance with the financial covenants required by the Credit Facility. On each of February 12, 2009 and March 6, 2009, the Company entered into a forbearance agreement and amendment to the Credit Facility whereby the lenders agreed to forbear from taking actions they would otherwise have been permitted to take as a result of the non-compliance. In consideration thereof, the Company agreed to further restrictions on its borrowings and an increase in the applicable margin rates. At December 31, 2008, the Company had $2.1 million of open letters of credit and $89.3 million of borrowings outstanding under the Credit Facility. Interest rates on outstanding borrowings at December 31, 2008 ranged from 2.50% to 7.07%. The Company has interest rate swap and collar agreements with an aggregate notional amount of $55.2 million. The Company entered into these agreements to effectively fix the interest rate on a portion of its borrowings under the Credit Facility.modifiesmodified the Credit Facility in certain ways including, as follows: (i) changeschanged the maturity date to January 31, 2011, (ii) addsadded certain asset categories to the borrowing base, (iii) increasesincreased the applicable margin rates (including a minimum LIBOR of 1.75%), (iv) revisesrevised the minimum Consolid ated EBITDA (as defined in the Credit Facility) and fixed charge coverage covenants and addsadded both a minimum net sales for 2009 only and maximum capital expenditures covenant, (v) eliminateseliminated the requirement of maximum leverage and minimum interest coverage ratios, (vi) eliminateseliminated the $50$50.0 million accordion feature, (vii) revisesrevised the minimum excess availability amount and (viii) placesplaced restrictions on dividends and acquisitions. As of March 31, 2009 (on a pro forma basis after giving effect to the terms of the Amendment), the Company had available liquidity of $29.7 million under the Credit Facility. The Amendment also providesprovided for a lock-box arrangement with the collateral agent. Pursuant toagent for the Amendment, althoughbenefit of its lenders; as such, the Credit Agreement matures on January 31, 2011, Emerging Issues Task Force 95-22, Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Arrangements That Include both a Subjective Acceleration Clause and a Lock-Box Arrangement, requiresCompany classified the indebtedness to be classified as a current liability on thein its consolidated balance sheetsheets as of December 31, 2008.During 20082009 and continuing in2008.has implemented certain actionsentered into an agreement with its lenders to reduce the minimum net sales requirement for the quarter ended September 30, 2009 from $114.8 million to $107.0 million.an effortthe aggregate, up to improve its future financial performance. Such actions include closing its retail outlet stores, consolidating distribution centers$15.0 million principal amount of the Company’s 4.75% Convertible Notes and (ii) eliminate the requirement for the Company to obtain a consent from the lenders prior to consummating a Permitted Acquisition (as defined in the Credit Facility).paring certain selling, generalthe Company had $1.2 million of open letters of credit and administrative expenses.The Company believes that availability$24.6 million of borrowings outstanding under the Credit Facility. Interest rates on outstanding borrowings at December 31, 2009 ranged from 5.75% to 6.25%. Availability under the Credit Facility will be sufficientat December 31, 2009 was $49.9 million (net of $15.0 million of minimum required availability). The Company has interest rate swap and collar agreements with an aggregate notional amount of $55.2 million at December 31, 2009. The Company entered into these agreements to fundeffectively fix the interest rate on a portion of its borrowings under the Credit Facility.operationsConsolidated EBITDA (as defined by the Credit Facility) for fiscal 2009. However, if circumstances werethe year ended December 31, 2009 was $33.3 million compared to change, the Company may need to refinanceminimum Consolidated EBITDA required by the Credit Facility or otherwise amendof $25.5 million. Capital expenditures for the termsyear ended December 31, 2009 were $2.3 million compared to the maximum capital expenditures permitted by the Credit Facility of $6.0 million. Net sales for the three months ended December 31, 2009 were $128.1 million compared to the minimum net sales required by the Credit Facility of $116.9 million. The fixed charge coverage ratio was 3.29 to 1.00 compared to the minimum fixed charge coverage ratio of 1.40 to 1.00.Credit Facility. In addition,orderly liquidation value of eligible inventory, less (2) reserves.Company would seekmeaning of Regulation G promulgated by the Securities and Exchange Commission. The following is a reconciliation of the net income (loss) as reported to engage in further activities, including efforts to lower its inventory and to reduce expenses. However, there can be no assurance that any such actions would be successful or that the results of any such actions would be adequate. Three Months Ended
December 31, Year Ended
December 31, 2009 2008 2009 2008 (in thousands) Net income (loss) as reported $ 5,048 $ (36,795 ) $ 2,715 $ (47,755 ) Add back: Provision (benefit) for income taxes 1,311 (5,993 ) 1,880 (14,249 ) Interest expense 4,124 3,371 13,185 11,577 Depreciation and amortization 4,855 2,829 13,511 10,782 Restructuring expenses 143 10,410 (56 ) 17,992 Goodwill and intangible asset impairment ― 29,400 ― 29,400 Stock option expense 611 957 2,099 2,800 Consolidated EBITDA $ 16,092 $ 4,179 $ 33,334 $ 10,547 $75$75.0 million aggregate principal amount of 4.75% Convertible Senior Notes due on July 2011 (the “Notes”). The Notes are convertible into shares of the Company’s common stock at a conversion price of $28.00 per share, subject to adjustment in certain events. The Notes bear interest at 4.75% per annum, payable semiannually in arrears on January 15 and July 15 of each year, and are unsubordinated except with respect to the Company’s debt outstanding under its Credit Facility. The Company may not redeem the Notes at any time prior to the extent secured by the Company’s assets. The Notes mature on July 15, 2011.maturity. The Notes are convertible at the option of the holder anytime prior to the close of business on the business day prior to the maturity date. & #160;Upon conversion, the Company may elect to deliver either shares of the Company’s common stock, cash or a combination of cash and shares of the Company’s common stock in satisfaction of the Company’s obligations upon conversion of the Notes. If the Notes are not converted prior to the maturity date the Company is required to pay the holders of the Notes the principal amount of the Notes in cash upon maturity.The Company has declared and paid the following dividends in 2008:DividendDate declaredDate of recordPayment date$0.0625January 23, 2008February 8, 2008February 15, 2008$0.0625March 4, 2008May 2, 2008May 16, 2008$0.0625June 5, 2008August 1, 2008August 15, 2008$0.0625October 30, 2008November 14, 2008November 28, 2008 in light of current economic conditions, the Company suspended paying a cash dividenddividends on its outstanding shares of common stock. The Company will review this decision as circumstances may warrant.2008 compared to $31.6 million in 2007.2008. The decreaseincrease was primarily attributable to improved operating results and working capital during the operating loss incurred in2009 period and the income tax refund related to the carry-back of fiscal 2008 compared to operating income generated in 2007. A reductionlosses. The increase in working capital was primarily attributable to a reduction of inventory and accounts receivable in 2009 compared to the 2008 most notably from lower inventory levels, partially mitigated the effect of the lower operating performance.292008 compared to $43.7 million in 2007.2008. In 2009, investing activities included capital expenditures of $2.3 million. In 2008, investing activities includeincluded cash paid by the Company of $16.3 million to acquire the business and certain assets of Mikasa® and capital expenditures of $8.9 million related primarily to the Company’s new West Coast distribution center located in Fontana, California and the Company’s new office space in Medford, Massachusetts. In 2007, investing activities include cash paid by the Company of $1.9 million to acquire Pomerantz® and Design for Living®, $8.3 million paid to acquire Gorham® and $23.0 million to acquire a 29.99% interest in Grupo Vasconia S.A.B. In 2007, capital expenditures included amounts related to leasehold improvements at the Company’s then new corporate headquarters, costs related to the implementation of the Company’s SAP business enterprise system and costs related to the Company’s new West Coast distribution center in Fontana, California. The Company’s 20092010 planned capital expenditures are estimated not to exceed $6.0$8.0 million.wasof $17.2 million in 2008 compared to $16.1 million in 2007.2008. In 2009, net repayments under the Company’s Credit Facility were $64.7 million. In 2008, the Company received net cash proceeds from borrowings under the Credit Facility of $20.6 million. In 2007, of the Company received net cash proceeds from borrowings under the Credit Facility of $42.2 million and used $22.7 million for repurchases of shares of its common stock.2008,2009, the Company’s contractual obligations were as follows (in thousands):
