UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _____________
COMMISSION FILE NUMBER 1-5354
SWANK, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 04-1886990
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
90 PARK AVENUE
NEW YORK, NEW YORK 10016
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 867-2600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.10 par value
Indicate by check mark if the Registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes No x .
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Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Act. Yes No x .
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No .
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / x /
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Large accelerated filer _____ Accelerated Filer ______
Non-accelerated filer x
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Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes No x .
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State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the close of business on June 30, 2005: $8,598,610
The number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 5,756,844 shares of Common
Stock as of the close of business on February 28, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
None.
FORWARD-LOOKING STATEMENTS.
In order to keep stockholders and investors informed of the future
plans of Swank, Inc. (which is referred to alternatively in this Form 10-K as
the "Company," "we," "us," and/or "our"), this Form 10-K contains and, from time
to time, other reports and oral or written statements issued by us may contain,
forward-looking statements concerning, among other things, our future plans and
objectives that are or may be deemed to be "forward-looking statements." Our
ability to do this has been fostered by the Private Securities Litigation Reform
Act of 1995 which provides a "safe harbor" for forward-looking statements to
encourage companies to provide prospective information so long as those
statements are accompanied by meaningful cautionary statements identifying
important factors that could cause actual results to differ materially from
those discussed in the statement. Our forward-looking statements are subject to
a number of known and unknown risks and uncertainties that could cause actual
results, performance or achievements to differ materially from those described
or implied in the forward-looking statements, including, but not limited to,
general economic and business conditions, competition in the accessories
markets; potential changes in customer spending; acceptance of our product
offerings and designs; the level of inventories maintained by our customers; the
variability of consumer spending resulting from changes in domestic economic
activity; a highly promotional retail environment; any significant variations
between actual amounts and the amounts estimated for those matters identified as
our critical accounting estimates as well as other significant accounting
estimates made in the preparation of our financial statements; and the impact of
the hostilities in the Middle East and the possibility of hostilities in other
geographic areas as well as other geopolitical concerns. Accordingly, actual
results may differ materially from such forward-looking statements. You are
urged to consider all such factors. In light of the uncertainty inherent in such
forward-looking statements, you should not consider their inclusion to be a
representation that such forward-looking matters will be achieved. We assume no
obligation for updating any such forward-looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting such
forward-looking statements.
PART I
ITEM 1. BUSINESS.
General
The Company was incorporated on April 17, 1936. We are engaged in the
importation, sale and distribution of men's accessories under the names "Kenneth
Cole", "Tommy Hilfiger", "Nautica", "Geoffrey Beene", "Claiborne", "Guess?",
"Ted Baker", "Donald Trump", "City of London", "Pierre Cardin", and "Field &
Stream", among others.
Products
Men's leather accessories, principally belts, wallets and other small
leather goods including billfolds, key cases, card holders and other items, and
men's jewelry, principally cuff links, tie klips, chains and tacs, bracelets,
neck chains, vest chains, collar pins, key rings and money clips, are
distributed under the names "Geoffrey Beene", "Claiborne", "Kenneth Cole",
"Tommy Hilfiger", "Nautica", "Guess?", "Ted Baker", "City of London", "Swank",
and "Field & Stream". We also distribute jewelry under the name "Donald Trump",
suspenders under the names "Geoffrey Beene", "Claiborne", "Tommy Hilfiger" and
"Pierre Cardin", and men's leather accessories under the name "Pierre Cardin"
and for customers' private labels.
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As is customary in the men's fashion accessories industry, substantial
percentages of our sales and earnings occur in the months of September, October
and November, during which we make significant shipments of our products to
retailers for sale during the holiday season. Our bank borrowings typically are
at a peak during these months corresponding with our peak working capital
requirements.
In addition to product, pricing and terms of payment, our customers
generally consider one or more factors, such as the availability of electronic
order processing and the timeliness and completeness of shipments, as important
in maintaining ongoing relationships. In addition, from time to time we will
allow customers to return merchandise in order to achieve proper stock balances.
We record a provision for estimated returns as an offset to gross sales at the
time merchandise is shipped based on historical returns experience, general
retail sales trends, and individual customer experience. These factors, among
others, result in an increase in our inventory levels during the Fall selling
season (July through December) in order to meet customer imposed delivery
requirements. We believe that these practices are substantially consistent
throughout the fashion accessories industry.
Sales and Distribution
Our customers are primarily major retailers within the United States.
In fiscal 2005, net sales to our three largest customers, Federated Department
Stores, Inc. ("Federated"), Kohl's Department Stores and TJX Companies, Inc.
("TJX"), accounted for approximately 23%, 10%, and 10%, respectively, of our
consolidated net sales. In fiscal 2004 and fiscal 2003, Federated accounted for
approximately 23% and 25%, respectively, and TJX accounted for approximately 10%
and 11%, respectively, of consolidated net sales. No other customer accounted
for more than 10% of consolidated net sales during fiscal years 2005, 2004 or
2003. During 2005, Federated completed its acquisition of the May Department
Stores Company and accordingly, these statistics reflect our sales to the
combined company. Exports to foreign countries accounted for approximately 8%,
7% and 4% of consolidated net sales in fiscal years 2005, 2004 and 2003,
respectively.
At March 16, 2006, we had unfilled orders of approximately $7,085,000
compared with approximately $5,478,000 at March 16, 2005. The increase in our
order backlog is primarily due to additional orders that have been received for
shipment during our spring selling season, particularly for certain new belt and
jewelry merchandise programs that were introduced during the fall of 2005. These
increases were offset in part by a decrease in orders for our personal leather
goods collections due mainly to unusually large orders that were received during
spring 2005 associated with the launch of new merchandise and packaging concepts
for one of our branded programs. In the ordinary course of business, the dollar
amount of unfilled orders at a particular point in time is affected by a number
of factors, including manufacturing schedules, timely shipment of goods, which,
in turn, may be dependent on the requirements of customers, and the timing of
placement by our customers of orders from year-to-year. Accordingly, a
comparison of backlog from period to period is not necessarily meaningful and
may not be indicative of future sales patterns or shipments.
Approximately 44 salespeople and district managers are engaged in the
sale of our products working out of sales offices located in New York, NY and
Atlanta, GA. In addition, at December 31, 2005 we sold certain of our products
through 8 company-owned factory outlet stores in 6 states.
Manufacturing
We no longer manufacture the products we sell, which are, instead,
sourced from third-party vendors. Historically, we manufactured and/or assembled
our costume jewelry products at our plant in Attleboro, Massachusetts and at the
facility of our former 65% owned subsidiary, Joyas y Cueros de Costa Rica, S.A.
("Joyas y Cueros") located in Cartago, Costa Rica. However, we discontinued
manufacturing operations at Joyas y Cueros and in Massachusetts in 2001 and
2000, respectively. In addition, during the fourth quarter of fiscal 2003, we
ceased manufacturing operations at our former belt and suspender manufacturing
facility located in Norwalk, Connecticut. We refer to Footnote I of the Notes to
Consolidated Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations for additional information
concerning the cessation of the Norwalk manufacturing operations.
We purchase substantially all of our small leather goods, principally
wallets, from a single supplier in India. Unexpected disruption of this source
of supply could have an adverse effect on our small leather goods business in
the short-term depending upon our inventory position and the seasonal shipping
requirements at that time. However, we have identified alternative sources for
small leather goods which could be utilized within several months. We also
purchase
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finished belts and other accessories from a number of suppliers in the United
States and abroad. We believe that alternative suppliers are readily available
for substantially all such purchased items.
Advertising Media and Promotion
Substantial expenditures on advertising and promotion are an integral
part of our business. We spent approximately 3.8% of net sales on advertising
and promotion in 2005, of which approximately 2.1% was for advertising media,
principally in national consumer magazines, trade publications, newspapers,
radio and television. The remaining expenditures were for cooperative
advertising, fixtures, displays and point-of-sale materials.
Competition
The businesses in which we are engaged are highly competitive. We
compete with, among others, Cipriani, Salant, Randa Accessories, Fossil, Tandy
Brands Accessories, Inc., and retail private label programs in men's belts;
Tandy Brands Accessories, Inc., Cipriani, Fossil, Mundi-Westport, Randa
Accessories and retail private label programs in small leather goods; and David
Donahue in men's jewelry. Our ability to continue to compete will depend largely
upon our ability to create new designs and products, to meet the increasing
service and technology requirements of our customers and to offer consumers high
quality merchandise at popular prices.
Patents, Trademarks and Licenses
We own the rights to various patents, trademarks, trade names and
copyrights and have exclusive licenses in the United States and, in some
instances, in certain other jurisdictions, for the distribution and sale of
men's leather accessories and costume jewelry under the names "Kenneth Cole",
"Tommy Hilfiger", "Nautica", "Geoffrey Beene", "Claiborne", "Guess?", "Ted
Baker", "City of London", and "Field & Stream". We also hold exclusive licenses
to distribute men's leather accessories under the name "Pierre Cardin" and an
exclusive license to distribute jewelry under the name "Donald Trump." Our
"Kenneth Cole", "Tommy Hilfiger", "Nautica", "Geoffrey Beene", "Claiborne",
"Guess?", "Ted Baker", "City of London", "Pierre Cardin", "Donald Trump" and
"Field & Stream" licenses collectively may be considered material to our
business. The "Pierre Cardin", "Geoffrey Beene", "Claiborne" and "Tommy
Hilfiger" agreements also permit us to distribute and sell suspenders. We do not
believe that our business is materially dependent on any one license agreement.
The "City of London" license provides for percentage royalty payments not
exceeding 5% of net sales. The "Pierre Cardin", "Field & Stream" and "Claiborne"
licenses provide for percentage royalty payments not exceeding 6% of net sales.
The "Geoffrey Beene", "Tommy Hilfiger" and "Nautica" licenses provide for
percentage royalty payments not exceeding 7% of net sales. The "Kenneth Cole",
"Ted Baker" and "Guess?" licenses provide for percentage royalty payments not
exceeding 8% of net sales. The "Donald Trump" license provides for percentage
royalty payments not exceeding 9% of net sales. Our license agreements generally
specify minimum royalties and minimum advertising and promotion expenditures.
The "Guess?" jewelry and "Field & Stream" licenses expire December 31, 2006; our
"Tommy Hilfiger" license expires December 31, 2007; the "Claiborne", "Geoffrey
Beene", "Guess?" personal leather goods and "City of London" licenses expire
June 30, 2008; the "Nautica", "Kenneth Cole", "Ted Baker" and "Donald Trump"
licenses expire December 31, 2008; and our "Pierre Cardin" licenses expire
December 31, 2009. We regularly assess the status of our license agreements and
anticipate renewing those contracts scheduled to expire in 2006, subject to the
negotiation of terms and conditions mutually satisfactory to our licensors and
us.
Employees
We have approximately 292 employees, of whom approximately 143 are
warehouse and distribution employees. None of these employees are represented by
labor unions and we believe our relationship with our employees to be
satisfactory.
ITEM 1A. RISK FACTORS.
The following risk factors should be read carefully in connection with
your evaluation of our business. Any of the following risks could materially and
adversely affect our business, operating results or financial condition, and
could cause actual results or events to differ materially from those
anticipated.
RISKS RELATING TO THE INDUSTRY IN WHICH WE COMPETE
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OUR BUSINESS IS INFLUENCED BY GENERAL ECONOMIC CONDITIONS.
We have no control over the economy in general or upon the overall
level of consumer spending. Our customers generally anticipate and respond to
adverse changes or perceptions of changes in economic conditions by limiting or
canceling purchases of our products in order to reduce their inventories.
Similarly, negative economic trends, a depression and other similar events may
depress the level of consumer confidence and consumer spending in general, and
on our products specifically. As a result, any substantial deterioration in
general economic conditions or trends, increases in energy costs, interest
rates, conflicts around the world, acts of nature, or political or terrorist
events that weaken consumer confidence and spending could reduce our sales and
adversely affect our financial condition and results of operations.
WE FACE INTENSE COMPETITION IN THE MEN'S' ACCESSORIES INDUSTRY.
The men's' accessories business is highly competitive. We compete with
a large number of both domestic and foreign manufacturers, designers and
distributors of branded products, as well as private label programs for
retailers. Many of these manufacturers, designers, distributors and retailers
may be larger and have greater resources than we do. We believe that our ability
to effectively compete depends on a number of factors, including the following:
o maintaining and expanding our group of highly recognizable licensed brands; o
designing and developing products and packaging that have strong and broad
appeal to consumers; o pricing products appropriately and providing strong
marketing support for them; o meeting the service and technology interface
requirements of our customers; o anticipating and responding to changing
customer tastes in a timely manner; and o obtaining access to retail outlets and
sufficient floor space for our products.
WE NEED TO MONITOR AND MEET CONTINUALLY CHANGING CONSUMER PREFERENCES.
Consumer tastes and fashion trends change rapidly. We believe that our
success depends in large part on anticipating and responding to changing
consumer tastes and fashion trends in a timely manner. If we misjudge the market
for our product lines, we may be faced with a significant amount of unsold
products, or a large number of returns of products from our customers, which in
each case could have an adverse effect on us.
RISKS RELATING TO OUR BUSINESS
WE SOURCE ALL OF OUR PRODUCTS.
We no longer operate manufacturing facilities, and as a result, we rely
on third parties for the manufacture of our products. The failure of these
parties to fulfill orders, deliver goods in a timely manner, or increase prices
could all adversely affect our business. In addition, we purchase substantially
all of our small leather goods, principally wallets, from a single supplier.
While we have identified alternative suppliers of these goods which we believe
we would be able to utilize within several months, unexpected disruption of our
present source of supply could have an adverse effect on our small leather goods
business in the short-term depending upon our inventory position and on seasonal
shipping requirements at that time.
WE FACE RISKS INHERENT WITH SOURCING OUR PRODUCTS OVERSEAS.
Substantially all of our products are manufactured outside the United
States, and our business is subject to risks of doing business abroad. The costs
of importing products may be adversely affected by taxes, tariffs, customs,
duties and transportation costs, whether as a result of higher prices for energy
or other commodities. Our ability to continue to purchase our products overseas
is also subject to political instability in countries where our contractors and
suppliers are located, and the imposition of regulation and quotas relating to
imports, labor disputes, severe weather, or increased homeland security
requirements in the United States and in other countries. We also import a
substantial portion of our products from China. The recent outbreaks of Avian
flu, or a recurrence of SARS, having an impact on China or other countries where
our vendors are located could also have a negative impact on their operations,
including delaying or preventing shipments. The occurrence of any of these
events, which are beyond our control and we are unable to predict,
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could adversely affect our ability to import our products at current or
increased levels or at all from certain countries and could harm our business.