than
1 year
years
years
than
5 years Payment due by period Total 1-3 years 3-5 years Operating leases $ 117,607 $ 12,476 $ 24,643 $ 24,567 $ 55,921 Long-term debt 75,000 ― 75,000 ― ― Minimum royalty payments 19,259 6,463 11,130 606 1,060 Interest on long-term debt 7,126 3,563 3,563 ― ― Post retirement benefits 3,296 148 296 296 2,556 Capitalized leases 263 169 94 ― ― Total $ 222,551 $ 22,819 $ 114,726 $ 25,469 $ 59,537 30$50$50.0 million and interest rate collar agreements with an aggregate notional amount of $40.2 million to manage interest rate exposure in connection with these variable interest rate borrowings. There have been no changes in interest rates that would have a material impact on the consolidatedconsolidat ed financial position, results of operations or cash flows of the Company for the year ended December 31, 2008.2009.20082009 in Item 15 commencing on page F-1 are incorporated herein by reference.2008.2009. This information is unaudited, but in the opinion of management, it has been prepared substantially on the same basis as the audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the unaudited consolidated quarterly results of operations. The consolidated quarterly data should be read in conjunction with the Company’s audited consolidated financial statements and the notes to such statements appearing elsewhere in this Annual Report. The results of operations for any quarter are not necessarily indicativeindi cative of the results of operations for any future period:
quarter(1)
quarter
quarter(1)
quarter (1) Year ended December 31, 2009
quarter
quarter
quarter
quarter (in thousands, except per share data) $ 90,214 $ 85,334 $ 111,422 $ 128,070 32,066 32,228 41,644 51,263 (3,373 ) 1,434 7,599 9,949 (5,959 ) (1,253 ) 4,879 5,048 $ (0.50 ) $ (0.10 ) $ 0.41 $ 0.42 $ (0.50 ) $ (0.10 ) $ 0.40 $ 0.41 Second quarter (in thousands, except per share data) Net sales $ 98,194 $ 92,399 $ 140,624 $ 156,718 Gross profit 38,589 37,111 54,528 54,172 Income (loss) from operations (8,784 ) (6,945 ) 3,365 (39,549 ) Net loss (6,357 ) (3,552 ) (1,051 ) (36,795 ) Basic and diluted loss per common share $ (0.53 ) $ (0.30 ) $ (0.09 ) $ (3.07 ) Note:(2) The Company recognized restructuring expenses of $2.9 million, $4.6 million and $10.5 million in the first, third and fourth quarterquarters of 2008, respectively, and a non-cash goodwill and intangible asset impairment of $29.4 million in the fourth quarter of 2008.31(3) Certain amounts have been adjusted in 2008 to reflect the provisions of ASC Topic No. 470-20 on a retrospective basis. See Note F of the Notes to the Consolidated Financial Statements included in Item 15 for further information regarding the provisions of ASC Topic No. 470-20. None(a)Evaluation of Disclosure Controls and Procedures2008,2009, that the Company’s controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed by it under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the ChiefCh ief Executive Officer and Chief Financial Officer of the Company, as appropriate, to allow timely decisions regarding required disclosure.2008.2009. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principle executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.Company’sCompany's assets that could have a material effect on the financial statements.20082009 using the criteria set forth in the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 20082009 is effective.20082009 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report.322008,2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Lifetime Brands Inc.’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 included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.ofo f 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.20082009 based on the COSO criteria.20082009 and 2007,2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 20082009 of Lifetime Brands, Inc. and our report dated March 31, 200917, 2010 expressed an unqualified opinion thereon./s/ ERNST & YOUNG LLPMelville,31, 20093320092010 Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days after the close of the Company’s fiscal year covered by this Annual Report on Form 10-K and is herein incorporated by reference.34(a)See list of Financial Statements and Financial Statement Schedule on page F-1.(b)Exhibits*:ExhibitNo.Description3.1Employment agreement dated October 17, 2005 between Lifetime Brands, Inc. and Ronald Shiftan (incorporated by reference to the Registrant’s Form 8-K dated October 17, 2005)**10.410.5Employment agreement dated April 18, 2006 between Lifetime Brands, Inc. and Alan Kanter (incorporated by reference to the Registrant’s Form 8-K dated May 2, 2006)**10.610.710.810.910.1010.11Amendment of Employment Agreement dated June 7, 2007 by and between Lifetime Brands, Inc. and Ronald Shiftan (incorporated by reference to the Registrant’s Form 8-K dated June 7, 2007)**3510.12 10.1310.1410.1510.16Robert McNally Amendment of Employment Agreement dated July 2, 2007 (incorporated by reference to the Registrant’s Form 8-K dated June 28, 2007)**10.1810.19Agent.Agent (incorporated by reference to the Registrant’s Form 8-K/A dated April 17, 2008)**10.202008*2008)*10.2210.23Lenders.Lenders (incorporated by reference to the Registrant’s Form 8-K dated February 12, 2009)**10.24Lenders.Lenders (incorporated by reference to the Registrant’s Form 8-K dated March 6, 2009)**14.110.23 Amended and Restated Employment Agreement, dated August 10, 2009 by and between Lifetime Brands, Inc. and Ronald Shiftan (incorporated by reference to the Registrant’s Form 8-K dated August 10, 2009)** 10.24 Amendment of Employment Agreement, dated August 10, 2009 by and between Lifetime Brands, Inc. and Jeffrey Siegel (incorporated by reference to the Registrant’s Form 8-K dated August 10, 2009)** 10.25 Waiver to the Second Amended and Restated Credit Agreement, dated as of October 13, 2009, by and among Lifetime Brands, Inc., the several financial institutions party hereto and HSBC Bank USA, National Association, as Administrative Agent and Co-Collateral Agent for the Lenders (incorporated by reference to the Registrant’s Form 8-K dated October 13, 2009)** 10.26 Amendment No. 6 to Second Amended and Restated Credit Agreement, dated as of October 30, 2009, by and among Lifetime Brands, Inc., the several financial institutions party hereto and HSBC Bank USA, National Association, as Administrative Agent for the Lenders (incorporated by reference to the Registrant’s Form 8-K dated October 30, 2009)** 10.27 Termination of Lease and Sublease Agreement Dated December 1, 2009 by and between Crispus Attucks Association of York, Pennsylvania, Inc. and Lifetime Brands, Inc. (incorporated by reference to the Registrant’s Form 8-K dated December 1, 2009)** 14.1 Code of Conduct dated March 25, 2004, as amended on June 7, 2007 (incorporated by reference to the Registrant’s Form 8-K dated June 7, 2007)** 36Notes to exhibits:*The Company will furnish a copy of any of the exhibits listed above upon payment of $5.00 per exhibit to cover the cost of the Company furnishing the exhibit. ** ** 37Chairman of the Board of Directors, 31, 2009Vice Chairman of the Board of Directors, 31, 2009Senior Vice President – Finance, 31, 2009 (PrincipalSenior Vice-President – Distribution, 31, 2009DirectorMarch 31, 200917, 2010DirectorMarch 31, 200917, 2010DirectorMarch 31, 200917, 2010/s/ Sheldon MisherDirectorMarch 31, 2009Sheldon MisherDirectorMarch 31, 200917, 2010DirectorMarch 31, 200917, 201038Data.