OUR LICENSES ARE IMPORTANT TO US.
We are the licensee under a number of licenses with both domestic and
foreign designers and others. A substantial portion of our revenues derive from
the sale of products under trademarks and tradenames which we license from third
parties, and we believe that licenses as a whole are material to our operations.
While we believe we can replace our licenses with others that would provide us
with the ability to sell product lines under new trademarks and tradenames, the
loss of our licenses, or any number of them comprising a significant portion of
our business, could have an adverse effect, at least in the short-term, on the
results of our operations.
WE ARE DEPENDENT ON A LIMITED NUMBER OF CUSTOMERS FOR A LARGE PORTION OF OUR
REVENUES.
Net sales to our four largest customers totaled 49% of our total net
sales in fiscal 2005 and totaled 44% of our total net sales in fiscal 2004.
Whether because of economic conditions, a change of the focus of products they
purchase or other strategic shifts in their business, their financial
difficulties, or otherwise, a decision by one of our largest customers to reduce
its purchases from us, to reduce floor space or advertising of our products, to
require increased allowances or reduced prices, or to take other action, may
adversely affect our business and financial condition. Further, consolidation in
the retail industry, such as the business combination of two of our customers,
Federated Department Stores, Inc. and May Department Stores Company, Inc., may
result in store closures; increased customer leverage over its suppliers
resulting in lower product prices or margins; tighter inventory management
resulting in lower retail inventory levels and decreased orders to us; and a
greater potential exposure to credit risk, all of which may adversely affect our
business.
OUR FAILURE TO RETAIN OUR SENIOR MANAGEMENT AND OTHER KEY PERSONNEL COULD
ADVERSELY AFFECT OUR BUSINESS.
Our business depends in large part on the personal efforts and
abilities of our senior executive officers, particularly John Tulin, our
President and Chief Executive Officer, as well as other key personnel. If any of
these individuals become unable or unwilling to continue in their present
positions, our business could be adversely affected.
WE HAVE A RECENT HISTORY OF UNPROFITABLE OPERATIONS.
From fiscal 2000 through fiscal 2003, we were not profitable. Starting
in 2000 we closed our domestic manufacturing plants and began moving all of the
manufacturing of our products overseas. We also closed and terminated the lease
on our former South Norwalk, Connecticut facility, sold certain assets,
including those associated with our former women's division, substantially
reduced the number of our employees, and implemented numerous cost reduction
strategies, all in an effort to return Swank to profitability. Our efforts have
been successful to date, and we were profitable in fiscal 2004 and we increased
our profitability in 2005. However, our financial condition remains somewhat
leveraged, and our financial flexibility to respond to developments in our
industry may be less than that of certain of our competitors. We believe our
continued profitability depends, at least in part, on our ability to effectively
monitor and control our cost structure consistent with anticipated revenue
levels.
OUR REVOLVING CREDIT FACILITY CONTAINS FINANCIAL AND OTHER COVENANT
RESTRICTIONS.
Our revolving credit facility contains financial and operating
covenants, including a minimum cash flow covenant, as well as certain
limitations on our ability to sell all or substantially all of our assets and
engage in mergers, consolidations and certain acquisitions. In addition,
advances under the revolving credit facility are subject to borrowing base
requirements based on our inventory and accounts receivable levels. Many of
these covenants are customary for companies like ours which borrow money from
banks and financial institutions. Failure to comply with any of the covenants,
which could result from, among other things, changes in our results of
operations or changes in general economic conditions, might result in our lender
asking for the repayment of its loans to us sooner than is currently
contemplated by our agreement.
RISKS RELATING TO OUR COMMON STOCK
THERE MAY BE A LIMITED TRADING MARKET FOR OUR STOCK.
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More than 50% of the issued and outstanding shares of our Common Stock
are presently held by The New Swank, Inc. Retirement Plan, and another
approximately 10% by our executive officers and directors. In addition, shares
of our Common Stock are not listed on any securities exchange or on an automated
dealer quotation system and, instead, we rely on the interest of securities
dealers in making a market in our shares. Accordingly, from time to time there
may be a limited trading market for our shares.
PROVISIONS IN OUR CERTIFICATE OF INCORPORATION, BY-LAWS, DELAWARE LAW AND OUR
"POISON PILL" MAY DELAY OR PREVENT AN ACQUISITION OF SWANK BY A THIRD PARTY.
Our certificate of incorporation and by-laws and Delaware law contain
provisions that could make it more difficult for a third party to acquire us.
Our certificate of incorporation permits the Board of Directors, to establish,
and to set the preferences, rights and other terms of various series of
preferred stock (commonly known as "blank check preferred"). Accordingly, the
Board could establish a series of preferred stock that could have the effect of
delaying, deferring or preventing a transaction with, or a change of control of,
Swank. In addition, under our by-laws, the Board of Directors is classified into
three classes, with each class being elected for a term of three years.
Accordingly, with only one-third of the members of the Board being elected at
any annual meeting of stockholders, any third party wanting to change the
composition of the Board of Directors through a proxy contest would need to do
so over time.
On October 26, 1999, we declared a dividend distribution to buy shares
of a special series of preferred stock to the holder of each outstanding share
of our common stock. The rights may be exercised if, with certain exceptions, a
person or group acquires or obtains the right to acquire 15% or more of our
common stock. Each right, if not redeemed by the Company, would entitle the
holder of each share of our common stock to buy one one-hundredth of a share of
preferred stock and, in certain circumstances, shares of our common stock at a
substantial discount. While this "poison pill" need not prevent us from entering
into consensual transactions, it may have the effect of preventing or delaying
unsolicited acquisition or takeover proposals.
In addition, Delaware law contains certain provisions that could
prevent the acquisition of the Company by a third party if the transaction is
not approved by the Board of Directors, even if the transaction would be
beneficial to most stockholders. Section 203 of the Delaware General Corporation
Law generally prohibits stockholders owning in excess of 15% of the Company's
outstanding voting stock from merging or combining with the Company for a period
of time after acquiring such shares without the approval of the Board of
Directors.
* * * * *
This list of risk factors, together with the note set forth above Part
I of this Form 10-K under the caption "Forward Looking Statements" is not
exhaustive. For example, there can be no assurance that we have correctly
identified and appropriately assessed all factors affecting our business, or
that the publicly available and other information with respect to these matters
is complete and correct. Additional risks and uncertainties not presently known
to us or that we currently believe to be immaterial also may adversely impact
our business. Should any risks or uncertainties develop into actual events,
these developments could have material adverse effects on our business,
financial condition, and results of operations. We assume no obligation (and
specifically disclaim any such obligation) to update these Risk Factors or any
other forward-looking statements contained in this Form 10-K to reflect actual
results, changes in assumptions or other factors affecting such forward-looking
statements.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not Applicable.
ITEM 2. PROPERTIES.
Our main administrative offices and distribution center are presently
located in a leased warehouse building containing approximately 242,000 square
feet in Taunton, Massachusetts. This facility is used in the distribution of
substantially all of our products. In addition, one of our factory stores is
located within the Taunton location. The lease for these premises expires in
2011. The warehouse facility in Taunton is equipped with modern machinery and
equipment, substantially all of which is owned by us, with the remainder leased.
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Our executive offices and national, international, and regional sales
offices are located in leased premises at 90 Park Avenue, New York, New York. On
July 23, 2001 we entered into a sublease agreement with K&M Associates, L.P. for
approximately 43% of our space under lease at 90 Park Avenue. The lease and
sublease of such premises both expire in 2010. A regional sales office is also
located in leased premises in Scottsdale, Arizona. The lease for the Scottsdale
office expires in 2006. Collectively, these two offices contain approximately
22,000 square feet.
We also own a three-story building containing approximately 193,000
square feet on a seven-acre site in Attleboro, Massachusetts. Until 2000, this
facility had been used to manufacture and/or assemble men's and women's costume
jewelry products and, until December 2004, housed our main administrative
offices, which were re-located to Taunton, MA.
Through fiscal 2003, men's belts and suspenders were manufactured in
leased premises located in Norwalk, Connecticut consisting of a manufacturing
plant and office space in a 126,500 square foot building, located on
approximately seven and one-half acres. In 2003, we ceased manufacturing
operations in Norwalk and the lease for these premises was terminated during the
first quarter of fiscal 2004.
We also presently operate seven factory outlet store locations in
addition to the outlet store in Taunton, Massachusetts as described above. These
stores have leases with terms not in excess of three years and contain
approximately 13,000 square feet in the aggregate.
We believe our properties and machinery and equipment are adequate for
the conduct of our businesses.
ITEM 3. LEGAL PROCEEDINGS.
(a) On June 7, 1990, we received notice from the United States
Environmental Protection Agency ("EPA") that we, along with fifteen others, had
been identified as a Potentially Responsible Party ("PRP") in connection with
the release of hazardous substances at a Superfund site located in
Massachusetts. This notice does not constitute the commencement of a proceeding
against us nor necessarily indicate that a proceeding against us is
contemplated. We, along with six other PRP's, have entered into an
Administrative Order by Consent pursuant to which, inter alia, we and they
undertook to conduct a remedial investigation/feasibility study (the "RI/FS")
with respect to the alleged contamination at the site.
The remedial investigation of the site has been completed and the EPA
has prepared its Record of Decision. The Massachusetts Superfund site is
adjacent to a municipal landfill that is in the process of being closed under
Massachusetts law. Once the EPA and the PRPs resolve an outstanding dispute
regarding certain oversight costs, the Company expects to receive confirmation
from the EPA that we have fulfilled our obligations under the Administrative
Order. In fiscal 2005, we withdrew from further participation in the PRP group.
It is unlikely that this matter will have a material adverse effect on our
operating results, financial condition or cash flows, and we believe that we
have adequately reserved for the potential costs associated with this site.
In September 1991, the Company signed a judicial consent decree
relating to the Western Sand and Gravel site located in Burrillville and North
Smithfield, Rhode Island. The consent decree was entered on August 28, 1992 by
the United States District Court for the District of Rhode Island. The most
likely scenario for remediation of the ground water at this site is through
natural attenuation, which will be monitored until 2017. Estimated cost of
remediation by natural attenuation to 2017 is approximately $1.5 million. Based
on current participation, our share of these costs is approximately $134,000. We
believe that this site will not result in any material adverse effect on the
Company's operating results, financial condition or cash flows based on the
results of periodic tests conducted at the site, and we believe we have
adequately reserved for the potential costs associated with this site.
(b) No material pending legal proceedings were terminated during the
three month period ended December 31, 2005.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Name Age Title
- ---- --- -----
John A. Tulin 59 President and Chief Executive Officer and Director
James E. Tulin 54 Senior Vice President - Merchandising and Director
Paul Duckett 65 Senior Vice President - Distribution and Retail Store Operations
Melvin Goldfeder 69 Senior Vice President - Special Markets Division
Jerold R. Kassner 49 Senior Vice President, Chief Financial Officer, Treasurer and Secretary
Eric P. Luft 50 Senior Vice President - Men's Division and Director
There are no family relationships among any of the persons listed
above or among such persons and the directors of the Company except that John A.
Tulin and James E. Tulin are brothers.
John A. Tulin has served as President and Chief Executive Officer since
October 1995. Mr. Tulin joined us in 1971, was elected a Vice President in 1974,
Senior Vice President in 1979 and Executive Vice President in 1982. He has
served as a director since 1975.
James E. Tulin has been Senior Vice President-Merchandising since
October 1995. For more than five years prior to October 1995, Mr. Tulin served
as a Senior Vice President. Mr. Tulin has been a director since 1985.
Paul Duckett has been Senior Vice President-Distribution and Retail
Store Operations since October 1995. For more than five years prior to October
1995, Mr. Duckett served as a Senior Vice President.
Melvin Goldfeder has been Senior Vice President-Special Markets
Division since October 1995. For more than five years prior to October 1995, Mr.
Goldfeder served as a Senior Vice President.
Jerold R. Kassner has been Senior Vice President, Chief Financial
Officer, Treasurer and Secretary since July 1999. Mr. Kassner joined the Company
in November 1988 and was elected Vice President and Controller in September
1997.
Eric P. Luft has been Senior Vice President-Men's Division since
October 1995. Mr. Luft served as a Divisional Vice President of the Men's
Products Division from June 1989 until January 1993, when he was elected a
Senior Vice President. Mr. Luft became a director in December 2000.
Each officer serves, at the pleasure of the Board of Directors, for a
term of one year and until his successor is elected and qualified.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) Our common stock, $.10 par value per share (the "Common Stock") is
traded in the over-the-counter market under the symbol SNKI. The following table
sets forth for each quarterly period during the last two fiscal years the high
and low bid prices for the Common Stock, as reported by Yahoo.com (which prices
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions).
2005 2004
------------------------------------------------------------------------------------------------------
Quarter HIGH LOW High Low
------------------------------------------------------------------------------------------------------
First $ 2.55 $ 1.25 $ .25 $ .16
Second 2.25 1.35 .31 .19
Third 1.70 1.13 1.02 .25
Fourth 1.60 1.10 1.30 .65
------------------------------------------------------------------------------------------------------
Number of Record Holders at February 28, 2006 - 1,200
Our loan agreement prohibits the payment of cash dividends on our
Common Stock (see "Management's Discussion and Analysis of Financial Condition
and Results of Operations"). We have not paid any cash dividends on our Common
Stock during the last two fiscal years and we have no current expectation that
cash dividends will be paid in the foreseeable future.
Except as previously reported, we did not issue any unregistered
securities during fiscal 2005.
(b) Not applicable.
(c) During the three-months ended December 31, 2005, we did not
repurchase any shares of our Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following table provides selected consolidated financial data of
the Company as of and for each of the years in the five-year period ended
December 31, 2005 and should be read in conjunction with our consolidated
financial statements and notes thereto included elsewhere in this annual report
on Form 10-K.