Data.20082009 and 20072007 and 200620072007 and 200620072007 and 20062007
The following consolidated financial statement schedule of Lifetime Brands, Inc. required pursuant to Item 15(a) is submitted herewith:All other financial schedules are not required under the related instructions or are inapplicable, and therefore have been omitted. DataData..20082009 and 2007,2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008.2009. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The financial statements of Grupo Vasconia, S.A.B. and Subsidiaries (a corporation in which the Company has a 29.99%30.12% interest), have been audited by other auditors whose report has been furnishedfurni shed to us, and our opinion on the consolidated financial statements, insofar as it relates to the amounts included for Grupo Vasconia, S.A.B. and Subsidiaries, is based solely on the report of the other auditors. In the consolidated financial statements, the Company’s investment in Grupo Vasconia, S.A.B. and Subsidiaries is stated at $17.8$20.3 million at December 31, 20082009 and the Company’s equity in the net income of Grupo Vasconia, S.A.B. and Subsidiaries is stated at $1.5$2.2 million for the year then ended.20082009 and 2007,2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008,2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.NoteNotes A and F to the consolidated financial statements, the Company adopted the provisions of Statement ofthe Financial Accounting Standards Board Accounting Standards Codification Topic No. 123(R), 470-20, Debt with Conversion and Other OptionsShare-Based Payment, effective January 1, 2006.2009.2008,2009, based on criteria established in Internal Control-IntegratedControl – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 31, 200917, 2010 expressed an unqualified opinion thereon.Melville, New YorkMarch 31, 2009
and $16,400 at 2007
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
issued and outstanding: 11,989,724 in 2008 and 11,964,388 in 2007 December 31, ASSETS 2009 2008 CURRENT ASSETS $ 682 $ 3,478 61,552 67,562 103,931 141,612 ― 11,597 7,685 8,429 173,850 232,678 PROPERTY AND EQUIPMENT, net (Note N) 41,623 49,908 OTHER INTANGIBLES, net (Note D) 37,641 38,420 INVESTMENT IN GRUPO VASCONIA, S.A.B. (Note C) 20,338 17,784 OTHER ASSETS 3,271 2,991 $ 276,723 $ 341,781 CURRENT LIABILITIES $ 24,601 $ 89,300 21,895 24,151 29,827 35,902 207 403 680 225 77,210 149,981 DEFERRED RENT & OTHER LONG-TERM LIABILITIES (Note N) 20,527 23,054 DEFERRED INCOME TAXES (Note J) 4,447 3,373 CONVERTIBLE NOTES (Note F) 70,527 67,864 STOCKHOLDERS’ EQUITY 120 120 Paid-in capital 129,655 127,497 Accumulated deficit (18,949 ) (21,515 ) (6,814 ) (8,593 ) 104,012 97,509 $ 276,723 $ 341,781
of Grupo Vasconia, S.A.B. Year ended December 31, 2009 2008 2007 Net sales $ 415,040 $ 487,935 $ 493,725 Cost of sales 257,839 303,535 288,997 Distribution expenses 43,329 57,695 53,493 Selling, general and administrative expenses 95,647 131,226 128,527 Goodwill and intangible asset impairment (Note D) ― 29,400 ― Restructuring expenses (Note B) 2,616 17,992 1,924 Income (loss) from operations 15,609 (51,913 ) 20,784 Interest expense (13,185 ) (11,577 ) (10,623 ) Other income, net ― ― 3,935 Income (loss) before income taxes and equity in earnings of Grupo Vasconia, S.A.B. 2,424 (63,490 ) 14,096 Income tax benefit (provision) (Note J) (1,880 ) 14,249 (6,567 ) Equity in earnings of Grupo Vasconia, S.A.B., net of taxes (Note C) 2,171 1,486 ― NET INCOME (LOSS) $ 2,715 $ (47,755 ) $ 7,529 BASIC INCOME (LOSS) PER COMMON SHARE (Note I) $ 0.23 $ (3.99 ) $ 0.58 DILUTED INCOME (LOSS) PER COMMON SHARE (Note I) $ 0.22 $ (3.99 ) $ 0.57 Paid-in Retained earnings
(accumulatedAccumulated
other
comprehensive
taxes of $170 Common stock Paid-in Retained earnings (accumulated Accumulated other comprehensive Shares Amount capital deficit) income (loss) Total BALANCE AT DECEMBER 31, 2006 13,283 $ 133 $ 111,165 $ 50,235 $ 78 $ 161,611 7,862 (637 ) 7,225 13,283 133 119,027 49,598 78 168,836 Comprehensive income: 7,529 7,529 Derivative fair value adjustment, net of taxes of $170 (Note G) (203 ) (203 ) Total comprehensive income 7,326 Tax benefit on exercise of stock options 161 161 Stock option expense (Note H) 2,197 2,197 Purchase and retirement of common stock (1,363 ) (14 ) (22,658 ) (22,672 ) Exercise of stock options 32 1 244 245 Stock issued for acquisition 5 133 133 Shares issued to directors 7 95 95 Dividends (3,219 ) (3,219 ) BALANCE AT DECEMBER 31, 2007 11,964 120 121,857 31,250 (125 ) 153,102 Comprehensive loss: (47,755 ) (47,755 ) Grupo Vasconia, S.A.B. translation adjustment (Note C) (6,587 ) (6,587 ) Derivative fair value adjustment (Note G) (1,881 ) (1,881 ) Total comprehensive loss (56,223 ) Tax benefit on exercise of stock options 7 7 Stock option expense (Note H) 2,800 2,800 Exercise of stock options 2 10 10 Shares issued to directors 24 57 57 Tax valuation allowance (Note F) 2,766 (2,766 ) - Dividends (2,244 ) (2,244 ) BALANCE AT DECEMBER 31, 2008 11,990 120 127,497 (21,515 ) (8,593 ) 97,509 Comprehensive income: Net income 2,715 2,715 Grupo Vasconia, S.A.B. translation adjustment (Note C) 456 456 Derivative hedge de-designation (Note G) 780 780 Derivative fair value adjustment (Note G) 543 543 Total comprehensive income 4,494 Stock option expense (Note H) 2,099 2,099 Exercise of stock options 46 59 59 Retirement of shares (Note H) (21 ) (149 ) (149 ) BALANCE AT DECEMBER 31, 2009 12,015 $ 120 $ 129,655 $ (18,949 ) $ (6,814 ) $ 104,012 Year ended December 31, 2009 2008 2007 OPERATING ACTIVITIES Net income (loss) $ 2,715 $ (47,755 ) $ 7,529 Adjustments to reconcile net income (loss) to net cash provided by operating activities: (420 ) 1,458 79 11,472 10,782 9,659 2,663 2,435 2,226 673 1,999 1,060 734 (3,554 ) 1,908 2,099 2,857 2,292 (1,953 ) (1,132 ) ― ― ― (3,760 ) ― 29,400 ― 789 3,912 1,635 Changes in operating assets and liabilities (excluding the effects of business acquisitions) 6,430 (3,990 ) (4,593 ) 37,680 26,154 19,925 (271 ) (908 ) 1,220 (10,324 ) 1,142 (5,270 ) 11,263 (11,597 ) ― 438 (4,295 ) (2,343 ) 63,988 6,908 31,567 INVESTING ACTIVITIES Purchases of property and equipment, net (2,344 ) (8,859 ) (19,023 ) Business acquisitions ― (16,312 ) (10,543 ) Investment in Grupo Vasconia, S.A.B. ― ― (22,950 ) Net proceeds from sale of property 408 362 8,832 NET CASH USED IN INVESTING ACTIVITIES (1,936 ) (24,809 ) (43,684 ) FINANCING ACTIVITIES Proceeds (repayments) from borrowings, net (64,699 ) 20,600 42,200 Cash dividends paid ― (2,995 ) (3,303 ) Payment of capital lease obligations (225 ) (414 ) (456 ) Proceeds from the exercise of stock options 59 10 245 Excess tax benefits from stock option expense 17 6 125 Purchases of common stock ― ― (22,672 ) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (64,848 ) 17,207 16,139 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,796 ) (694 ) 4,022 Cash and cash equivalents at beginning of year 3,478 4,172 150 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 682 $ 3,478 $ 4,172 2008theits Pfaltzgraff®, Mikasa® and Lifetime Sterling™ Internet websites and Pfaltzgraff® mail order catalogs. Duringsold its products through Company-operated factory,operated retail outlet stores under the Pfaltzgraff® and clearance stores. However, as more fully described in Note B, the Company ceased operating its retail stores by December 31, 2008.Lifetime Brands, Inc.the Company and its wholly-owned subsidiaries (collectively, the “Company”).subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.of merchandise passes and the risks and rewards of ownership haveis transferred to the customer. RetailInternet and catalog sales are recognized upon delivery to the customer. The retail outlet store sales in 2008 were recognized at the time of sale. Catalog and Internet sales are recognized upon receipt by the customer. Shipping and handling fees that are billed to customers in sales transactions are included in net sales and amounted to $4.4$3.5 million, $4.8$4.4 million, and $4.8 million for the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively. Net sales exclude taxes that are collected from customers and remitted to the taxing authorities.costsexpenses amounted to $6.9 million, $8.7 million, $8.4 million and $8.9$8.4 million for the years ended December 31, 2009, 2008 and 2007, and 2006, respectively.$1.6 million,$880,000, $1.6 million and $2.0$1.6 million for the years ended December 31, 2009, 2008 and 2007, and 2006, respectively.credit-worthinessinitial and on-going creditworthiness of each wholesale customer.the Company’s customers. The Company also establishesmaintains an allowance for anticipated customer deductions. The allowances for sales returns anddeductions are primarily based on contracts the Company has with its customers. However, in certain cases the Company does not have a formal contract and/or customer chargebacks.deductions are non-contractual. To evaluate the adequacyreasonableness of the sales returns andnon-contractual customer chargeback allowances,deductions, the Company analyzes currently available informationin formation and historical trends.trends of deductions. If the financial conditions of the Company’s customers or economic conditions were to deteriorate, resulting in an impairment of their ability to make payments or sell the Company’s products at reasonable sales prices, or the Company’s estimate of returns isnon-contractual deductions was determined to be inadequate, additionalinaccurate, revisions to allowances may be required.required, which could adversely affect the Company’s financial condition. Historically, the Company’s allowances have been appropriate and have not resulted in material unexpected charges.2008 The Company periodically reviews and analyzes inventory based on a number of factors including, but not limited to, future product demand for items and estimated profitability of merchandise. When appropriate, the Company writes down inventory to net realizable value.variousseveral financial institutions.2007 and 2006,2007, Wal-Mart Stores, Inc. (including Sam’s Clubs) accounted for 20%18%, 20% and 21% and 17% of net sales, respectively. No other customer accounted for 10% or more of the Company’s net sales during the periods. For the years ended December 31, 2009, 2008 2007 and 2006,2007, the Company’s ten largest customers accounted for 60%64%, 60% and 62% and 49% of net sales, respectively.2008$75$75.0 million 4.75% Convertible Senior Notes at December 31, 2009 and 2008 and 2007 was $39.4$66.8 million and $66.1$39.4 million, respectively, based on Level 2 observable inputs consisting of the most recent quoted price offor the Company’s 4.75% Convertible Senior Notes obtained from the FINRA Trade Reporting and Compliance Engine™ system at December 31, 20082009 and 2007.In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards Codification (“SFAS”ASC”) Topic No. 157, 820, Fair Value Measurements and Disclosures, which provides enhanced guidance for using fair value to measure assets and liabilities. SFAS No. 157liabilities and establishes a common definition of fair value, provides a framework for measuring fair value under U.S. generally accepted accounting principles and expands disclosure requirements about fair value measurements. In February 2008, the FASB issued FASB Staff Position (“FSP”) 157-1, Application of FASB Statement No.157 to FASB Statement No.13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13and FSP 157-2, Effective Date of FASB Statement No.157. FSP 157-1 amends SFAS No. 157 to remove certain leasing transactions from its scope. FSP 157-2, Effective Date of FASB Statement No.157, delays the effective date of SFAS No. 157 for all nonfinancial assets and liabilities except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis until January 1, 2009. The Company adopted SFAS No. 157, except as it applies to nonfinancial assets and liabilities as noted in FSP 157-2, on January 1, 2008. Fair value measurements included in the Company’s consolidated financial statements are disclosedrelate to the Company’s convertible notes, annual intangible asset impairment test and derivatives, described in Notes EA, D and H.G, respectively.SFASASC Topic No. 133, 815, Accounting for Derivative InstrumentsDerivatives and Hedging Activities, and subsequent amendments. SFAS. ASC Topic No. 133815 requires that all derivative instruments be recognized on the balance sheet at fair value as either an asset or a liability. Changes in the fair value of derivatives that qualify as hedges and have been designated as part of a hedging relationship for accounting purposes have no net impact on earnings to the extent the derivative is considered perfectly effective in achieving offsetting changes in fair value or cash flows attributable to the risk being hedged, until the hedged item is recognized in earnings. For derivatives that do not qualify or are not designated as hedging instruments for accounting purposes, changes in fair value are recorded in current period earnings.operations.LIFETIME BRANDS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008NOTE A — SIGNIFICANT ACCOUNTING POLICIES (continued) other intangible assets and long-lived assetsSFAS No.142, ASC Topic No. 350, GoodwillIntangibles-Goodwill and Other Intangible Assets.During 2008, the Company changed the date of its annual goodwill impairment assessment from December 31 to October 1. This change was performed to better support the completion of the assessment prior to the Company’s filing requirement for its Annual Report on Form 10-K as an accelerated filer, and in order to better align the timing of this assessment with the Company’s normal process for updating its strategic plan and forecasts. The Company determined that the change in accounting principle related to the annual testing date is preferable under the circumstances and does not result in adjustments to the financial statements when applied retrospectively.E, at December 31, 2008,D, the Company has recognized a non-cash goodwillresults of the Company’s 2009 assessment did not indicate an impairment charge and a non-cash impairment charge related to certainof the Company’s indefinite-lived intangible assets in accordance with the provisions of SFAS No.142, assets.Goodwill and Other Intangible Assets.SFASASC Topic No. 144, 360, Property, Plant and EquipmentAccounting for the Impairment or Disposal of Long-lived Assets, whenever events or changes in circumstances indicate that such amounts may have been impaired. Impairment indicators include, among other conditions, cash flow deficits, historic or anticipated declines in revenue or operating profit or material adverse changes in the business climate that indicate that the carrying amount of an asset may be impaired. When impairment indicators are present, the Company compares the carrying value of the asset to the estimated undiscounted future cash flows expected to be generated by the assets. If the assets are considered to be impaired, the impairment to be recognizedrecog nized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. As more fullyThe Company considered indicators of impairment of its long-lived assets and determined that, other than the impairment charges related to the Company’s restructuring activities described in Note B, during 2008, the Company recognized fixed asset impairment charges in connection with its restructuring activities in 2008.no such indicators were present at December 31, 2009.SFASASC Topic No. 109, 740, Accounting for Income Taxes. 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.Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”)ASC Topic No. 48, Accounting for Uncertainty in Income Taxes,740 for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the Company’s financial statements.In accordance with FIN No. 48,this provision, tax positions must meet a more-likely-than-not recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position.LIFETIME BRANDS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008NOTE A — SIGNIFICANT ACCOUNTING POLICIES (continued)SFASASC Topic No. 123(R), 718-20, Awards Classified as Equity,Share-Based Payment. SFAS 123(R) which requires the measurement of compensation expense for all share-based compensation granted to employees and non-employee directors at fair value on the date of grant and recognition of compensation expense over the related service period for awards expected to vest. The Company uses the Black-Scholes option valuation model to estimate the fair value of its stock options. The Black-Scholes option valuation model requires the input of highly subjective assumptions including the expected stock price volatility of the Company’s common stock. Changes in these subjective input assumptions can materially affect the fair value estimate of the Company’sC ompany’s stock options.In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations(“SFAS 141(R)”). Under SFAS 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. SFAS 141(R) will change the accounting treatment for certain specific acquisition-related items, including expensing acquisition-related costs as incurred and expensing restructuring costs associated with an acquired business. SFAS 141(R) applies prospectively, with limited exceptions, to business combinations for which the acquisition date is on or after the first fiscal period beginning on or after December 15, 2008. Early adoption is not permitted. Generally, the effect of SFAS 141(R) will depend on future acquisitions and, as such, the Company does not currently expect the adoption of SFAS 141(R) to have a material impact on the Company’s consolidated financial statements.In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities– an amendment of FASB Statement No. 133, which enhances the disclosure requirements for derivatives and hedging activities. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. SFAS No. 161 will only affect the Company’s derivatives disclosures beginning January 1, 2009 and will not have any impact on the Company’s consolidated financial statements.FASB Staff Position Accounting Principles Board (“APB”)ASC Topic No. 14-1, 470-20, Accounting for Convertible Debt Instruments That May Be Settled in Cash uponwith Conversion (Including Partial Cash Settlement)and Other Options,(“FSP APB 14-1”). FSP APB 14-1 which requires the issuer of certain convertible debt instruments that may be settled in cash, or other assets, on conversion (including partial cash settlement), to separately account for the liability (debt) and equity (conversion option) components in a manner that reflects the issuer’s non-convertible debt borrowing rate. Therate with the resulting debt discount (equity portion) is amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense.expense over the life of the convertible debt. The provisions of FSP APB 14-1 will be required to be applied to the Company’s 4.75% Convertible Senior Notes and areASC Topic No. 470-20 were effective for the Company on January 1, 2009 on a retrospective basis. The Company expects that upon adoption of FSP APB 14-1 on January 1, 2009, interest expense for 2008, 2007 and 2006 will be increased by $2.4 million, $2.2 million and $1.0 million, respectively, and the Company will record an unamortized debt discount of $12.8 million, which will be amortized over a period of five years from the date the Company’s 4.75% Convertible Senior Notes were issued. The Company expects to record additional interest expense of approximately $2.7 million, $2.9 million and $1.6 million in 2009, 2010 and 2011, respectively, due to the adoption of FSP APB 14-1.ReclassificationsCertain amounts in the 2007 and 2006 consolidated statement of cash flows were reclassified to conform to the presentation in 2008. These reclassifications had no material effecteffects on the Company’s previously reportedconsolidated financial statements as a result of the adoption are described in Note F.20082730 underperforming Farberware® outlet stores and 3 underperforming Pfaltzgraff® factory outlet stores. All 30 stores were closed by the end of the first quarter of 2008. In connection with these store closings the Company incurred restructuring related costs consisting of $3.0 million and $289,000the following: Year Ended December 31, 2008 2007 (in thousands) Store lease obligations $ 2,300 $ ― Consulting fees 393 289 Employee related expenses 141 ― Other related costs 153 ― Total $ 2,987 $ 289 yearsyear ended December 31, 2008 and 2007, respectively, consisting of the following:
December 31, 2008
December 31, 2007following is a roll-forward of the amountsremaining store lease obligations that were included in accrued expenses related to the December 2007 restructuring initiative (there were no amounts accrued related to this restructuring at December 31, 2007):
March 31, 2008
December 31, 2008Due2008 related to these store closings of $566,000 were paid in the change in circumstances with respect to the stores that were closed, thefirst quarter of 2009.reviewed the related fixed assets of the stores for impairment and determined that the net book value of the fixed assets would not be recoverable. Accordingly, the Companyalso recorded a non-cash fixed asset impairment charge of $1.6 million at December 31, 2007.toto: (i) close allits 53 of its remaining Farberware® and Pfaltzgraff® factory and clearance stores and Farberware®retail outlet stores anddue to continued poor performance, (ii) vacate its York, PAPennsylvania distribution center.center and consolidate the distribution with the Company’s main East and West Coast distribution centers and (iii) vacate certain excess showroom space. In connection with thisthese restructuring initiative,activities the Company incurred restructuring related costs of $11.1 million during the year ended December 31, 2008 consisting of the following:
December 31, 2008 Year Ended December 31, 2009 2008 (in thousands) Store lease obligations $ 1,263 $ 7,662 Consulting fees — 1,766 Employee related expenses (206 ) 1,354 Other related costs 411 318 Total $ 1,468 $ 11,100 2008September 2008 restructuring initiative (continued)initiative:initiative (in thousands):
September 30, 2008
December 31, 2008Due to Accrual
adjustments Charges Payments Lease obligations $ 7,578 $ (439 ) $ 1,702 $ (8,494 ) $ 347 Consulting fees 354 — — (354 ) — Employee related expenses 1,168 (289 ) 83 (955 ) 7 Other related costs 224 — 411 (537 ) 98 Total $ 9,324 $ (728 ) $ 2,196 $ (10,340 ) $ 452 change in circumstances as a result of the September 2008 restructuring initiative,table above reflect decisions by the Company reviewed the fixed assets relatednot to the stores and the York, PA distribution center for impairment and determinedvacate certain leased space that the net book valueCompany had expected to vacate and not to terminate the employment of certain fixed assets would not be recoverable. Accordingly,employees, whose employment the Company recorded a non-cash fixed asset impairment charge of $3.9 million duringhad expected to terminate. The amounts were included in the Company’s restructuring charges for the year ended December 31, 2008.The above restructuring related costs and non-cash fixed asset impairment charges are included within restructuring expenses in the accompanying consolidated statement of operations for20082009 and 2007.NOTE C — MIKASA® ACQUISITIONIn June 2008, the Company acquiredrecorded non-cash asset impairment charges of $789,000 and $3.9 million, respectively, related to these restructuring activities. The non-cash impairment charge for the business and certain assetsyear ended December 31, 2009 reflects an adjustment reducing the non-cash impairment charge recognized in 2008 by $1.2 million as the result of Mikasa, Inc. (“Mikasa®”) from Arc International SA (“ARC”). Mikasa® is a leading provider of dinnerware, crystal stemware, barware, flatware and decorative accessories. Mikasa® products are distributed through department stores, specialty stores and big box chains, as well as through the Internet. The preliminary purchase price was $20.7 million, consisting of (i) $17.3 million of cash, (ii) $3.3 million of certain liabilities assumed at closing, and (iii) acquisition related costs of $142,000. The agreement also requiresdecisions by the Company not to pay ARC an amount by whichvacate certain leased space that the sumCompany had expected to vacate.5% ofFinancial Statements- Discontinued Operations, the annual net sales of Mikasa® products for 2009, 2010 and 2011, exceeds $5.0 million.The Company has not accounted for its acquisitionretail outlet store operations as discontinued operations since the Company believes that the operations and cash flows of the business and certain assets of Mikasa® underretail outlet store operations would not be eliminated from the purchase method of accounting in accordance with SFAS No. 141. Accordingly, the results ofon-going operations of Mikasa® have beenthe Company as a result of these store closings. Specifically, the Company determined that the migration of customers from the Company’s retail outlet stores to the Company’s Internet, catalog and wholesale businesses would not be insignificant. For this purpose, the Company concluded that the migration of sales from the retail outlet stores to the Internet, catalog and wholesale businesses of greater than 5% would be signifi cant.the Company’s consolidated statement of operations from the date of acquisition. The purchase price was funded by borrowings under the Company’s Credit Facility. The Mikasa® acquisition was not deemed material; accordingly, summary pro formafinancial information has not been presented.accrued expenses at December 31, 2009.2008— MIKASA® ACQUISITION (continued)A valuation of the assets acquired from Mikasa® resulted in an excess of the fair value of the assets acquired from Mikasa®, which consisted of inventory, the Mikasa® tradename and tools and molds, over the preliminary purchase price in the amount of $6.2 million. In accordance with SFAS No. 141, as the Company is subject to potential contingent consideration that could result in an addition to the preliminary purchase price, the excess value (negative goodwill) has been recorded as a long-term liability in the accompanying balance sheet pending resolution of the contingencies. To the extent that the fair value of the assets acquired exceeds the total purchase price, after a reduction to the carrying value of the non-current assets acquired, at the end of the contingency period, the Company will recognize the excess value as an extraordinary gain. To the extent that the additional purchase price, if any, at the end of the contingency period exceeds the excess value, the Company will record additional purchase price related to the Mikasa® acquisition.NOTE D — INVESTMENT IN GRUPO VASCONIA, S.A.B.29.99% of the capital stock ofa 30% interest in Grupo Vasconia, S.A.B. (“Vasconia”), (formerly known as, Ekco, S.A.B.), a manufacturer and distributor of aluminum disks, cookware and related items. Shares of Vasconia’s capital stock are traded on the Bolsa Mexicana de Valores, S.A. de C.V., the Mexico Stock Exchange, under the symbol VASCONI.MX. The Company, based upon a third-party valuation, allocated the purchase price of Vasconia as follows (in thousands):, for the yearyears ended December 31, 2009 and 2008 in the accompanying consolidated statementstatements of operations and itsoperations. The Company’s proportionate share of Vasconia’s translation adjustment innet income has been translated from Mexican Pesos (“MXP”) to U.S. Dollars (“USD”) using the accompanying consolidated statement of Stockholders’ Equity ataverage daily exchange rate during the years ended December 31, 2009 and 2008. During the year ended December 31, 20082009, the Company received a cash dividend in the amount of $263,000$218,000 from Vasconia.yearyears ended December 31, 2009 and 2008 is as follows (in thousands):follows: Year Ended December 31, 2009 2008 (in thousands) Income Statement USD MXP USD MXP Net Sales $ 94,633 $ 1,276,126 $ 110,026 $ 1,219,151 Gross Profit 26,251 353,500 28,212 313,739 Income from operations 11,803 159,531 11,662 129,518 Net Income 8,306 111,709 6,270 63,014 December 31, 2009 2008 (in thousands) Balance Sheet USD MXP USD MXP Current assets $ 48,422 $ 630,250 $ 46,320 $ 619,962 Non-current assets 23,698 308,447 22,371 325,351 Current liabilities 11,624 151,295 17,583 251,799 Non-current liabilities 3,711 48,297 3,981 55,264 2008ED — GOODWILL AND INTANGIBLE ASSETSGoodwill was included as an asset in the wholesale segment. There were no additions to goodwill during the year ended December 31, 2008.initially performed its 2009 annual impairment tests for its goodwill and indefinite-lived intangible assets in accordance with SFASASC Topic No. 142350, Intangibles- Goodwill and Other, as of October 1, 2008, but due primarily to a continued decline in the market value of the Company’s common stock, updated the tests at December 31, 2008.2009. The goodwill test involved the assessment of the fair market value of the Company as a single reporting unit. In connection with these tests, the Company calculated the Company’s implied goodwill and determined the fair value of its indefinite-lived intangible assets at December 31, 2008. The fair value measurements werewhich was based on Level 2 observable inputs using a combination of market capitalization, discounted cash flow approach assuming a discount rate of 14% and market approach. As a resultan annual growth rate of 3%. The results of the goodwillassessment indicated that the fair value of the Company’s indefinite-lived intangibles exceeded the carrying amount by approximately $29.0 million. Accordingly, the Company concluded that no impairment test,to the carrying value of the Company’s indefinite-lived intangibles existed at December 31, 2009.value of its common stock,capitalization, the Company recognized non-cash impairment charges of $29.4 million consisting of the write-off of all recorded goodwill of $27.4 million and a non-cash goodwill impairment chargereduction of approximately $26.9 million. The Company also recorded a non-cash indefinite-lived intangible impairment charge of $1.7 million due to the fair value of certain indefinite-lived assets being less than the carrying amount of the assets. These impairment charges are included within goodwill and intangible asset impairment in the accompanying consolidated statementCompany’s indefinite-lived intangibles of operations for 2008.In January 2009, the Company disposed of its USE: business. As a result of the disposal, the Company recognized a non-cash impairment charge related to USE: goodwill of $579,000 and USE: intangible assets of $247,000 at December 31, 2008.