The selected consolidated financial data as of December 31, 2005 and
2004 and for each of the three years in the period ended December 31, 2005 have
been derived from our consolidated financial statements which are included
elsewhere in this annual report on Form 10-K and were audited by BDO Seidman,
LLP, an independent registered public accounting firm. The selected consolidated
financial data as of December 31, 2003 and 2002 and for the year ended December
31, 2002 have been derived from our consolidated financial statements not
included herein, which were audited by BDO Seidman, LLP. The selected
consolidated financial data as of and for the year ended December 31, 2001 have
been derived from our consolidated financial statements not included herein,
which were audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm.
10
SWANK, INC.
FINANCIAL HIGHLIGHTS
For each of the Five Years Ended December 31
(In thousands, except share and per share data) 2005 2004 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA:
- -------------------------------------------------------------------------------------------------------------------------------
Net sales $97,914 $93,287 $94,845 $100,011 $87,812
- -------------------------------------------------------------------------------------------------------------------------------
Cost of goods sold - operations 65,048 62,567 67,123 71,857 61,831
Cost of goods sold - restructuring - - 1,360 - -
- -------------------------------------------------------------------------------------------------------------------------------
Total cost of goods sold 65,048 62,567 68,483 71,857 61,831
- -------------------------------------------------------------------------------------------------------------------------------
Gross profit 32,866 30,720 26,362 28,154 25,981
Selling and administrative expenses 28,036 28,256 27,540 30,618 30,397
(Gain) loss on lease termination, restructuring expenses,
and other (75) (728) 280 - 473
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 4,905 3,192 (1,458) (2,464) (4,889)
Interest expense, net 1,261 1,621 1,162 1,144 1,422
Other (income) - - - (640) -
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 3,644 1,571 (2,620) (2,968) (6,311)
Provision (benefit) for income taxes 30 - - (2,594) (267)
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 3,614 1,571 (2,620) (374) (6,044)
- -------------------------------------------------------------------------------------------------------------------------------
Discontinued operations:
(Loss) from discontinued operations, net of income tax
(benefit) of $(505) - - - - (3,717)
Income (loss) on disposal of discontinued operations, net
of income tax provision (benefit) of $0 and $(810) - - - 300 (5,957)
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations - - - 300 (9,674)
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $3,614 $1,571 $(2,620) $(74) $(15,718)
- -------------------------------------------------------------------------------------------------------------------------------
Share and per share information:
Weighted average common shares outstanding - basic 5,620,160 5,522,490 5,522,490 5,522,490 5,522,490
- -------------------------------------------------------------------------------------------------------------------------------
Basic net income (loss) per common share:
Continuing operations $.64 $.28 $(.47) $(.06) $(1.10)
Discontinued operations - - - .05 (1.75)
- -------------------------------------------------------------------------------------------------------------------------------
Basic net income (loss) per common share $.64 $.28 $(.47) $(.01) $(2.85)
- -------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding - diluted 6,160,492 6,007,594 5,522,490 5,522,490 5,522,490
- -------------------------------------------------------------------------------------------------------------------------------
Diluted net income (loss) per common share:
Continuing operations $.59 $.26 $(.47) $(.06) $(1.10)
Discontinued operations - - - .05 (1.75)
- -------------------------------------------------------------------------------------------------------------------------------
Diluted net income (loss) per common share $.59 $.26 $(.47) $(.01) $(2.85)
BALANCE SHEET DATA:
- -------------------------------------------------------------------------------------------------------------------------------
Current assets $27,383 $26,703 $28,811 $30,390 $34,327
Current liabilities 17,446 19,562 22,077 20,591 25,357
Net working capital 9,937 7,141 6,734 9,799 8,970
Property, plant and equipment, net 475 499 1,469 2,056 2,581
Total assets 31,321 30,778 34,035 35,590 43,211
Capital expenditures 120 319 62 187 660
Depreciation and amortization 233 351 711 759 904
Long-term obligations 5,817 6,669 9,018 9,464 12,213
Stockholders' equity 8,058 4,547 2,940 5,535 5,641
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
We are currently engaged in the importation, sale and distribution of
men's belts, leather accessories, suspenders, and men's jewelry. Our products
are sold both domestically and internationally under a broad assortment of
brands including both licensed tradenames and private labels. We distribute our
merchandise principally through department stores and through a wide variety of
specialty stores and mass merchandisers. We also operate a number of factory
outlet stores primarily to distribute excess and out of line merchandise.
Our net sales in 2005 increased 5.0% to $97,914,000 compared to
$93,287,000 in 2004. The increase was mainly due to higher shipments of our
jewelry and belt merchandise offset in part by a reduction in net sales for our
personal leather goods lines. Gross profit increased 7.0% to $32,866,000 from
$30,720,000 in 2004 and, as a percentage of net sales, increased to 33.6% from
32.9% last year. The increase in gross profit was due primarily to a more
favorable sales mix resulting from the growth in our relatively high-margin
jewelry net sales. Selling and administrative expenses during 2005 were
approximately even with 2004 as increases in certain merchandising and
distribution costs associated with higher net sales were offset by reductions in
professional fees and other administrative costs.
Net income for the year ending December 31, 2004 included a net expense
of $728,000 consisting of a net gain of $1,090,000 from the termination of a
real estate lease that was offset in part by a $362,000 asset impairment charge
in connection with our former jewelry manufacturing facility and administrative
offices in Attleboro, Massachusetts. During the fourth quarter of 2004, we
relocated our administrative staff to our Taunton, Massachusetts distribution
facility and are presently assessing our options with regard to alternative uses
or the disposition of the Attleboro property. The net gain on the lease
termination and the Attleboro fixed asset impairment charges were both recorded
separately in our consolidated statement of operations in 2004. Also during
2004, we recorded an expense of $589,000, which was included in interest
expense, in connection with the write-off of certain deferred financing costs,
early termination fees and other charges related to the termination of our
revolving credit agreement with a prior lender (see "Restructuring Charges"
below).
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management believes that the accounting policies discussed below are
important to an understanding of the Company's financial statements because they
require management to exercise judgment and estimate the effects of uncertain
matters in the preparation and reporting of financial results. Accordingly,
management cautions that these policies and the judgments and estimates they
involve are subject to revision and adjustment in the future. While they involve
judgment, management believes the other accounting policies discussed in Note B
to the consolidated financial statements are also important in understanding the
statements.
Revenue Recognition
Net sales are generally recorded upon shipment, provided there exists
persuasive evidence of an arrangement, the fee is fixed or determinable and
collectability of the related receivable is reasonably assured. The Company
records revenues net of sales allowances, including cash discounts, in-store
customer allowances, cooperative advertising, and customer returns, which are
all accounted for in accordance with Statement of Financial Accounting Standards
No. 48, "Revenue Recognition When Right of Return Exists," and Emerging Issues
Task Force Issue No. 01-09, "Accounting for Consideration Given by a Vendor to a
Customer or Reseller of the Vendor's Products". Sales allowances are estimated
using a number of factors including historical experience, current trends in the
retail industry and individual customer and product experience. The Company
reduces net sales and cost of sales by the estimated effect of future returns of
current period shipments. Each spring upon the completion of processing returns
from the preceding fall season, the Company records adjustments to net sales in
the second quarter to reflect the difference between customer returns of prior
year shipments actually received in the current year and the estimate used to
establish the allowance for customer returns at the end of the preceding fiscal
year.
12
Allowance for Doubtful Accounts
The Company determines allowances for doubtful accounts using a number of
factors including historical collection experience, general economic conditions
and the amount of time an account receivable is past its payment due date. In
certain circumstances where it is believed a customer is unable to meet its
financial obligations, a specific allowance for doubtful accounts is recorded to
reduce the account receivable to the amount believed to be collectable.
Environmental Costs
In accordance with AICPA Statement of Position 96-1, "Environmental
Remediation Liabilities", environmental expenditures that relate to current
operations are expensed or capitalized, as appropriate. Expenditures that relate
to an existing condition caused by past operations, and which do not contribute
to current or future revenue generation, are expensed. Liabilities are recorded
when environmental assessments and/or remedial efforts are probable and the
costs can be reasonably estimated. Generally, adjustments to these accruals
coincide with the completion of a feasibility study or a commitment made by us
to a formal plan of action or other appropriate benchmark (see Note I to the
consolidated financial statements for additional discussion).
Inventory and Reserves
Inventories are stated at the lower of cost (principally average cost which
approximates FIFO) or market. Our inventory is somewhat fashion oriented and, as
a result, is subject to risk of rapid obsolescence. We believe that our
inventory has been adequately adjusted, where appropriate, and that we have
adequate channels to dispose of excess and obsolete inventory.
Income Taxes
The Company determines the valuation allowance for deferred tax assets
based upon projections of taxable income or loss for future tax years in which
the temporary differences that created the deferred tax asset are anticipated to
reverse, and the likelihood that the Company's deferred tax assets will be
recovered.
2005 VS. 2004
NET SALES
Net sales for the year ended December 31, 2005 increased by $4,627,000 or
5.0% compared to 2004. The increase was mainly due to increases in net sales for
both our men's jewelry and belt merchandise collections offset in part by
decreased net sales of personal leather goods items. During 2005, our jewelry
net sales increased 38.2% compared to 2004, as we were able to capitalize on
menswear fashion trends that continued to emphasize a more dressy look,
including French cuff shirts and related accessories. Jewelry net sales
increased in virtually every brand and distribution channel, and we launched
several new merchandise programs during the year. Net sales of our belt
merchandise rose 7.3% in 2005, primarily due to a number of new branded and
private label merchandise programs for certain department and specialty store
retailers that were launched during the fall selling season, as well as
decreased customer returns. The increase in belt net sales during 2005 was also
due in part to higher net sales of our "Kenneth Cole" branded belt merchandise
and increased net sales of both new and existing private label merchandise
collections to certain major customers.
Personal leather goods net sales decreased 11.7% in 2005 compared to 2004.
The decrease was primarily due to the loss of a certain merchandise program for
one of our chain store customers. Exclusive of this loss, net sales for our
personal leather goods lines would have declined 1.5%. Increased shipments for
our "Guess?", "Geoffrey Beene", and "Pierre Cardin" merchandise collections were
generally offset by reductions in certain other branded and private label
programs sold mainly to department store customers.
13
Net sales to international customers increased 13.1% during 2005 due mainly
to higher shipments of belt and personal leather goods merchandise. Export net
sales accounted for approximately 8% of our total net sales during 2005 compared
to approximately 7% in 2004.
Net sales in both 2005 and 2004 were favorably affected by the annual
returns adjustment made during each year's second quarter. Each month, we reduce
net sales and cost of sales by the estimated effect of future returns of current
period shipments. Each spring upon the completion of processing returns from the
preceding fall season, we record adjustments to net sales in the second quarter
to reflect the difference between customer returns of prior year shipments
actually received in the current year and the estimate used to establish the
allowance for customer returns at the end of the preceding fiscal year. These
adjustments increased net sales by $814,000 and $1,703,000 for the twelve month
periods ended December 31, 2005 and 2004, respectively. Our actual returns
experience during both the spring 2005 and spring 2004 seasons was better than
anticipated compared to the reserves established at December 31, 2004 and
December 31, 2003, respectively, principally due to lower than expected customer
returns for men's leather goods and belts. The reserve at December 31, 2004
assumed additional returns would be received during the spring 2005 season in
connection with the launch of a new personal leather goods program. While actual
returns for this merchandise category did increase 58% during the spring 2005
season compared to the prior year, returns were less than originally anticipated
due to heavier in-store promotional expenditures that accelerated retail sales
of the existing merchandise. We established our reserve for returns at December
31, 2004 based on our estimates of merchandise to be received during the spring
2005 season which was generally shipped to retailers for the 2004 fall and
holiday selling seasons.
GROSS PROFIT
Gross profit for the year ended December 31, 2005 increased by
$2,146,000 or 7.0% to $32,866,000 compared to the prior year's gross profit of
$30,720,000. Gross profit expressed as a percentage of net sales in 2005 was
33.6% compared to 32.9% in 2004.
The increase in gross profit both in dollars and as a percentage of net
sales during 2005 was due to an increase in relatively high-margin jewelry net
sales, offset in part by lower net sales and initial markups for our personal
leather goods lines, higher inventory-related costs for belts, and increased
merchandise display expenditures. In 2005, jewelry net sales accounted for
approximately 17% of total company net sales compared to approximately 13% in
2004. Provisions for in-store markdown and cooperative advertising expenditures,
which are included in our net sales, generally increased during 2005 reflecting
variable costs associated with certain new business opportunities. However,
these costs were partially offset by a reduction in the provision for customer
returns (see above "Net Sales" discussion).
The reduction in initial markup for personal leather goods was mainly due
to an adverse sales mix that led to an increase in net sales for certain
lower-margin merchandise assortments and a decrease in others. Inventory-related
costs for belts increased during 2005 mainly due to year-end markdowns taken on
discontinued and excess inventory. We routinely assess our on-hand inventory
position and record valuation adjustments as appropriate.
Royalty charges associated with the Company's license agreements increased
6.1% in 2005 but were unchanged expressed as a percentage of net sales. The
increase in dollars was due to higher net sales of merchandise sold under
licensed tradenames and in certain circumstances, increases in our contractual
minimum royalty obligations.
Included in gross profit are annual second quarter adjustments to
record the variance between customer returns of prior year shipments actually
received in the current year and the allowance for customer returns which was
established at the end of the preceding fiscal year. The adjustment to net sales
recorded in the second quarter described above resulted in a favorable
adjustment to gross profit of $569,000 and $911,000 for the years ended December
31, 2005 and 2004, respectively.
SELLING, ADMINISTRATIVE, AND OTHER INCOME AND EXPENSE
Selling and administrative expenses for the year ended December 31, 2005
decreased $220,000, or less than 1%, compared to the prior year. Selling and
administrative expense expressed as a percentage of net sales declined to 28.6%
from 30.3% in 2004. The decrease in our selling and administrative expenses was
due to lower professional fees, reduced administrative compensation and fringe
benefit costs, and lower telecommunications and software licensing and
maintenance
14
expenses, all offset in part by higher product development and merchandising
costs and increased warehouse, shipping, and other variable expenses associated
with the increase in net sales. The decrease in professional fees during 2005
reflects unusually high costs that were incurred during 2004 in connection with
the negotiation and closing of a new revolving credit agreement and other
financing-related activities.
Selling expenses increased by $1,081,000, or 5.4%, while administrative
expenses decreased by $1,301,000, or 15.8%, both as compared to the prior year.
Expressed as a percentage of net sales, selling expenses totaled 21.6% and 21.5%
for fiscal 2005 and 2004, respectively, and administrative expenses totaled 7.1%
and 8.8% for fiscal 2005 and 2004, respectively. The increase in selling expense
as a percentage of net sales was principally due to the increase in product
development and variable sales costs, offset in part by the effect of higher net
sales. The decrease in administrative expense as a percentage of net sales was
due mainly to higher net sales.
Our license agreements also generally include minimum advertising and
promotional spending requirements. Advertising and promotional costs charged to
selling expense in support of our men's accessories business, exclusive of
cooperative advertising and display expenditures (which are included in net
sales and cost of sales, respectively), totaled 2.1% of net sales for the year
ended December 31, 2005 compared to 2.6% in 2004.
GAIN/LOSS ON LEASE TERMINATION, RESTRUCTURING EXPENSES AND OTHER
During the first quarter of 2005, we paid the landlord of our former
Norwalk, Connecticut belt manufacturing facility $925,000 to settle all of our
remaining obligations under the lease termination agreement signed in 2004 (see
below). As a result of this prepayment, we recorded a gain of $75,000 during the
first quarter to recognize the difference between the amount of the liability
outstanding at December 31, 2004 under the termination agreement and the final
amount paid. The gain is stated separately in our consolidated statement of
operations.
During the first quarter of 2004, we entered into an agreement with the
landlord of our former Norwalk facility under which the lease for that facility
was terminated effective April 1, 2004. We paid $250,000 to the landlord upon
the signing of the termination agreement and an additional $250,000 on April 30,
2004. The agreement also provided for payments to the landlord of an additional
$1,000,000, in installments, during the period from January 2005 through March
2006. Our estimated aggregate remaining liabilities under the lease, had it not
been terminated, would have been approximately $2,586,000. During 2004, we
recorded a net gain of $1,090,000 consisting of a $3,348,000 gain associated
with the recognition of the remaining balance of a deferred gain on real estate
offset in part by $2,084,000 in costs related to the lease termination
(including $1,500,000 in lease termination costs, $455,000 in asset impairment
charges, and $129,000 for other plant closing expenses), and $174,000 in
severance and related expenses recorded in connection with employee
terminations. The net gain was stated separately in the Company's consolidated
statement of operations. As noted above, we settled all of the remaining
obligations under the termination agreement during the first quarter of 2005.
During the fourth quarter of 2004, we also recorded a non-cash impairment
charge of $362,000 in connection with certain fixed assets associated with our
former jewelry manufacturing facility and administrative offices located in
Attleboro, Massachusetts. We ceased our jewelry manufacturing operations in 2000
but until the fourth quarter of 2004, the Attleboro building continued to house
our main administrative offices. We consolidated our remaining administrative
staff into our Taunton, Massachusetts location and are currently assessing
alternative uses or the disposition of the Attleboro property. The impairment
charge was stated separately in our consolidated statement of operations for the
year ended December 31, 2004.
INTEREST EXPENSE
Net interest expense for the year ended December 31, 2005 decreased
$360,000 or 22.2% compared to 2004. The decrease was due to the expense of
$589,000 recorded in 2004 associated with the write-off of deferred financing
costs, early termination fees and other charges related to the termination of a
previous financing agreement. Exclusive of this charge, net interest expense
would have increased $229,000 or 22.2% compared to 2004. The increase is due to
higher average outstanding revolving credit balances during 2005 compared to
2004, as well as an increase of approximately 121 basis points in our average
borrowing rate (see "Liquidity and Capital Resources"). The increase in average
borrowings during 2005 was due to higher inventories required to support
increased sales, particularly during the fall selling season.
15
2004 VS. 2003
NET SALES
Net sales for the year ended December 31, 2004 decreased by $1,558,000
or 1.6% compared to 2003. Net sales of the Company's men's jewelry merchandise
increased 11.5% while net sales of personal leather goods and belts decreased
3.7% and 2.5%, respectively, all as compared to the prior year. The increase in
jewelry net sales is due to higher shipments of certain private-label
merchandise and increased sales of branded programs to department and chain
stores. Jewelry net sales have also increased due to improved trends generally
at retail for this classification resulting in an increased emphasis by
retailers on "giftable" merchandise. The decrease in personal leather goods net
sales was primarily due to a reduction in shipments of certain branded goods
sold mainly to department store customers, offset in part by a significant
increase in shipments of the Company's "Guess?" merchandise. The decrease in
men's belt net sales in 2004 was primarily due to lower sales of the Company's
"Geoffrey Beene" and "Pierre Cardin" merchandise offset in part by higher sales
associated with the Company's "Axcess by Claiborne" and "Kenneth Cole" goods.
During 2004, one of the Company's larger customers for "Pierre Cardin"
merchandise began placing more emphasis on alternative private-label brands.
During 2004, the Company also decreased its exposure to certain lower-margin
private-label businesses in favor of faster-growing, more profitable lines,
including its export business. The Company's international business overall
increased 84% during 2004 mainly due to higher shipments of "Guess?" branded
personal leather goods merchandise to existing customers and generally higher
shipments of all product categories, especially belts, to certain new export
accounts. Net sales to international customers accounted for approximately 7% of
the Company's total net sales during 2004 compared to less than 4% in 2003.
The decrease in belt and small leather goods shipments during 2004 was
offset in part by a reduction in sales dilution associated with reduced customer
returns. The Company's provision for customer returns decreased 38% in 2004
mainly due to a more stable product line and an increased emphasis on
promotional expenditures to promote retail sales. Cooperative advertising and
markdown expenditures increased approximately 9% during the year. The Company
regularly participates in promotional events designed to stimulate sales of its
merchandise or expand its market share within certain retail channels.
Net sales in 2004 and 2003 were also favorably affected by the annual
returns adjustment made in the second quarter. The Company reduces net sales and
cost of sales by the estimated effect of future returns of current period
shipments. Each spring upon the completion of processing returns from the
preceding fall season, the Company records adjustments to net sales in the
second quarter to reflect the difference between customer returns of prior year
shipments actually received in the current year and the estimate used to
establish the allowance for customer returns at the end of the preceding fiscal
year. These adjustments increased net sales by $1,703,000 and $2,069,000 for the
twelve month periods ended December 31, 2004 and 2003, respectively. The
Company's actual return experience during both the spring 2004 and spring 2003
seasons was better than anticipated compared to the reserves established at
December 31, 2003 and December 31, 2002, respectively, principally due to lower
than expected returns for men's personal leather goods and belts. Returns
generally declined during 2004 compared to the prior year as the Company
maintained a more stable merchandise assortment and increased its emphasis on
in-store promotions to promote the sale of slower-moving goods. The Company
established its reserve for returns as of December 31, 2003 based on its
estimate of merchandise to be received during the spring 2004 season which was
generally shipped to retailers for the 2003 fall and holiday selling seasons.
Although the Company anticipated a reduction in returns in establishing its
reserve at December 31, 2003, actual experience was more favorable than planned.
GROSS PROFIT
Gross profit for the year ended December 31, 2004 increased by
$4,358,000 or 16.5% to $30,720,000 compared to the prior year's gross profit of
$26,362,000. Gross profit expressed as a percentage of net sales for 2004 was
32.9% compared to 27.8% for 2003.
The increase in gross profit both in dollars and as a percentage of net
sales during 2004 was primarily due to higher margins for men's belts resulting
from the closure of the Company's Norwalk, Connecticut manufacturing facility in
2003 and subsequent re-sourcing of all merchandise requirements to third-party
vendors. The Company was able to significantly decrease its merchandise cost for
men's belts in 2004 through the elimination of certain manufacturing
inefficiencies and other fixed overhead expenses associated with the operation
of its Norwalk plant. During 2003, the Company recorded substantial labor and
overhead manufacturing variances at Norwalk in an attempt to adjust production
levels with anticipated
16
demand. The Company began significantly decreasing its production levels at
Norwalk during the third quarter of 2003 and ceased manufacturing operations
during the fourth quarter.
The improvement in 2004's gross profit was also due to lower inventory
control costs, primarily belt raw material obsolescence, and a more favorable
sales mix, principally an increase in net sales of men's jewelry which commands
a higher gross margin than the Company's other products, compared to the prior
year. Gross profit for the year ended December 31, 2003 included a charge of
$1,360,000 recorded during the fourth quarter in connection with the write-off
of the Company's remaining belt raw material inventory. Net sales of the
Company's men's jewelry merchandise increased 11.5% in 2004 compared to the
prior year and accounted for approximately 13.0% of consolidated net sales
compared to 11.5% in 2003. The Company's initial markup in 2004 on its men's
personal leather goods merchandise also increased during the year mainly due to
a reduction in net sales to lower-margin customers which was offset in part by
an increase in export net sales.
Provisions for customer returns, in-store markdown and cooperative
advertising allowances, and other sales dilution decreased to 10.2% of gross
shipments in 2004 from 11.3% last year. The reduction was mainly due to lower
customer returns offset in part by an increase in the provision for in-store
markdowns and cooperative advertising allowances. Royalty charges associated
with the Company's license agreements increased 6.8% in 2004 due to an increase
in net sales of certain branded merchandise and in some cases, increases in
contractual minimum royalty obligations.
Included in gross profit are annual second quarter adjustments to
record the variance between customer returns of prior year shipments actually
received in the current year and the allowance for customer returns which was
established at the end of the preceding fiscal year. The adjustment to net sales
recorded in the second quarter described above resulted in a favorable
adjustment to gross profit of $911,000 and $913,000 for the years ended December
31, 2004 and 2003 respectively.
SELLING, ADMINISTRATIVE, AND OTHER INCOME AND EXPENSE
Selling and administrative expenses for the year ended December 31,
2004 increased $716,000 or 2.6% compared to the prior year. Selling and
administrative expense expressed as a percentage of net sales increased to 30.3%
from 29.0% in 2003. Selling expenses increased by $544,000 or 2.8% while
administrative expenses increased by $172,000 or 2.1%, both as compared to the
prior year. Expressed as a percentage of net sales, selling expenses totaled
21.5% and 20.5% for 2004 and 2003, respectively, and administrative expenses
totaled 8.8% and 8.5% for 2004 and 2003, respectively.
The increase in selling expenses was primarily due to higher
advertising and promotional expenditures and increased product development costs
including purchased samples and other supplies, trade shows, and international
travel. These increases were offset in part by lower compensation and related
expenses, occupancy costs, and freight expense. The Company routinely makes
advertising and promotional expenditures to enhance its business and to support
the advertising and promotion activity of its licensors. The license agreements
to which the Company is a party also generally include minimum advertising and
promotional spending requirements. Advertising and promotional expenses in
support of the Company's men's accessories business, exclusive of cooperative
advertising and display expenditures, totaled 2.6% of net sales for the year
ended December 31, 2004 compared to 2.1% in 2003.
The increase in administrative expenses in 2004 was mainly due to
higher professional fees and bad debt expense offset in part by a reduction in
administrative compensation and related expense and occupancy costs. The
increase in professional fees was primarily due to activities associated with
the Company's revolving credit refinancing during the first half of 2004.
GAIN/LOSS ON LEASE TERMINATION, RESTRUCTURING EXPENSES AND OTHER
During the first quarter of 2004, the Company and the landlord of its
former Norwalk, Connecticut belt manufacturing facility entered into an
agreement under which the lease for that facility was terminated effective April
1, 2004. The Company paid $250,000 to the landlord upon the signing of the
termination agreement and $250,000 on April 30, 2004. The agreement also
provided for payments to the landlord of an additional $1,000,000, in
installments, during the period from January 2005 through March 2006. The
Company estimates its aggregate remaining liabilities under the lease, had it
not been terminated, would have been approximately $2,586,000. During the first
quarter, the Company recorded a net gain of $1,090,000 consisting of a
$3,348,000 gain associated with the recognition of the remaining balance of a
deferred gain on
17
real estate offset in part by $2,084,000 in costs related to the lease
termination (including $1,500,000 in lease termination costs, $455,000 in asset
impairment charges, and $129,000 for other plant closing expenses), and $174,000
in severance and related expenses recorded in connection with employee
terminations. The net gain was stated separately in the Company's consolidated
statement of operations. On January 3, 2005, the Company paid the landlord
$925,000 to settle all of its remaining obligations under the termination
agreement. The Company recorded a gain of $75,000 during the first quarter of
2005 to recognize the difference between the amount of the liability outstanding
at December 31, 2004 under the termination agreement and the final amount paid.
During the quarter ended December 31, 2004, the Company recorded a
non-cash impairment charge of $362,000 in connection with certain fixed assets
associated with its former jewelry manufacturing facility and administrative
offices in Attleboro, Massachusetts. Although the Company ceased jewelry
manufacturing operations in 2000, the Attleboro building continued to house the
Company's main administrative offices. In December 2004, the Company
consolidated its administrative staff into its Taunton, Massachusetts
distribution center and is currently assessing alternative uses or the
disposition of its Attleboro property.
During the fourth quarter of 2003, the Company ceased manufacturing
operations at its belt and suspender manufacturing facility in Norwalk,
Connecticut and began sourcing the balance of its belt and suspender merchandise
requirements from third-party vendors. As part of this transition, beginning
early in the third quarter the Company gradually began to reduce production
levels at Norwalk and subsequently reorganized its sourcing and production
organizations to better reflect the Company's new supply chain model. In
connection with the plant closure, the Company recorded and included in cost of
goods sold during the fourth quarter $1,360,000 in charges associated with
obsolete raw materials and supplies. In addition, the Company also recorded
during the fourth quarter a $280,000 restructuring charge associated with
severances and other expenses incurred in connection with the plant closure. The
restructuring charge is stated separately in the accompanying Consolidated
Statements of Operations for the year ending December 31, 2003. At December 31,
2003, $181,000 had been paid representing all of the severance liability payable
to the affected employees. An additional $99,000 was recorded as a reduction in
the cost basis of the machinery and equipment formerly used in the Company's
belt and suspender manufacturing operations, to reflect their estimated fair
market values.