Amortization
Amortization
intangible assets: Year Ended December 31, 2009 2008 Gross Accumulated Amortization Net Gross Accumulated Amortization Net Indefinite-lived intangible assets: Trade names $ 25,530 $ ― $ 25,530 $ 25,530 $ ― $ 25,530 Finite-lived intangible assets: Licenses 15,847 (5,685 ) 10,162 15,847 (5,123 ) 10,724 Trade names 2,477 (1,185 ) 1,292 2,477 (1,103 ) 1,374 Customer relationships 586 (421 ) 165 586 (321 ) 265 Patents 584 (92 ) 492 584 (57 ) 527 Total $ 45,024 $ (7,383 ) $ 37,641 $ 45,024 $ (6,604 ) $ 38,420 20082009 are as follows:Years 30 33 3 17 LIFETIME BRANDS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008NOTE E — GOODWILL AND INTANGIBLE ASSETS (continued)Intangible assets (continued)Year ending December 31 2010 $ 717 2011 631 2012 591 2013 591 2014 591 2006 was $978,000, $915,000, and $855,000, respectively.FE — CREDITFACILITY$150$130.0 million secured credit facility which until Marchthat matures on January 31, 2009, had an accordion feature for an additional $50 million and matures in April 2011 (the “Credit Facility”). Borrowings under the Credit Facility are secured by all assets of the Company. Under the terms of the Credit Facility (until March 31, 2009), the Company was required to satisfy certain financial covenants, including maximum leverage and capital expenditures and a minimum interest coverage ratio. Borrowings under the Credit Facility have different interest rate options that are based either on, (i) an alternate base rate, (ii) LIBOR, or (iii) the lender’s cost of funds rate, plus in each case a margin based on the applicable leverage ratio.In March 2008, the Credit Facility was amended to: (i) establish a borrowing base (comprised of a percentage of each of eligible accounts receivable, inventory and trademarks) calculation to determine availability under the Credit Facility, (ii) increase the applicable margin rates and (iii) revised certain financial covenants. In September 2008, the Credit Facility was further amended to: (i) establish a minimum excess availability amount, (ii) include a minimum fixed charge ratio and a minimum EBITDA covenants, (iii) revised the leverage and interest coverage covenants and (iv) increased the applicable margin rates.LIFETIME BRANDS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008NOTE F — CREDITFACILITY (continued)At December 31, 2008, the Company was not in compliance with the financial covenants required by the Credit Facility. On each of February 12, 2009 and March 6, 2009, the Company entered into a forbearance agreement and amendment to the Credit Facility whereby the lenders agreed to forbear from taking actions they would otherwise have been permitted to take as a result of the non-compliance. In consideration thereof, the Company agreed to further restrictions on its borrowings and an increase in the applicable margin rates.modifiesmodified the Credit Facility in certain ways including, as follows: (i) changeschanged the maturity date to January 31, 2011, (ii) addsadded certain asset categories to the borrowing base, (iii) increasesincreased the applicable margin rates (including a minimum LIBOR of 1.75%), (iv) revisesrevised the minimum Consolidated EBITDA (as defined in the Credit Facility) and fixed charge coverage covenants and addsadded both a minimum net sales for 2009 only and maximum capital expenditures covenant, (v) eliminateseliminated the requirement of maximum leverage anda nd minimum interest coverage ratios, (vi) eliminateseliminated the $50$50.0 million accordion feature, (vii) revisesrevised the minimum excess availability amount and (viii) placesplaced restrictions on dividends and acquisitions. The Company was in compliance with its financial covenants at December 31, 2009. The Amendment also providesprovided for a lock-box arrangement with the collateral agent. Pursuant toagent for the Amendment, althoughbenefit of its lenders; as such, the Credit Agreement matures on January 31, 2011, Emerging Issues Task Force 95-22, Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Arrangements That Include both a Subjective Acceleration Clause and a Lock-Box Arrangement, requiresCompany has classified the indebtedness to be classified as a current liability on thein its consolidated balance sheetsheets as of December 31, 2009 and 2008.2008,2009, the Company had $2.1$1.2 million of open letters of credit and $89.3$24.6 million of borrowings outstanding under the Credit Facility. Interest rates on outstanding borrowings at December 31, 20082009 ranged from 2.50%5.75% to 7.07%6.25%. Availability under the Credit Facility at December 31, 2009 was $49.9 million (net of $15.0 million of minimum required availability). The Company has interest rate swap and collar agreements (see Note H) with an aggregate notional amount of $55.2 million.million at December 31, 2009 (see Note G). The Company entered into these agreements to effectively fix the interest rate on a portion of its borrowings under the Credit Facility.The Company believes that availability under the Credit Facility will be sufficient to fund the Company’s operations for fiscal 2009. However, if circumstances were to change, the Company may need to refinance the Credit Facility or otherwise amend the terms of the Credit Facility. In addition, the Company would seek to engage in further activities, including efforts to lower its inventory and to reduce expenses. However, there can be no assurance that any such actions would be successful or that the results of any such actions would be adequate.GF — CONVERTIBLE NOTES$75$75.0 million aggregate principal amount of 4.75% Convertible Senior Notes due July 15, 2011 (the “Notes”). The Notes are convertible into shares of the Company’s common stock at a conversion price of $28.00 per share, subject to adjustment in certain events. The Notes bear interest at 4.75% per annum, payable semiannually in arrears on January 15th and July 15th of each year and are unsubordinated except with respect to the Company’s debt to the extent secured by the Company’s assets. The Notes mature on July 15, 2011.outstanding under its Credit Facility. The Company may not redeem the Notes at any time prior to maturity.will be required to retrospectively adopt FSP APB 14-1. The Company expects that uponadopted the provisions of ASC Topic No. 470-20 on a retrospective basis as though the provisions were in effect at the date of issuance of the Notes in June 2006. As a result of the adoption, of FSP APB 14-1 on January 1, 2009, interest expense for 2008, 2007 and 2006 will be increased by $2.4 million, $2.2 million and $1.0 million, respectively, and the Company will record an unamortizedreclassified $7.9 million (net of taxes of $2.8 million) from convertible notes to additional paid-in-capital and recorded a debt discount of $12.8 million which willto be amortized over a period of five years from the date the Company’s 4.75% Convertible Senior Notes were issued. The Company expects to record additional interest expense over the term of approximately $2.7the Notes. In 2008, the Company recorded a full valuation allowance against all of its deferred taxes. Accordingly, the Company increased additional paid in capital and accumulated deficit by $2.8 million $2.9 million and $1.6 millionto reflect th e valuation allowance in 2009, 2010 and 2011, respectively, due to the adoption2008 period in the accompanying statement of FSP APB 14-1.stockholders' equity.2008HF — CONVERTIBLE NOTES (continued) December 31, 2008, As reported As adjusted Convertible notes $ 75,000 $ 67,864 Paid-in-capital 116,869 127,497 Accumulated deficit (18,023 ) (21,515 ) As reported As adjusted Statement of Operations Interest expense $ (9,142 ) $ (11,577 ) Loss before income taxes and equity in earnings of Grupo Vasconia, S.A.B. (61,055 ) (63,490 ) Income tax benefit 10,540 14,249 Net loss (49,029 ) (47,755 ) Basic and diluted loss per common share (4.09 ) (3.99 ) Statement of Cash Flows Amortization of debt discount ― 2,435 Deferred income taxes 155 (3,554 ) As reported As adjusted Statement of Operations Interest expense $ (8,397 ) $ (10,623 ) Income before income taxes 16,322 14,096 Income tax provision (7,430 ) (6,567 ) Net income 8,892 7,529 Basic income per common share 0.69 0.58 Diluted income per common share 0.68 0.57 Statement of Cash Flows Amortization of debt discount ― 2,226 Deferred income taxes 2,771 1,908 December 31, 2009 2008 Carrying amount of equity component, net of tax $ 10,628 $ 10,628 Principal amount of liability component $ 75,000 $ 75,000 Unamortized discount (4,473 ) (7,136 ) Carrying amount of debt component $ 70,527 $ 67,864 $50$50.0 million and interest rate collar agreements with an aggregate notional amount of $40.2 million to manage interest rate exposure in connection withrelated to its variable interest rate borrowings and a credit defaultunder the Credit Facility. The agreements expire in November 2010 through January 2011.$1$15.0 million to manage credit exposureand the interest rate collar agreements were designated as cash flow hedges at inception, with the effective portion of the fair value gains or losses on these agreements recorded as a component of accumulated other comprehensive loss. During November 2009, the interest rate collar agreements were de-designated as a cash flow hedge as a result of reductions and projected future reductions in the Company’s borrowings hedged by the interest rate collar agreements. Accordingly, the Company reclassified a portion of the loss included in other comprehensive loss related to certain accounts receivable. Thethe interest rate swap and collar agreements expireof $780,000, representing the ineffective portion of the hedge, to interest expense. In addition, beginning in 2010December 2009 and through the credit default swap expirestermin ation of the interest rate collar agreements, the Company will amortize the remaining loss of $382,000 included in 2009.Certainother comprehensive loss and recognize the fair value gains or losses related to the interest rate collar agreements in interest expense. The effect of recording the cash flow hedges at fair value resulted in an unrealized gain of $543,000 at December 31, 2009 and unrealized losses of $1.9 million and $203,000 (net of taxes of $170,000) for the years ended December 31, 2008 and 2007, respectively.