INTEREST EXPENSE
Net interest expense for the year ended December 31, 2004 increased
$459,000 or 40% compared to 2003. The increase was primarily due to an expense
of $589,000 recorded during the quarter ended June 30, 2004 in connection with
the write-off of deferred financing costs, early termination fees and other
charges related to the termination of the Company's previous loan and security
agreement. Exclusive of this charge, net interest expense declined $130,000 or
11.2% compared to 2003. This decrease was due mainly to a reduction in average
outstanding revolving credit balances during 2004 compared to 2003 offset in
part by an increase of approximately 89 basis points in the Company's average
borrowing costs compared to the prior year (see "Liquidity and Capital
Resources").
PROVISION FOR INCOME TAXES
We recorded a current income tax provision of $30,000 in fiscal 2005
and recorded no income tax provision or benefit during 2004. In fiscal year
2000, we began recording a valuation reserve against all of our deferred tax
assets. During both 2005 and 2004, we utilized various deferred tax assets which
had been fully reserved to offset the majority of our tax provision. During
2003, we recorded a valuation reserve against the deferred tax assets generated
from our losses. The amount of the deferred tax asset considered realizable
could be adjusted in the future if estimates of taxable income or loss for
future years are revised based on our actual results.
PROMOTIONAL EXPENDITURES
We routinely make advertising and promotional expenditures to enhance
our business and support the advertising and promotion activity of our
licensors. Promotional expenditures included in selling and administrative
expenses decreased by $348,000 in 2005 compared to 2004 and increased by
$385,000 in 2004 compared to 2003. We also make expenditures in support of
cooperative advertising arrangements with certain of our retail customers. These
expenses, which are included in net sales, increased $512,000 and decreased
$398,000 in 2005 and 2004, respectively, both as compared to the corresponding
18
prior year amounts. Expenditures for merchandise displays and fixturing, which
we include in cost of sales, increased $473,000 in 2005 and decreased $77,000 in
2004 compared to the prior year amounts.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations in 2005 was $2,805,000 compared to
$4,107,000 in 2004. Cash was provided in 2005 principally by net income,
depreciation and amortization, and increases in accounts payable, accrued and
other liabilities. Cash provided during 2005 was offset in part by an increase
in inventories and other current assets and decreases in income taxes payable
and certain long term obligations and deferred credits. The increase in
inventory in 2005 was due to additional purchases we made during the fall season
to support higher sales levels, particularly for our jewelry and belt
merchandise lines. During 2004, inventory balances generally declined due to our
efforts to reduce excess inventories and better match our overall inventory
investment with projected sales and other working capital requirements
anticipated during that time period. The increase in accounts payable and other
current liabilities during 2005 was mainly due to increased inventory purchases,
particularly during the fall season, in response to higher sales.
Cash provided by investing activities was $61,000 in 2005 compared to
cash used of $266,000 during 2004. Cash was provided in 2005 by the proceeds of
life insurance policies used to fund certain employee benefits for retired
executives, offset in part by cash used for capital expenditures and premiums on
life insurance policies. During 2004, cash used for capital expenditures and
premiums on life insurance policies was offset partially by the proceeds
received from the sale of certain manufacturing equipment.
Cash used in financing activities was $3,094,000 in 2005 compared to
$3,835,000 in 2004. In both years, cash was used primarily for net repayments of
borrowings under our revolving credit agreements. During 2004, cash was also
used for closing and other costs associated with a new financing agreement,
offset in part by an increase in notes payable due to affiliates.
Working capital financing is provided primarily by cash flows from
operating activities and a $25,000,000 Loan and Security Agreement signed on
June 30, 2004 (the "2004 Loan Agreement") with Wells Fargo Foothill, Inc
("WFF"). The 2004 Loan Agreement, which replaced a previous loan and security
agreement with a prior lender, is collateralized by substantially all of our
assets, including accounts receivable, inventory, and machinery and equipment.
The 2004 Loan Agreement contains a $5,000,000 sublimit for the issuance of
letters of credit and also prohibits us from paying dividends, imposes limits on
additional indebtedness for borrowed money, and contains minimum monthly
earnings before interest, taxes, depreciation, and amortization requirements.
The terms of the 2004 Loan Agreement permit us to borrow against a percentage of
eligible accounts receivable and eligible inventory at an interest rate based on
Wells Fargo Bank, N.A.'s prime lending rate plus 1.25% or at WFF's LIBOR rate
plus 3.75%. We also are required to pay a monthly unused line fee of .5% of the
maximum revolving credit amount less the average daily balance of loans and
letters of credit outstanding during the immediately preceding month. As of
December 31, 2005, we were in compliance with all covenants contained within the
2004 Loan Agreement.
On April 1, 2004, Marshall Tulin, our former Chairman and a director of
the Company, loaned $350,000 to the Company pursuant to the terms of a
subordinated promissory note, as amended and restated as of June 30, 2004 (the
"Note") issued by the Company to Mr. Tulin. The Note is expressly subordinate in
right of payment to the Company's senior debt, has an original maturity of two
years and bears interest at an annual rate of 7.0%, payable quarterly. Under
certain circumstances, as more fully set forth in the Note, the original
maturity date of the Note will be extended to the earlier of December 31, 2009
or the date the 2004 Loan Agreement shall have been terminated and all
obligations of the Company under the 2004 Loan Agreement shall have been paid in
full in cash.
On November 12, 2005, Mr. Tulin died. John Tulin, President and a
director of the Company, and James Tulin, Senior Vice President and a director
of the Company, both sons of Marshall Tulin, are co-executors of Mr. Tulin's
estate (the "Estate"). The Estate has the option at any time to convert the
principal amount of the Note into shares of our common stock pursuant to a
formula based on the greater of the aggregate market value of the Company or its
going concern value as determined by an investment banking firm or nationally
recognized accounting firm, on the conversion date. The number of shares of our
common stock that may be issued under the Note may not exceed 20% of the then
issued and outstanding shares of our common stock on the conversion date. At our
option and subject to certain provisions of the Note, we may prepay the Note at
any time without premium or penalty.
19
During the normal course of business, we are theoretically exposed to
interest rate change market risk with respect to borrowings under our 2004 Loan
Agreement. The seasonal nature of our business typically requires that we build
inventories during the course of the year in anticipation of heavy shipments to
retailers during the upcoming holiday season. Accordingly, our revolving credit
borrowings generally peak during the third and fourth quarters. Therefore, a
sudden increase in interest rates (which under our 2004 Loan Agreement is
presently the prime rate plus a margin of 1.25% or LIBOR plus a margin of 3.75%)
may, especially during peak borrowing periods, have a negative impact on
short-term results. We are also theoretically exposed to market risk with
respect to changes in the global price level of certain commodities used in the
production of the Company's products.
In the ordinary course of business, we are contingently liable for
performance under letters of credit of approximately $223,000 at December 31,
2005. We are required to pay a fee quarterly equal to 2.0% per annum on
outstanding letters of credit.
The following chart summarizes our contractual obligations as of
December 31, 2005 (in thousands):
-------------------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------------------------------------------------------
TOTALLESS THAN 1 YEAR 1-3 YEARS 3-5 YEARS MORE THAN 5
YEARS
-------------------------------------------------------------------------------------------------------------------
Operating leases $ 10,177 $ 2,249 $4,234 $ 3,538 $ 156
-------------------------------------------------------------------------------------------------------------------
Minimum royalty and advertising
payments required under License
Agreements 23,680 7,877 15,053 750 -
-------------------------------------------------------------------------------------------------------------------
Postretirement benefits 4,689 449 939 965 2,336
-------------------------------------------------------------------------------------------------------------------
Deferred compensation 614 265 244 105 -
-------------------------------------------------------------------------------------------------------------------
TOTAL $ 39,160 $ 10,840 $ 20,470 $ 5,358 $ 2,492
-------------------------------------------------------------------------------------------------------------------
We are also a party to employment agreements with certain of our
executive officers that provide for the payment of compensation and other
benefits during the term of each executives' employment and, under certain
circumstances, for a period of time following their termination.
CAPITAL EXPENDITURES
We expect that cash from operations and availability under our 2004
Loan Agreement will be sufficient to fund our ongoing program of replacing aging
machinery and equipment to maintain or enhance operating efficiencies.
FORWARD LOOKING STATEMENTS
Certain of the preceding paragraphs contain "forward looking
statements" which are based upon current expectations and involve certain risks
and uncertainties. Under the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, readers should note that these statements may be
impacted by, and the Company's actual performance may vary as a result of, a
number of known and unknown risks and uncertainties that could cause actual
results, performance or achievements to differ materially from those described
or implied in the forward-looking statements, including, but not limited to,
general economic and business conditions, competition in the accessories
markets; potential changes in customer spending; acceptance of our product
offerings and designs; the level of inventories maintained by our customers; the
variability of consumer spending resulting from changes in domestic economic
activity; a highly promotional retail environment; any significant variations
between actual amounts and the amounts estimated for those matters identified as
our critical accounting estimates as well as other significant accounting
estimates made in the preparation of our financial statements; and the impact of
the hostilities in the Middle East and the possibility of hostilities in other
geographic areas as well as other geopolitical concerns. Accordingly, actual
results may differ materially from such forward-looking statements. You are
urged to consider all such factors. In light of the uncertainty inherent in such
forward-looking statements, you should not consider their inclusion to be a
representation that such forward-looking matters will be achieved. We assume no
obligation for updating any such forward-looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting such
forward-looking statements.
20
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 (revised 2004, "SFAS No. 123R"), Share-Based Payment. SFAS
123R addresses the accounting for share-based payments to employees, including
grants of employee stock options. Under the new standard, companies will no
longer be able to account for share-based compensation transactions using the
intrinsic method in accordance with APB Opinion No. 25, Accounting For Stock
Issued To Employees. Instead, companies will be required to account for such
transactions using a fair-value method and recognize the expense in the
consolidated statement of operations. Under the original guidance of SFAS No.
123R, we were to adopt the statement's provisions for the interim period
beginning after June 15, 2005. However, in April 2005, as a result of an action
by the Securities and Exchange Commission, companies were allowed to adopt the
provisions of SFAS No. 123R at the beginning of their fiscal year that begins
after June 15, 2005. Consequently, we will adopt SFAS No. 123R effective January
1, 2006.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB
107") regarding the SEC's interpretation of SFAS 123R and the valuation of
share-based payments for public companies. We are evaluating the requirements of
SFAS 123R and SAB 107 and expect that the adoption of SFAS 123R will not have a
material impact on our consolidated financial statements since all of our
outstanding stock options are currently vested. However, depending upon future
share-based payment activity, SFAS 123R could have a material impact on future
financial statements.
In May 2005, FASB issued SFAS No. 154, Accounting Changes and Error
Corrections: a Replacement of Accounting Principles Board (APB) Opinion No. 20
and FASB Statement No. 3 ("SFAS 154"). SFAS 154 requires that a voluntary change
in accounting principles be retrospectively applied to prior periods unless it
is impracticable to do so. Retrospective application would require the
application of a different accounting principle to previously issued financial
statements as if that principle had always been used. The requirements of SFAS
154 are effective for accounting changes made in fiscal years beginning after
December 15, 2005. We did not change nor are we considering a change in
accounting principles in fiscal 2006 and accordingly, we do not expect that the
adoption of SFAS 154 will have a significant impact on our financial condition,
results of operations, or cash flows.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs ("SFAS
151"), an amendment of Accounting Research Bulletin No. 43 ("ARB 43"), Chapter
4, Inventory Pricing. SFAS 151 amends previous guidance regarding treatment of
abnormal amounts of idle facility expense, freight, handling costs, and
spoilage. This statement requires that those items be recognized as current
period charges regardless of whether they meet the criterion of "so abnormal"
which was the criterion specified in ARB 43. In addition, this Statement
requires that allocation of fixed production overheads to the cost of the
production be based on normal capacity of the production facilities. This
pronouncement is effective for fiscal periods beginning after June 15, 2005. We
do not believe that the adoption of SFAS 151 will have a material impact on our
financial condition, results of operations, or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We sell products primarily to major retailers within the United States.
Our three largest customers combined accounted for approximately 38%, 37% and
30%, respectively, of consolidated trade receivables (gross of allowances) at
December 31, 2005, 2004, and 2003, respectively.
During fiscal 2005, Federated acquired the May Department Store Company
("May"). Combined net sales during fiscal 2005 to Federated and May were
approximately 23% of our consolidated net sales and these entities accounted for
approximately 27% of our consolidated trade receivables at December 31, 2005. We
believe that our relationship with both of these customers is excellent.
However, the acquisition may result in a greater potential exposure to credit
risk, which may adversely affect our business. We will continue to follow this
situation and assess the effect, if any, that it may have on us.
In the normal course of our business, we are theoretically exposed to
interest rate change market risk with respect to borrowings under our revolving
credit line. The seasonal nature of our business typically requires us to build
inventories during the course of the year in anticipation of heavy shipments to
retailers for the upcoming holiday season. Our revolving credit borrowings
generally peak during the third and fourth quarters. Therefore, a sudden
increase in interest rates (which under our revolving credit facility is
presently the prime rate plus 1.25% or LIBOR plus 3.75%) may, especially during
peak borrowing periods, have a negative impact on short-term results. We also
are theoretically exposed
21
to market risk with respect to changes in the global price level of certain
commodities used in the production of our products. We purchase substantially
all of our men's personal leather items and belts from third-party suppliers. An
unanticipated material increase in the market price of leather could increase
the cost of these products to us and therefore have a negative effect on our
results.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
--------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
SWANK, INC. AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm 24
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2005 and 2004 25
Consolidated Statements of Operations for each of the three
Years Ended December 31, 2005, 2004 and 2003 26
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
Income (Loss) for each of the three Years Ended December 31, 2005, 2004 and 2003 27
Consolidated Statements of Cash Flows for each of the three Years Ended 28
December 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements 29 - 42
Financial Statement Schedule II * 57
*All other schedules have been omitted because they are not applicable
or not required as the required information is included in the Consolidated
Financial Statements of the Company or the Notes thereto.
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Swank, Inc.
Taunton, Massachusetts
We have audited the accompanying consolidated balance sheets of Swank, Inc. and
subsidiaries (the "Company") as of December 31, 2005 and 2004 and the related
consolidated statements of operations, changes in stockholders' equity and
comprehensive income (loss), and cash flows for each of the three years in the
period ended December 31, 2005. We have also audited the financial statement
schedule listed in the accompanying index appearing under Item 15(a)(2) on page
51. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements and schedule. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Swank, Inc. and
subsidiaries at December 31, 2005 and 2004, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2005 in conformity with accounting principles generally accepted in the
United States of America.
Also, in our opinion, the schedule, listed in the index appearing under Item
15(a)(2) on page 51, presents fairly, in all material respects, the information
set forth therein.
BDO Seidman, LLP
/s/ BDO Seidman, LLP
Boston, Massachusetts
February 17, 2006
24
SWANK, INC.
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31
(Dollars in thousands)
ASSETS 2005 2004
- -----------------------------------------------------------------------------------------------
Current:
Cash and cash equivalents $ 505 $ 733
Accounts receivable, less allowances of $5,241 and $5,595, respectively 11,262 11,344
- -----------------------------------------------------------------------------------------------
Inventories, net:
Raw materials 143 98
Work in process 1,466 1,057
Finished goods 13,266 12,949
- -----------------------------------------------------------------------------------------------
Total inventories, net 14,875 14,104
Prepaid and other current assets 741 522
- -----------------------------------------------------------------------------------------------
Total current assets 27,383 26,703
- -----------------------------------------------------------------------------------------------
Property, plant and equipment, at cost:
Land and buildings 29 29
Machinery, equipment and software 1,042 1,101
Leasehold improvements 418 343
- -----------------------------------------------------------------------------------------------
Total property, plant and equipment at cost 1,489 1,473
Less accumulated depreciation 1,014 974
- -----------------------------------------------------------------------------------------------
Total property, plant and equipment, net 475 499
Other assets 3,463 3,576
- -----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 31,321 $ 30,778
- -----------------------------------------------------------------------------------------------
LIABILITIES
- -----------------------------------------------------------------------------------------------
Current:
Notes payable to banks $ 8,264 $ 11,301
Current portion of long-term obligations 1,000 1,443
Accounts payable 4,346 3,579
Accrued employee compensation 639 727
Accrued royalties payable 872 880
Income taxes payable 305 440
Convertible note due to related party (Note M) 350 -
Other current liabilities 1,670 1,192
- -----------------------------------------------------------------------------------------------
Total current liabilities 17,446 19,562
- -----------------------------------------------------------------------------------------------
Convertible note due to related party (Note M) - 350
Long-term obligations, net of current portion 5,817 6,319
- -----------------------------------------------------------------------------------------------
Total long-term obligations, net of current portion 5,817 6,669
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES 23,263 26,231
- -----------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE I)
STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------
Preferred stock, par value $1.00
Authorized - 1,000,000 shares - -
Common stock, par value $.10
Authorized -- 43,000,000 shares
Issued - 5,908,712 and 5,633,712 shares, respectively 591 563
Capital in excess of par value 1,460 1,440
Retained earnings 6,450 2,836
Accumulated other comprehensive (loss) (102) (56)
Treasury stock at cost, 176,791 and 111,222 shares, respectively (341) (236)
- -----------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 8,058 4,547
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 31,321 $ 30,778
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements
25
SWANK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For Each of the Three Years Ended December 31
(In thousands, except share and per share data) 2005 2004 2003
- ----------------------------------------------------------------------------------------------------------------
Net sales $97,914 $93,287 $94,845
- ----------------------------------------------------------------------------------------------------------------
Cost of goods sold -- operations 65,048 62,567 67,123
Cost of goods sold -- restructuring - - 1,360
- ----------------------------------------------------------------------------------------------------------------
Total cost of goods sold 65,048 62,567 68,483
- ----------------------------------------------------------------------------------------------------------------
Gross profit 32,866 30,720 26,362
Selling and administrative expenses 28,036 28,256 27,540
(Gain) loss on lease termination, restructuring expenses, and other (75) (728) 280
- ----------------------------------------------------------------------------------------------------------------
Income (loss) from operations 4,905 3,192 (1,458)
Interest expense, net 1,261 1,621 1,162
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes 3,644 1,571 (2,620)
Provision for income taxes 30 - -
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $3,614 $1,571 $(2,620)
- ----------------------------------------------------------------------------------------------------------------
Share and per share information:
Weighted average common shares outstanding -- basic 5,620,160 5,522,490 5,522,490
Basic net income (loss) per common share $.64 $.28 $(.47)
Weighted average common shares outstanding -- diluted 6,160,492 6,007,594 5,522,490
Diluted net income (loss) per share $.59 $.26 $(.47)
The accompanying notes are an integral part of the consolidated financial
statements
26
SWANK, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
FOR EACH OF THE THREE YEARS COMMON STOCK, PAR CAPITAL RETAINED ACCUMULATED TOTAL
ENDED DECEMBER 31, 2005, 2004 VALUE $.10 IN EXCESS EARNINGS OTHER STOCKHOLDERS
AND 2003 OF PAR COMPREHENSIVE TREASURY STOCK EQUITY COMPREHENSIVE
(DOLLARS IN THOUSANDS) SHARES AMOUNT VALUE INCOME (LOSS) SHARES AMOUNTS INCOME (LOSS)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 5,633,712 $ 563 $ 1,440 $ 3,885 $ (117) 111,222 $ (236) $ 5,535
Net (loss) (2,620) (2,620) $ (2,620)
Other comprehensive income:
Change in minimum pension
liability 13 13 13
Unrealized gain on securities
available for sale 12 12 12
--
Total comprehensive (loss) $ (2,595)
=========
Balance, December 31, 2003 5,633,712 563 1,440 1,265 (92) 111,222 (236) 2,940
Net income 1,571 1,571 $ 1,571
Other comprehensive income:
Change in minimum pension
liability 30 30 30
Unrealized gain on securities
available for sale 6 6 6
-
Total comprehensive income $ 1,607
=======
--------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 5,633,712 563 1,440 2,836 (56) 111,222 (236) 4,547
NET INCOME 3,614 3,614 $ 3,614
EXERCISE OF STOCK OPTIONS 275,000 28 20 18,694 (30) 18
PARTIAL REPAYMENT OF LOAN TO ESOP 46,875 (75) (75)
OTHER COMPREHENSIVE INCOME
(LOSS):
CHANGE IN MINIMUM PENSION
LIABILITY (44) (44) (44)
UNREALIZED (LOSS) ON SECURITIES
AVAILABLE FOR SALE (2) (2) (2)
---
TOTAL COMPREHENSIVE INCOME $ 3,568
=======
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2005 5,908,712 $ 591 $ 1,460 $ 6,450 $ (102) 176,791 $ (341) $ 8,058
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements
27
SWANK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For Each of the Three Years Ended December 31 2005 2004 2003
- -------------------------------------------------------------------------------------------------------
Cash flow from operating activities:
Net income (loss) $3,614 $1,571 $(2,620)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operations:
(Recoveries) provision for bad debt 63 (13) (194)
Depreciation and amortization 233 351 711
Loss on sale of equipment and investments - - 116
Amortization of deferred gain on sale of building - (117) (467)
(Gain) on lease termination (75) (1,544) -
Loss on early termination of short-term debt - 409 -
Loss on disposition/impairment of fixed assets - 817 -
Decrease (increase) in cash surrender value of life insurance 26 67 (123)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 19 1,432 (2,254)
(Increase) decrease in inventories (771) 421 2,111
(Increase) decrease in prepaid and other assets (229) 461 (82)
Decrease in recoverable income taxes - - 1,661
Increase (decrease) in accounts payable, accrued and other
liabilities 837 90 (1,238)
(Decrease) increase in income taxes payable (135) 14 (346)
(Decrease) increase in other long-term obligations and deferred
credits (777) 148 21
- -------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operations 2,805 4,107 (2,704)
- -------------------------------------------------------------------------------------------------------
Cash flow from investing activities:
Capital expenditures (120) (319) (62)
Proceeds from sales of equipment - 255 -
Proceeds from surrender of life insurance policies 429 - -
Premiums on life insurance (248) (202) (241)
- -------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 61 (266) (303)
- -------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Borrowings under revolving credit agreements 49,986 51,560 52,869
Payments of revolving credit obligations (53,023) (55,315) (49,784)
Principal payments on long-term debt - - (2)
Costs to obtain new financing - (430) -
Note due to affiliate - 350 -
Treasury stock received (105) - -
Proceeds from stock option exercises 48 - -
- -------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (3,094) (3,835) 3,083
- -------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (228) 6 76
Cash and cash equivalents at beginning of year 733 727 651
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $505 $733 $727
- -------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $1,237 $1,609 $1,076
Income taxes $102 $131 $48
- -------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. THE COMPANY
The Company is currently engaged in the importation, sale and
distribution of men's belts, leather accessories, suspenders, and men's jewelry.
These products are sold both domestically and internationally, principally
through department stores, and also through a wide variety of specialty stores
and mass merchandisers. The Company also operates a number of factory outlet
stores primarily to distribute excess and out of line merchandise.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Swank,
Inc. Amounts are in thousands except for share and per share data. During 2001,
we ceased operations at our manufacturing joint-venture in Cartago, Costa Rica
and liquidated its assets. This subsidiary is presently inactive.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
REVENUE RECOGNITION
Net sales are generally recorded upon shipment, provided there exists
persuasive evidence of an arrangement, the fee is fixed or determinable and
collectability of the related receivable is reasonably assured. Allowances,
including cash discounts, in-store customer allowances, cooperative advertising
allowances and customer returns, which are all accounted for in accordance with
Statement of Financial Accounting Standards No. 48, "Revenue Recognition When
Right of Return Exists" and Emerging Issues Task Force Issue No. 01-09,
"Accounting for Consideration Given by a Vendor to a Customer or Reseller of the
Vendor's Products", are provided for at the time the revenue is recognized based
upon historical experience, current trends in the retail industry and individual
customer and product experience. Each spring upon the completion of processing
returns from the preceding fall season, we record adjustments to net sales in
the second quarter to reflect the difference between customer returns of prior
year shipments actually received in the current year and the estimate used to
establish the allowance for customer returns at the end of the preceding fiscal
year.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, we consider
all highly liquid instruments purchased with original maturities of three months
or less to be cash equivalents.
ALLOWANCES FOR ACCOUNTS RECEIVABLE
Our allowances for receivables are comprised of cash discounts,
doubtful accounts, in-store markdowns, cooperative advertising and customer
returns. Provisions for doubtful accounts are reflected in selling and
administrative expenses. We perform ongoing credit evaluations of our customers
and maintain allowances for potential bad debt losses. We do not typically
require collateral from our customers. The allowance for customer returns
results from the reversal of sales for estimated returns and associated costs.
Allowances for in-store markdowns and cooperative advertising reflect the
estimated costs of our share of certain promotions by our retail customers.
Allowances for accounts receivable are generally at their seasonal highs on
December 31. Reductions of allowances occur principally in the first and second
quarters when the balances are adjusted to reflect actual charges as processed.
Allowances for accounts receivable are estimates made by management based on
historical experience, adjusted for current conditions, and may differ from
actual results. The provisions (recoveries) for bad debts in 2005, 2004 and 2003
were $63,000, $(13,000) and $(194,000), respectively.
29
CONCENTRATION OF CREDIT RISK
We sell products primarily to major retailers within the United States.
Our three largest customers combined accounted for approximately 38%, 37% and
30%, respectively, of consolidated trade receivables (gross of allowances) at
December 31, 2005, 2004, and 2003, respectively.
In fiscal 2005, net sales to our three largest customers, Federated
Department Stores, Inc. ("Federated"), Kohl's Department Stores and TJX
Companies, Inc. ("TJX"), accounted for approximately 23%, 10%, and 10%,
respectively, of our consolidated net sales. In fiscal 2004 and fiscal 2003,
Federated accounted for approximately 23% and 25%, respectively, and TJX
accounted for approximately 10% and 11%, respectively, of consolidated net
sales. No other customer accounted for more than 10% of consolidated net sales
during fiscal years 2005, 2004 or 2003. During 2005, Federated completed its
acquisition of the May Department Stores Company and accordingly, these
statistics reflect our sales to the combined company. Exports to foreign
countries accounted for approximately 8% of consolidated net sales in fiscal
2005, 7% in fiscal 2004, and less then 4% in fiscal 2003.
In the normal course of our business, we are theoretically exposed to
interest rate change market risk with respect to borrowings under our revolving
credit line. The seasonal nature of our business typically requires us to build
inventories during the course of the year in anticipation of heavy shipments to
retailers for the upcoming holiday season. Our revolving credit borrowings
generally peak during the third and fourth quarters. Therefore, a sudden
increase in interest rates (which under our revolving credit facility is
presently the prime rate plus 1.25% or LIBOR plus 3.75%) may, especially during
peak borrowing periods, have a negative impact on short-term results. We also
are theoretically exposed to market risk with respect to changes in the global
price level of certain commodities used in the production of our products. We
purchase substantially all of our men's personal leather items and belts from
third-party suppliers. An unanticipated material increase in the market price of
leather could increase the cost of these products to us and therefore have a
negative effect on our results.
We purchase substantially all of our small leather goods, principally
wallets, from a single supplier in India. Unexpected disruption of this source
of supply could have an adverse effect on our small leather goods business in
the short-term depending upon our inventory position and on the seasonal
shipping requirements at that time. However, we believe that alternative sources
for small leather goods are available and could be utilized by us within several
months. We also purchase substantially all of our finished belts and other
accessories from a number of suppliers in the United States and abroad. We
believe that alternative suppliers are readily available for substantially all
such purchased items.
INVENTORIES
Inventories are stated at the lower of cost (principally average cost
which approximates FIFO) or market. Our inventory is somewhat fashion oriented
and, as a result, is subject to risk of rapid obsolescence. Management believes
that inventory has been adequately adjusted, where appropriate, and that we have
adequate channels to dispose of excess and obsolete inventory.
PROPERTY PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. We provide for
depreciation of plant and equipment by charges against income which are
sufficient to write off the cost of the assets over estimated useful lives of
10-45 years for buildings and improvements and 3-12 years for machinery,
equipment and software. Improvements to leased premises are amortized on a
straight-line basis over the shorter of the useful life of the improvement or
the term of the lease.
Expenditures for maintenance and repairs and minor renewals are charged
to expense; betterments and major renewals are capitalized. Upon disposition,
cost and related accumulated depreciation are removed from the accounts with any
related gain or loss reflected in results of operations.