$35$35.0 million and the credit default swap were not designated as hedges under SFAS 133at inception and the fair value gains or losses from these swap agreements are recognized in earnings.interest expense. The effect of recording these interest rate swap agreements and the interest rate collar agreements (beginning with December 31, 2009) at fair value resulted in an unrealized gaingains of $143,000 and $148,000 for the years ended December 31, 2009 and 2008, respectively, and an unrealized loss of $358,000 for the years ended December 31, 2008 and 2007, respectively, which is included in interest expense.An interest rate swap agreement with a notional amount of $15 million and the interest rate collar agreements were designated as cash flow hedges under SFAS 133. The effective portion of the fair value gains or losses on these agreements is recorded in other comprehensive loss. The effect of recording these agreements at fair value resulted in an unrealized loss of $1.9 million for the year ended December 31, 2008 and an unrealized loss of $203,000 (net of taxes of $170,000) for the year ended December 31, 2007. No amounts recorded in other comprehensive loss are expected to be reclassified to interest expense in the next twelve months.and $731,000 for the years endedat December 31, 2009 and 2008, and 2007, respectively, whichand is included in accrued expenses and deferred rent & other long-term liabilities.NOTE I — CAPITAL STOCKCash dividendsThe 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 2008, 2007 and 2006. In February 2009, in light of current economic conditions, the Company suspended paying a cash dividend on its outstanding shares of common stock.Share repurchase programIn 2007, the Board of Directors of the Company authorized a program to repurchase up to $40.0 million of the Company’s common stock through open market purchases or privately-negotiated transactions. As of December 31, 2008, the Company had purchased in the open market and retired a total of 1,362,505 shares of its common stock for a total cost of $22.7 million under the program. There were no purchases during 2008. In March 2009, the Board of Directors of the Company terminated the program.Preferred stockThe 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 at December 31, 2008.2008IH — CAPITAL STOCK (continued)Themaintainsapproved an amendment to the Company’s 2000 Long-Term Incentive Plan (the “Plan”), whereby up to 2,500,000increase the shares available for grant by 1,000,000 shares to 3,500,000 shares. These shares of the Company’s common stock may be subject to outstanding awards granted to directors, officers, employees, consultants and service providers and affiliates in the form of stock options or other equity-based awards. The Plan authorizes the Board of Directors of the Company, or a duly appointed committee thereof, to issue incentive stock options, non-qualified options, and other stock-based awards. Options that have been granted under the Plan expire over a range of five to ten years from the date of grant and vest over a range of up to five years from the dated ate of grant. As of December 31, 2008,2009, there were 11,0311,215,729 shares available for grant under the Plan. All stock options granted through December 31, 20082009 under the Plan have exercise prices equal to the market values of the Company’s common stock on the dates of grant.20082009, is as follows:
average
exercise
price
average
remaining
contractual
life
(years)
intrinsic
value Options Options outstanding, December 31, 2006 $ 22.78 Grants 516,500 21.65 Exercises (32,000 ) 7.64 Cancellations (86,500 ) 23.48 Options outstanding, December 31, 2007 1,808,900 22.69 Grants 286,000 7.15 Exercises (1,750 ) 5.50 Cancellations (56,500 ) 26.67 Options outstanding, December 31, 2008 2,036,650 20.41 Grants 632,000 3.43 Exercises (12,650 ) 5.43 Cancellations (869,333 ) 25.28 Options outstanding, December 31, 2009 1,786,667 12.14 6.51 $ 3,091,570 Options exercisable, December 31, 2009 693,858 15.44 5.03 $ 474,197 2008.2009. The intrinsic value is calculated for each in-the-money stock option as the difference between the closing price of the Company’s common stock on December 31, 20082009 and the exercise price. There were no in-the-money options at December 31, 2008.LIFETIME BRANDS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008NOTE I — CAPITAL STOCK (continued)Stock options (continued)2006 was $9,900, $417,000, and $2.7 million, respectively. The intrinsic value of a stock option that is exercised is calculated as the difference between the quoted market price of the Company’s common stock at the date of exercise and the exercise price of the stock option multiplied by the number of shares exercised.$2.8$2.1 million, $2.2$2.8 million, and $2.2 million for the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively. Total unrecognized compensation cost related to unvested stock options at December 31, 2008,2009, before the effect of income taxes, was $5.2$3.8 million and is expected to be recognized over a weighted-average period of 2.62.37 years.2006 was $5.05, $8.26, and $12.11, respectively. 2009 2008 2007 Historical volatility 73 % 50 % 40 % Expected term (years) 4.4 4.8 5.2 Risk-free interest rate 1.92 % 2.41 % 4.56 % Expected dividend yield 0.00 % 5.20 % 1.18 % 2007 and 2006,2007, the Company issued 33,335, 22,586 7,280 and 5,2547,280 restricted shares, respectively, of the Company’s common stock to its Board of Directors representing payment of a portion of their annual retainer. The total fair value of the restricted shares, based on the number of shares granted and the quoted market price of the Company’s common stock on the date of grant, was $150,000, $172,500 $150,000 and $115,000,$150,000, respectively. The shares granted in 2008 and 2007 cliff vest 100% one year from the date of grant. The grantedvested in quarterly installments over a periodacquisition of one year.certain assets of Syratech Corporation. See Note L.LIFETIME BRANDS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008JI — INCOME (LOSS) PER COMMON SHARE2007 and 20062007 are as follows: 2009 2008 2007 (in thousands - except per share amounts) Net income (loss) - Basic $ 2,715 $ (47,755 ) $ 7,529 Interest expense, net, 4.75% Convertible Senior Notes ― ― ― Net income (loss) – Diluted $ 2,715 $ (47,755 ) $ 7,529 Weighted-average shares outstanding – Basic 12,009 11,976 12,969 Effect of dilutive securities: Stock options 66 ― 130 4.75% Convertible Senior Notes ― ― ― Weighted-average shares outstanding – Diluted 12,075 11,976 13,099 Basic income (loss) per common share $ 0.23 $ (3.99 ) $ 0.58 Diluted income (loss) per common share $ 0.22 $ (3.99 ) $ 0.57 2007 and 20062007 excludes options to purchase 1,435,348, 2,036,650 1,544,000 and 974,0001,544,000 shares of the Company’s common stock, respectively, due to their antidilutive effect. The computations of diluted income (loss) per common share for the years ended December 31, 2009, 2008 and 2007 also excludes 2,678,571 shares of the Company’s common stock issuable upon the conversion of the Company’s 4.75% Convertible Senior Notes and related interest expense, due to itstheir antidilutive effect in those years.effect.2008KJ — INCOME TAXES Year Ended December 31, 2009 2008 2007 (in thousands) Current: Federal $ 162 $ (11,478 ) $ 3,891 State and local 984 1,388 768 Deferred 734 (4,159 ) 1,908 Income tax provision (benefit) $ 1,880 $ (14,249 ) $ 6,567 the ability to carrycarried back the majority of the currentprior year loss for Federal tax purposes. Accordingly, the Company has recorded a current benefit for these losses. December 31, 2009 2008 (in thousands) Deferred income tax assets: Deferred rent expense $ 2,424 $ 2,117 Grupo Vasconia, S.A.B. translation adjustment 2,403 2,553 Stock options 1,413 919 Inventory 1,603 2,614 Depreciation and amortization 672 ― Operating loss carry-forward 617 1,209 AMT credit 633 709 Accounts receivable allowances 176 852 Accrued bonuses 389 313 Derivatives 619 1,054 Other 990 4,033 $ 11,939 $ 16,373 Deferred income tax liability: Depreciation and amortization ― (31 ) Indefinite-lived intangibles (4,273 ) (3,776 ) Convertible Debt (1,727 ) (2,765 ) Grupo Vasconia, S.A.B. equity in earnings (383 ) (198 ) Inventory ― (1,303 ) Other ― (211 ) (6,383 ) (8,284 ) Net deferred income tax asset 5,556 8,089 Valuation allowance (10,210 ) (11,865 ) Net deferred income tax liability $ (4,654 ) $ (3,776 ) 2008KJ — INCOME TAXES (continued)AtAs of December 31, 2008,2009, the Company has autilized the Federal net operating loss carry forward of $1.3 million which will expiregenerated in 2029.the prior year. Additionally, the Company has various state net operating loss carry forwards of $12.4 million that will begin to expire in 2014. Since managementThe Company has credit carryforwards of $633,000 that do not expire. Management has determined that it is uncertain of its ability to utilize its future deferred tax benefits,not more likely than not that these assets will be realized and a full valuation allowance has been established. In accordance with SFASASC Topic No. 109, 740, Accounting for Income Taxes, the Company has offset its total deferred tax asset with certain deferred tax liabilitiesliabilitie s that are expected to reverse in the carry forward period. The net deferred tax liability of $3.8 million at December 31, 2008 relates to indefinite-lived intangible assets.federalFederal statutory rates as follows: Year Ended December 31, 2009 2008 2007 Provision (benefit) for Federal income taxes at at the statutory rate 35.0 % (35.0 )% 35.0 % Increases (decreases): State and local income taxes, net of Federal income tax benefit 37.9 (3.3 ) 5.9 Non-deductible stock options 11.5 0.5 3.4 Non-deductible expenses 6.4 1.1 0.8 Valuation allowance (19.3 ) 19.4 ― Other 6.1 (5.1 ) 1.5 Provision (benefit) for income taxes 77.6 % (22.4 )% 46.6 % consistedconsists of the following (in thousands):following: Year Ended December 31, 2009 2008 2007 (in thousands) Balance at January 1 $ 498 $ 1,437 $ 1,704 Additions based on tax positions related to the current year 36 Additions for tax positions of prior years 28 303 9 Reductions for tax position of prior years 191 1,242 312 Balance at December 31 $ 335 $ 498 $ 1,437 FIN 48 liability would be reduced by $498,000,$335,000, of which $307,000$335,000 would impact the Company’s tax provision. On a quarterly basis, the Company evaluates its tax positions and revises its estimates accordingly. During the quarter ended June 30, 2008 the Company reversed $1.3 million (including accrued interest) of its FIN 48 liability as a result of the expiration of the statute of limitations on a certain tax year, resulting in an increase in the income tax benefit recorded during the period. The Company believes that $342,000it is reasonably possible that $335,000 of its tax positions will reversebe resolved within the next twelve months.Jersey as “major”Jersey. As of December 31, 2009, the Company has settled their Federal tax jurisdictions.examination for the periods 2006 through 2008. The Company is no longer subject to U.S. Federal income tax examinations for the years prior to 2008. The periods subject to examination for the Company’s Federal returnsmajor state jurisdictions are the years ended 2006 and 2007. The periods subject to examination for the Company’s California, Massachusetts, New York and New Jersey returns are years 2005, 2006 and 2007.through 2008.2008INCOME TAXES (continued)The Company’s policy for recording interest and penalties is to record such items as a component of income taxes. Interest and penalties were not material to the Company’s financial position, results of operations or cash flows as of and for the years ended December 31, 2008 and 2007.NOTE L — BUSINESS SEGMENTSMikasa®Lifetime Sterling™ Internet websites and the Company’s Pfaltzgraff® mail-order catalogs.factory and clearance stores and Farberware® retail outlet stores by December 31, 2008. The results of operations of certain of these retails stores were included in the direct-to-consumer segment during 2008.specificsp ecific segments and are reflected as unallocated corporate expenses. Assets in each segment consist of assets used in its operations and acquired intangible assets and goodwill.assets. Assets in the unallocated corporate category consist of cash and tax related assets that are not allocated to the segments.2008LK — BUSINESS SEGMENTS (continued) Year Ended December 31, 2009 2008 2007 (in thousands) Assets: Wholesale $ 273,589 $ 321,284 $ 337,156 Direct-to-consumer 2,452 5,422 22,163 Unallocated/ corporate/ other 682 15,075 12,096 Total assets $ 276,723 $ 341,781 $ 371,415 Capital expenditures: Wholesale $ 1,684 $ 8,538 $ 17,412 Direct-to-consumer 660 321 1,611 Total capital expenditures $ 2,344 $ 8,859 $ 19,023 includesincluded non-cash goodwill and intangible asset impairment charges totaling $29.4 million. See Note E.2008ML — COMMITMENTS AND CONTINGENCIES direct-to-consumer offices, showrooms and sales offices that expire through 2022. These leases generally provide for, among other things, annual base rent escalations, and additional rent for real estate taxes and other costs.January 2008,December 2009, in connection with the Company’s restructuring activities described in Note B, the Company entered into a 12-yearan agreement pursuant to which, among other things, the Company was released from its lease agreement for 69,000 square feet of office, showroom and warehouse space located in Medford, Massachusetts. The lease includes a renewal option for two additional five-year periods. The location serves as the headquartersobligations for the Syratech business operations. Annual rent is $991,000 and will increase over the initial term of the lease to $1.3 million. The new office space replaced 118,000 square feet of office space that the Company leased in the Boston, Massachusetts area.The forgoing lease obligations at December 31, 2008 exclude the leases related to the Company’s retail stores, all of which were closed by December 31, 2008.During the year ended December 31, 2006, the Company had an agreement with Meyer Corporation whereby Meyer Corporation occupied 30% of the space in each of the Company’s Farberware® outlet stores and was responsible for merchandising and stocking Farberware® cookware products in these stores. Pursuant to the agreement Meyer Corporation received all revenue from the sale of the Farberware® cookware in the Company’s Farberware® outlet stores and in turn reimbursed the Company for 30% of the operating expenses of the stores, including rent. The agreement was terminated in June 2006. During the year ended December 31, 2006, Meyer Corporation reimbursed the Company $2.0 million.Year ending December 31 2010 $ 12,476 2011 12,195 2012 12,448 2013 12,319 2014 12,248 Thereafter 55,921 Total $ 117,607 $18.3 million and $16.5$18.3 million for the years ended December 31, 2009, 2008 and 2007, and 2006, respectively. The amounts for 2006 are prior to the Meyer reimbursement described above.LIFETIME BRANDS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008NOTE M — COMMITMENTS AND CONTINGENCIES (continued)Year ending December 31 2010 $ 169 2011 94 Total minimum lease payments 263 Less: amounts representing interest (19 ) Present value of minimum lease payments $ 244 20082009 of $230,000$154,000 and $239,000,$90,000, respectively, and at December 31, 20072008 of $369,000$230,000 and $457,000,$239,000, respectively, are included in accrued expenses, and deferred rent & other long-term liabilities, respectively.paymentsthe payment of royalties on sales of licensed products, which expire through 2023. Future minimum royalties payable under these agreements are as follows (in thousands):Year ending December 31 2010 $ 6,463 2011 5,423 2012 5,707 2013 300 2014 306 Thereafter 1,060 Total $ 19,259 allegesalleged that the Company breached the parties’ asset purchase agreement by failing to file and make effective a registration statement for shares of the Company’s common stock issued to Syratech for its assets. The complaint alleges damages of approximately $2.1 million. TheIn November 2009, the Company denies that it is liableentered into a settlement agreement and the action was dismissed. Pursuant to the settlement agreement, the Company paid Syratech under the claim set forward in the complaint, and intends to vigorously defend this action. No trial date has been set. A mediation session is scheduled for April 15, 2009.$425,000.LIFETIME BRANDS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008NOTE M — COMMITMENTS AND CONTINGENCIES (continued)Legal proceedings (continued)GermanGermán Ground Water Contamination site in Puerto Rico was added to the Superfund National Priorities List due to contamination present in the local drinking water supply. Wallace Silversmiths de Puerto Rico, Ltd. (“Wallace”), a wholly-owned subsidiary of the Company, received a Notice of Potential Liability and Request for Information Pursuant to 42 U.S.C. Sections 9607(a) and 9604(e) of the Comprehensive Environmental Response, Compensation, Liability Act regarding the San GermanGermán Ground Water Contamination Superfund Site, San German,Germán, Puerto Rico dated May 29, 2008 from the EPA. The EPA requested that Wallace provide information regarding Wallace’s occupation of the facility located in San German,Germá n, Puerto Rico and contamination of the ground water supply. By letter dated June 18, 2008, the Company responded to the EPA’s Request for Information on behalf of Wallace. The Company has engaged environmental consultants to investigate the environmental condition of the property and preliminary discussions with the EPA have been initiated. At this time, it is not possible for the Company to evaluate the outcome.NM — RETIREMENT PLANSa maximumthe Internal Revenue Service limit of 15% of their respective salaries.$16,500 ($22,000 for employees 50 years or over) for 2009. During 2008 2007 and 2006,2007, the Company matched 50% of employee contributions up to 4% of an employee’s eligible compensation. Effective January 1, 2009 the Company suspended its matching contribution as an expense savings measure. The Company made matching contributions to the 401(k) plan of $777,000 $778,000 and $809,000$778,000 in 2008 and 2007, and 2006, respectively.20082009 and 2007,2008, the total unfunded retirement benefit obligation was $3.2$3.3 million and $3.0$3.2 million, respectively, and is included in accrued expenses, and deferred rent & other long-term liabilities. During the years ended December 31, 20082009 and 2007,2008, the Company paid retirement benefits related to these obligations of $148,000.$153,000 and $148,000, respectively. The Company expects to pay a total of $148,000 in retirement benefits related to these obligations during the year ending December 31, 2009.ON — OTHER2008ON — OTHER (continued) December 31, 2009 2008 (in thousands) Machinery, furniture and equipment $ 64,927 $ 63,868 Leasehold improvements 24,283 24,469 Building and improvements 1,716 1,708 Construction in progress 123 1,301 Land 115 115 91,164 91,461 Less: accumulated depreciation and amortization (49,541 ) (41,553 ) Total $ 41,623 $ 49,908 and 2006 was $9.4 million, $9.8 million and $8.7 million, respectively.$7.5equipment and accumulated depreciation at December 31, 2009 are $2.1 million respectively. Included in machinery, furniture and equipment and accumulated depreciation at December 31, 2007 are $2.1 million and $1.2 million, respectively, related to assets recorded under capital leases.2008ON — OTHER (continued) December 31, 2009 2008 (in thousands) Deferred rent liability $ 10,998 $ 11,135 Mikasa® contingent consideration 6,215 6,215 Retirement benefit obligations 3,148 3,003 Derivative liability 76 2,462 Long-term portion of capital lease obligations 90 239 Total $ 20,527 $ 23,054 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTSSCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
beginning
of period
charged to
costs and
expenses
(describe)
at end of
period COL. A COL. B COL. C COL. D COL. E Description Balance at beginning of period Additions charged to costs and expenses Deductions (describe) Balance at end of period Year ended December 31, 2009 Deducted from asset accounts: Allowance for doubtful accounts $ 1,853 $ 1,204 $ 1,624 (a) $ 1,433 Reserve for sales returns and allowances 12,798 22,180 (c) 19,854 (b) 15,124 $ 14,651 $ 23,384 $ 21,478 $ 16,557 Year ended December 31, 2008 Deducted from asset accounts: Allowance for doubtful accounts $ 395 $ 1,614 $ 156 (a) $ 1,853 Reserve for sales returns and allowances 16,005 23,160 (c) 26,367 (b) 12,798 $ 16,400 $ 24,774 $ 26,523 $ 14,651 Year ended December 31, 2007 Deducted from asset accounts: Allowance for doubtful accounts $ 395 $ (79 ) $ (79 ) (a) $ 395 Reserve for sales returns and allowances 11,702 19,970 (c) 15,667 (b) 16,005 $ 12,097 $ 19,891 $ 15,588 $ 16,400