We review the carrying value of our long-lived assets in accordance
with Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, whenever events and circumstances
indicate that the assets might be impaired and the carrying value may not be
recoverable. Recoverability of these assets is measured by comparison of the
carrying value of the assets to the undiscounted cash flows estimated to be
generated by those assets over their remaining economic life. If such assets are
considered impaired, the impairment loss is measured by comparing the fair value
of the assets to their carrying values. Fair value is determined by either a
quoted market price or a value determined by a
30
discounted cash flow technique, whichever is more appropriate under the
circumstances involved. During the fourth quarter of 2003, we reduced the
carrying value of certain machinery and equipment at our Norwalk, CT facility,
to its estimated fair market value, and recognized an expense of $99,000, which
was included in restructuring expenses for the year ending December 31, 2003.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments, including cash and
equivalents, accounts receivable, accounts payable, accrued expenses and notes
payable approximated fair value as of December 31, 2005 and 2004. Included on
the balance sheet in prepaid and other current assets are securities available
for sale, stated at fair market value, of approximately $13,000 and $15,000 at
December 31, 2005 and 2004, respectively.
ADVERTISING COSTS
The Company charges advertising costs to expense as they are incurred.
Total expenditures charged to advertising expense during 2005, 2004, and 2003
were $2,019,000, $2,367,000, and $1,982,000, respectively.
ENVIRONMENTAL COSTS
In accordance with AICPA Statement of Position 96-1, "Environmental
Remediation Liabilities", environmental expenditures that relate to current
operations are expensed or capitalized, as appropriate. Expenditures that relate
to an existing condition caused by past operations, and which do not contribute
to current or future revenue generation, are expensed. Liabilities are recorded
when environmental assessments and/or remedial efforts are probable and the
costs can be reasonably estimated. Generally, adjustments to these accruals
coincide with the completion of a feasibility study or a commitment made by us
to a formal plan of action or other appropriate benchmark (see Note I to the
consolidated financial statements for additional discussion).
INCOME TAXES
We utilize the liability method of accounting for income taxes. Under
the liability method, deferred taxes are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse. Net deferred tax assets are recorded when it is more likely than not
that such tax benefits will be realized. A valuation allowance is recorded to
reflect the estimated realization of the deferred tax asset.
STOCK-BASED COMPENSATION
We measure the cost of employee stock-based compensation associated
with the stock option plans described in Note H using the "intrinsic value"
method. Under this method, the incremental fair value of our common stock, if
any, at the date of grant over the exercise price is charged to expense over the
period that the employee provides the associated services. We disclose the
information required by SFAS No. 123 "Accounting for Stock Based Compensation",
which includes information with respect to stock-based compensation determined
under the "fair value" method. The Company uses the Black-Scholes model to
determine the fair value of options on the grant date for purposes of this
disclosure.
We grant stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant,
and account for stock-based compensation for employees in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), and follow the disclosure-only alternative under SFAS 123
(see Note H).
Had compensation expense for the Company's stock plans been determined
consistent with SFAS 123, the pro forma net income (loss) per share would have
been as follows:
31
YEAR ENDED DECEMBER 31,
(Dollars in thousands except per share amounts) 2005 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) as reported $3,614 $1,571 $(2,620)
Add: Stock-based employee compensation included in reported net income (loss) - - -
Deduct: Total stock-based employee compensation determined under fair value based
method for all awards (4) (1) -
------- ------- -------
Pro forma net income (loss) $3,610 $1,570 $(2,620)
======= ======= =======
Basic net income (loss) per common share as reported and pro forma $.64 $.28 $(.47)
Diluted net income (loss) per common share as reported and pro forma $.59 $.26 $(.47)
For options granted in 2005, 2004 and 2003, the Company used the
Black-Scholes model to calculate the estimated weighted average fair values,
assuming no dividends, which were approximately $1.23, $.29, and $.14,
respectively, using a risk-free rate of 6.5%, and an expected volatility of 99%
in each year, and expected lives of 5 years in each of 2005, 2004 and 2003,
respectively.
NET INCOME (LOSS) PER SHARE
Net income (loss) per common share or basic earnings per share amounts
are adjusted to include, where appropriate, shares held by our employee stock
ownership plan and deemed to be allocated to participants. Net income (loss) per
share assuming full dilution includes the effects of options and convertible
securities issued by the Company. For the year ended December 31, 2003, basic
net loss per share is equal to fully diluted net loss per share as the effect of
all options is anti-dilutive. For periods in which there is net income, diluted
earnings per share is determined by using the weighted average number of common
and dilutive common equivalent shares outstanding during the period unless the
effect is antidilutive. Potentially dilutive common shares consist of the
incremental common shares that would be issuable upon the assumed exercise of
stock options and the conversion of convertible securities. Approximately
540,000 and 485,000 common shares issuable upon the exercise of options and the
assumed conversion of convertible securities were included in the calculation of
diluted earnings per share for the fiscal years ended December 31, 2005 and
2004, respectively. Approximately 94,000 common shares issuable upon the
exercise of options were excluded from the calculation of diluted earnings per
share for the fiscal year ended December 31, 2003, as their effect would have
been antidilutive. We had options for 363,334 shares of common stock outstanding
at December 31, 2005 with exercise prices ranging from $.17 to $1.60.
COMPREHENSIVE INCOME (LOSS)
Reporting comprehensive income (loss) requires that certain items
recognized under generally accepted accounting standards as separate components
of stockholders' equity be reported as comprehensive income (loss) in an annual
financial statement that is displayed with the same prominence as the other
annual financial statements. This statement also requires that an entity
classify items of other comprehensive income (loss) by their nature in an annual
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional capital in excess of par
value in the equity section of the balance sheet. Reportable other comprehensive
income (loss) was $(46,000), $36,000 and $25,000 in 2005, 2004 and 2003,
respectively. Income (loss) in these years resulted primarily from adjustments
associated with unrecognized actuarial gains and losses relating to our defined
benefit plan and from unrealized gains (losses) on securities available for
sale.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to be consistent with
the current year's presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 (revised 2004, "SFAS 123R"), Share-Based Payment. SFAS 123R
addresses the accounting for share-based payments to employees, including grants
of employee stock options. Under the new standard, companies will no longer be
able to account for share-based compensation transactions using the intrinsic
method in accordance with APB Opinion No. 25, Accounting
32
For Stock Issued To Employees. Instead, companies will be required to account
for such transactions using a fair-value method and recognize the expense in the
consolidated statement of operations. Under the original guidance of SFAS 123R,
we were to adopt the statement's provisions for the interim period beginning
after June 15, 2005. However, in April 2005, as a result of an action by the
Securities and Exchange Commission, companies were allowed to adopt the
provisions of SFAS 123R at the beginning of their fiscal year that begins after
June 15, 2005. Consequently, we will adopt SFAS 123R effective January 1, 2006.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB
107") regarding the SEC's interpretation of SFAS 123R and the valuation of
share-based payments for public companies. We are evaluating the requirements of
SFAS 123R and SAB 107 and expect that the adoption of SFAS 123R will not have a
material impact on our consolidated financial statements since all of our
outstanding stock options are currently vested. However, depending upon future
share-based payment activity, SFAS 123R could have a material impact on future
financial statements.
In May 2005, FASB issued SFAS No. 154, Accounting Changes and Error
Corrections: a Replacement of Accounting Principles Board (APB) Opinion No. 20
and FASB Statement No. 3 ("SFAS 154"). SFAS 154 requires that a voluntary change
in accounting principles be retrospectively applied to prior periods unless it
is impracticable to do so. Retrospective application would require the
application of a different accounting principle to previously issued financial
statements as if that principle had always been used. The requirements of SFAS
154 are effective for accounting changes made in fiscal years beginning after
December 15, 2005. We did not change nor are we considering a change in
accounting principles in fiscal 2006 and accordingly, we do not expect that the
adoption of SFAS 154 will have a significant impact on our financial condition,
results of operations, or cash flows.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs ("SFAS
151"), an amendment of Accounting Research Bulletin No. 43 ("ARB 43"), Chapter
4, Inventory Pricing. SFAS 151 amends previous guidance regarding treatment of
abnormal amounts of idle facility expense, freight, handling costs, and
spoilage. This statement requires that those items be recognized as current
period charges regardless of whether they meet the criterion of "so abnormal"
which was the criterion specified in ARB 43. In addition, this Statement
requires that allocation of fixed production overheads to the cost of the
production be based on normal capacity of the production facilities. This
pronouncement is effective for fiscal periods beginning after June 15, 2005. We
do not believe that the adoption of SFAS 151 will have a material impact on our
financial condition, results of operations, or cash flows.
C. RESTRUCTURING CHARGES
During the first quarter of 2005, we paid the landlord of our former
Norwalk, Connecticut belt manufacturing facility $925,000 to settle all of our
remaining obligations under the lease termination agreement signed in 2004 (see
below). As a result of this prepayment, we recorded a gain of $75,000 during the
first quarter to recognize the difference between the amount of the liability
outstanding at December 31, 2004 under the termination agreement and the final
amount paid. The gain is stated separately in our consolidated statement of
operations.
During the first quarter of 2004, we entered into an agreement with the
landlord of our former Norwalk facility under which the lease for that facility
was terminated effective April 1, 2004. We paid $250,000 to the landlord upon
the signing of the termination agreement and an additional $250,000 on April 30,
2004. The agreement also provided for payments to the landlord of an additional
$1,000,000, in installments, during the period from January 2005 through March
2006. Our estimated aggregate remaining liabilities under the lease, had it not
been terminated, would have been approximately $2,586,000. During 2004, we
recorded a net gain of $1,090,000 consisting of a $3,348,000 gain associated
with the recognition of the remaining balance of a deferred gain on real estate
offset in part by $2,084,000 in costs related to the lease termination
(including $1,500,000 in lease termination costs, $455,000 in asset impairment
charges, and $129,000 for other plant closing expenses), and $174,000 in
severance and related expenses recorded in connection with employee
terminations. The net gain was stated separately in our consolidated statement
of operations (as noted above, we settled all of the remaining obligations under
the termination agreement during the first quarter of 2005).
During the second quarter of 2004, we recorded an expense of $589,000
in connection with the write-off of deferred financing costs, early termination
fees and other charges related to the termination of the prior loan and security
agreement. These expenses were included in interest expense in our 2004
consolidated statement of operations.
33
During the fourth quarter of 2004, we also recorded a non-cash
impairment charge of $362,000 in connection with certain fixed assets associated
with our former jewelry manufacturing facility and administrative offices
located in Attleboro, Massachusetts. We ceased our jewelry manufacturing
operations in 2000 but until the fourth quarter of 2004, the Attleboro building
continued to house our main administrative offices. We consolidated our
remaining administrative staff into our Taunton, Massachusetts location and are
currently assessing alternative uses or the disposition of the Attleboro
property. The impairment charge was included as an expense in our consolidated
statement of operations for the year ended December 31, 2004.
During the fourth quarter of 2003, we discontinued manufacturing
operations at our Norwalk facility and began sourcing the balance of our belt
and suspender merchandise requirements from third-party vendors. In connection
with the plant closure, we recorded and included in cost of goods sold during
the fourth quarter $1,360,000 in charges associated with obsolete raw materials
and supplies. In addition, we also recorded during the fourth quarter a $280,000
restructuring charge associated with severances and other expenses incurred in
connection with the plant closure. The restructuring charge is stated separately
in the accompanying consolidated statements of operations for the year ending
December 31, 2003. At December 31, 2003, $181,000 had been paid representing all
of the severance liability payable to the affected employees and an additional
$99,000 was recorded as a reduction in the cost basis of the machinery and
equipment formerly used in our belt and suspender manufacturing operations, to
reflect their estimated fair market values.
D. SHORT-TERM BORROWINGS
- --------------------------------------------------------------------------------
(Dollars in thousands) 2005 2004
- --------------------------------------------------------------------------------
At December 31:
Total lines $25,000 $25,000
Weighted average interest rate 8.50% 6.50%
For the year:
Monthly average borrowing outstanding 14,241 13,066
Maximum borrowing outstanding at any month end 19,091 18,124
Monthly interest rate (weighted average) 8.38% 7.17%
Balance outstanding at December 31 8,264 11,301
- --------------------------------------------------------------------------------
The average amounts outstanding and weighted average interest rates
during each year are based on average monthly balances outstanding under our
revolving credit facility for seasonal working capital needs.
The Company's revolving credit line is provided by Wells Fargo
Foothill, Inc. ("WFF") under a $25,000,000 Loan and Security Agreement signed on
June 30, 2004 (the "2004 Loan Agreement"). The 2004 Loan Agreement replaced a
previous loan and security agreement with a prior lender that was terminated
during 2004 (the "2003 Loan Agreement"). The 2004 Loan Agreement is
collateralized by substantially all of our assets, including accounts
receivable, inventory, and machinery and equipment. The 2004 Loan Agreement
contains a $5,000,000 sublimit for the issuance of letters of credit and also
prohibits us from paying dividends, imposes limits on additional indebtedness
for borrowed money, and contains minimum monthly EBITDA requirements. The terms
of the 2004 Loan Agreement permit us to borrow against a percentage of eligible
accounts receivable and eligible inventory at an interest rate based on Wells
Fargo Bank, N.A.'s prime lending rate plus 1.25% or at WFF's LIBOR rate plus
3.75% or 8.50% and 8.15%, respectively at December 31, 2005. We are required to
pay a monthly unused line fee of .5% of the maximum revolving credit amount less
the average daily balance of loans and letters of credit outstanding during the
immediately preceding month. During the quarter ended June 30, 2004, the Company
recorded an expense of $589,000 in connection with the write-off of deferred
financing costs, early termination fees and other charges related to the
termination of the 2003 Loan Agreement (see Note C, "Restructuring Costs").
These expenses are included in interest expense in our consolidated statement of
operations for 2004. As of December 31, 2005, the Company was in compliance with
all financial covenants contained within the 2004 Loan Agreement.
34
E. INCOME TAXES
The components of income taxes are as follows:
(Dollars in thousands)
- ------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES: 2005 2004 2003
- ------------------------------------------------------------------------------------------
Currently payable:
Federal $ 30 $ - -
State - - -
Deferred:
Federal - - -
State - - -
- ------------------------------------------------------------------------------------------
$ 30 $ - -
- ------------------------------------------------------------------------------------------
DEFERRED TAX PROVISION (BENEFIT):
- ------------------------------------------------------------------------------------------
Deferred compensation $ 126 $ 135 $ 126
Lease termination cost of note payable 395 (395) -
Gain on sale of assets - 1,405 240
Federal NOL carryforwards 486 (619) (921)
State NOL carryforwards 79 547 (224)
AMT credit carryforwards (30) - -
Other items 132 174 99
Valuation allowance (1,188) (1,247) 680
- ------------------------------------------------------------------------------------------
$ - $ - $ -
- ------------------------------------------------------------------------------------------
A RECONCILIATION OF THE COMPANY'S EFFECTIVE INCOME TAX
RATE IS AS FOLLOWS:
- ------------------------------------------------------------------------------------------
Statutory federal income tax rate 34.0 % 34.0 % (34.0) %
State income taxes, net of federal tax benefit - 5.1 (8.6)
Valuation allowance (38.8) (36.6) 37.8
Other items, net 5.6 (2.5) 4.8
- ------------------------------------------------------------------------------------------
EFFECTIVE INCOME TAX RATE .8 % - % - %
- ------------------------------------------------------------------------------------------
COMPONENTS OF THE NET DEFERRED TAX ASSET:
- ------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Accounts receivable reserves $ 1,066 $ 1,041 $ 1,335
Deferred compensation 226 352 487
Inventory capitalization 447 381 489
Postretirement benefits 1,723 1,531 1,355
Inventory reserves 182 362 315
Workman's compensation 58 137 184
Termination costs 1 1 1
Gain on sale of assets - - 1,405
Federal NOL carryforwards 1,676 2,162 1,543
State NOL carryforwards 1,006 1,085 1,632
AMT credit carryforwards 767 737 737
Environmental costs 527 546 566
Lease termination cost of note payable - 395 -
Other 278 393 378
--- --- ---
Gross deferred asset 7,957 9,123 10,427
DEFERRED TAX LIABILITIES:
Depreciation (147) (125) (182)
----- ----- -----
Valuation allowance (7,810) (8,998) (10,245)
- ------------------------------------------------------------------------------------------
NET DEFERRED TAX ASSET $ - $ - $ -
- ------------------------------------------------------------------------------------------
At December 31, 2005, we had federal and state net operating loss
carryforwards of approximately $4,242,000 and $18,298,000 which expire through
2023 and 2010, respectively. The alternative minimum tax credit carryforward of
approximately $767,000 at December 31, 2005, currently does not expire. These
loss and credit carryforwards are available to reduce future federal and state
taxable income, if any. These loss carryforwards are subject to review and
possible adjustment by the appropriate taxing authorities. These losses may be
subject to the Internal Revenue Service Code Section 382 limitation which
imposes an annual limitation on the use of these losses if certain ownership
changes occur.
35
We monitor the realization of our deferred tax assets based on changes
in circumstances, for example, recurring periods of income for tax purposes
following historical periods of cumulative losses or changes in tax laws or
regulations. Our income tax provision and our assessment of the realizability of
our deferred tax assets involve significant judgments and estimates. Our
valuation reserve is recorded based upon the uncertainty surrounding the
realizability of deferred tax assets as they can only be realized via profitable
operations. If we continue to generate taxable income through profitable
operations in future years, we may be required to recognize these deferred tax
assets through the reduction of the valuation allowance which would result in a
material benefit to our results of operations in the period in which the benefit
is determined.
F. LONG-TERM OBLIGATIONS
Long-term obligations at December 31, were as follows:
- ----------------------------------------------------------------------------
(Dollars in thousands) 2005 2004
- ----------------------------------------------------------------------------
Benefits under 1987 Deferred Compensation
Plan and Postretirement benefits (See Note G) $ 4,976 $ 4,777
Environmental liabilities (See Note I) 1,335 1,383
Supplemental death benefits 38 49
Obligation on property sublease 468 553
Note payable on lease termination (See Notes C and I) - 1,000
- ----------------------------------------------------------------------------
Total long-term obligations, including current portion 6,817 7,762
Less current portion (1,000) (1,443)
- ----------------------------------------------------------------------------
TOTAL LONG-TERM OBLIGATIONS $ 5,817 $ 6,319
- ----------------------------------------------------------------------------
G. EMPLOYEE BENEFITS
Effective January 1, 1994, we amended and restated the Swank, Inc.
Employees' Stock Ownership Plan in a merger with the Swank, Inc. Employees'
Stock Ownership Plan No. 2 and the Swank, Inc. Savings Plan. The combined plans
became The New Swank, Inc. Retirement Plan (the "Plan"). The Plan incorporates
the characteristics of the three predecessor plans, covers substantially all
full time employees and reflects management's continued desire to provide added
incentives and to enable employees to acquire shares of our common stock. The
cost of the Plan has been borne by the Company.
The savings (401(k)) component of the Plan provides employees an
election to reduce taxable compensation through contributions to the Plan.
Matching cash contributions from the Company are determined annually at the
Board's discretion. Shares of Common Stock acquired by the stock ownership
component of the Plan are allocated to participating employees to the extent of
contributions to the Plan, as determined annually at the discretion of the Board
of Directors, and are vested on a prescribed schedule. Expenses associated with
contributions to the Plan were $122,000, $218,000, and $17,000 in 2005, 2004 and
2003, respectively. At December 31, 2005 and 2004, the Plan held a total of
2,987,822 and 3,172,930 shares, respectively, of the Company's outstanding
common stock, including 39,337 shares at December 31, 2005 that have not been
allocated to participants. The Plan held no unallocated shares at December 31,
2004. From time to time, we make loans to the Plan at an interest rate equal to
the Prime lending rate plus 2 percentage points per annum to provide the Plan
with liquidity, primarily to enable the Plan to make distributions of cash
rather than shares to former employees. Total outstanding obligations due from
the Plan at December 31, 2005 were $120,000. There were no outstanding
obligations due from the plan at December 31, 2004.
In October 1999, the Plan's 401(k) Savings and Stock Ownership Plan
Committee authorized the repurchase by the Plan of up to 600,000 shares of the
Company's common stock. Purchases will be made at the discretion of the Plan's
trustees from time to time in the open market and through privately negotiated
transactions, subject to general market and other conditions. Repurchases are
intended to be financed by the Plan with its own funds and from any future cash
contributions made by us to the Plan. Shares acquired will be used to provide
benefits to employees under the terms of the Plan. Since the repurchase plan was
authorized in October 1999, the Plan has repurchased 96,666 shares. There were
no shares purchased during 2005 or 2004.
We provide postretirement life insurance, supplemental pension and
medical benefits for certain groups of active and retired employees. The
postretirement medical plan is contributory, with contributions adjusted
annually; the death benefit is noncontributory. We recognize the cost of
postretirement benefits over the period in which they are earned and amortize
the
36
transition obligation for all plan participants on a straight-line basis over a
20 year period which began in 1993.
The following table sets forth a reconciliation of the beginning and
ending balances of our postretirement benefits and defined benefits under our
1987 Deferred Compensation Plan described below:
(Dollars in thousands)
POSTRETIREMENT BENEFITS DEFINED BENEFITS
- ------------------------------------------------------------------------------------------------------
Change in Benefit Obligation 2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------
Benefit obligation at beginning of year: $ 6,043 $ 6,477 $ 892 $ 1,234
Service cost 17 16 - -
Interest cost 335 337 29 42
Participants' contributions - - - -
Amendments - - - -
Actuarial (gain) loss 278 (690) (5) -
Benefits paid (503) (97) (344) (384)
- ------------------------------------------------------------------------------------------------------
BENEFIT OBLIGATION AT END OF YEAR $ 6,170 $ 6,043 $ 572 $ 892
- ------------------------------------------------------------------------------------------------------
Change in Plan Assets
- ------------------------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ - $ - $ - $ -
Employer contributions 503 97 344 384
Participants' contributions - - - -
Benefits paid (503) (97) (344) (384)
----- ---- ----- -----
Fair value of Plan assets at end of year $ - $ - $ - $ -
- ------------------------------------------------------------------------------------------------------
Funded status $(6,170) $(6,043) $ (572) $ (892)
Unrecognized actuarial loss 1,457 1,230 44 79
Unrecognized transition obligation 808 928 - -
- ------------------------------------------------------------------------------------------------------
ACCRUED BENEFIT COST (1) $(3,905) $(3,885) $ (528) $ (813)
- ------------------------------------------------------------------------------------------------------
(1) Amounts totaling $344,000 and $441,000 have been included in accrued
employee compensation as of December 31, 2005 and 2004, respectively. The
remaining balance has been included in long-term obligations as set forth in
Note F.
The weighted-average discount rate used in determining the accumulated
benefit obligations was 5.50%, 5.75%, and 5.75% at December 31, 2005, 2004, and
2003, respectively. For measurement purposes, a 5.5% annual rate of increase in
the per capita cost of covered Medicare Part B health care benefits is assumed
for 2005 and all years thereafter. A 10.0% annual rate of increase in the per
capita cost of AARP Medicare Supplemental Coverage is assumed for 2005. This
rate is assumed to decrease gradually to 5.0% in 2010 and remain at that level
thereafter. As of the current valuation date, all participants in the Pre-65
Continuation of Medical Coverage program are age 65 or older, therefore, no
valuation is presented.
The weighted-average discount rate used in determining the accumulated
benefit obligations of the defined benefit plan was 4.5%, 4.0%, and 4.0% at
December 31, 2005, 2004, and 2003, respectively. Net periodic pension costs for
the fiscal years ended December 31, 2005, 2004 and 2003 were determined using
discount rates of 4.0%, 4.0% and 4.5%, respectively.
Net periodic postretirement and defined benefit cost for 2005, 2004 and
2003 included the following components:
(Dollars in thousands) POSTRETIREMENT BENEFITS DEFINED BENEFITS
- ---------------------------------------------------------------------------------------------------------------
2005 2004 2003 2005 2004 2003
- ---------------------------------------------------------------------------------------------------------------
Service cost $ 17 $ 16 $ 14 $ - $ - $ -
Interest cost 335 337 354 29 42 62
Recognized actuarial (gain) loss 51 78 94 30 30 28
Amortization of transition obligation 119 119 119 - - -
- ---------------------------------------------------------------------------------------------------------------
NET PERIODIC BENEFIT COSTS INCLUDED IN SELLING AND
ADMINISTRATIVE EXPENSES $522 $550 $581 $ 59 $ 72 $ 90
- ---------------------------------------------------------------------------------------------------------------
We have multiple health care and life insurance postretirement benefit
programs which are generally available to
37
executives. The health care plans are contributory (except for certain AARP and
Medicare Part B coverage) and the life insurance plans are noncontributory. A
portion of the life insurance benefits are fully insured through group life
coverage and the remaining life benefits are self-insured. Life insurance
contracts have been purchased on the lives of certain employees in order to fund
postretirement death benefits to beneficiaries of salaried employees who reach
age 60 with ten years of service. Proceeds from these contracts are expected to
be adequate to fund our obligations. The cost of these contracts is included in
the annual postretirement cost shown above.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage point decrease in
assumed health care cost trend rates would decrease the total of service and
interest cost by $7,000 and the postretirement benefit obligation by $112,000
respectively, while a one-percentage point increase would increase the total of
service and interest cost by $8,000 and the postretirement benefit obligation by
$127,000, respectively.
In 1987, we adopted a deferred compensation plan (the "1987 Plan")
available to certain key executives for the purpose of providing retirement
benefits. Interest credited to participants' accounts is paid at retirement in
the form of a monthly annuity over a period of ten years. All compensation that
was deferred under the 1987 Plan has been returned to participants. The 1987
Plan was amended at the end of 1998 to change the method of determining future
interest credits on participants' accounts. Life insurance contracts intended to
fund 1987 Plan benefits through future death proceeds had been purchased on the
lives of the participants and on certain other employees. These contracts were
surrendered in November 1998 with a corresponding reduction in gross cash
surrender value and policy loans as set forth below. In 1999, we determined that
it would be advantageous to place all remaining participants in the 1987 Plan
who were not currently receiving benefits into payout status, effective January
1, 2000. Participants will receive benefit payments over ten years resulting in
the elimination of the Company's liability under the 1987 Plan by the end of
2009.
We use loans against the policy cash values to pay part or all of the
annual life insurance premiums, except for the variable life policies. The life
insurance policies state that we have the legal right of offset. The aggregate
gross cash surrender value of all policies was approximately $5,050,000 and
$5,697,000 at December 31, 2005 and 2004, respectively, which is included in
other assets, net of policy loans aggregating approximately $1,986,000 and
$2,608,000 respectively. We presently have no intention of repaying any policy
loans and expect that they will be liquidated from future death benefits or by
surrender of the policies. Interest on policy loans amounted to approximately
$151,000, $100,000 and $143,000 in 2005, 2004 and 2003, respectively, and is
included in the net costs of the various plans described above. The weighted
average interest rate on policy loans was 6.6%, 4.0%, and 5.7% at December 31,
2005, 2004 and 2003, respectively.
H. STOCK OPTIONS
In 1994, we established a directors' stock option plan pursuant to
which options may be granted to non-employee directors to purchase 50,000 shares
of common stock at market value on the date of grant. Options granted under this
plan are for a period of five years and are immediately exercisable. We granted
options for 3,334, 3,334 and 3,333 shares of common stock under this plan in
2005, 2004 and 2003, respectively. At December 31, 2005, all 50,000 shares of
common stock under the directors' plan had been issued.
In April 1998, our stockholders approved the Swank, Inc. 1998 Equity
Incentive Compensation Plan (the "1998 Plan") which replaced the Company's prior
incentive stock plans, all of which had expired by their terms. The 1998 Plan
permits our Board of Directors to grant a maximum of 1,000,000 shares to key
employees through stock options, stock appreciation rights, restricted stock
units, performance awards and other stock-based awards. We granted options for
625,000 shares under the 1998 Plan in 2001. These shares vested immediately. No
awards were granted by the Board in either 2005 or 2004. At December 31, 2005, a
total of 375,000 shares of common stock remain available for future grants under
the 1998 Plan.
38
The following table summarizes stock option activity for the years 2003
through 2005:
- -----------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE
OPTION SHARES EXERCISE PRICE
Outstanding at December 31, 2002 638,333 $ .22
Forfeited - -
Expired (3,333) 3.84
Granted 3,333 .22
- -----------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2003 638,333 $ .20
Forfeited - -
Expired (3,333) 3.66
Granted 3,334 .38
- -----------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2004 638,334 $ .18
Exercised (275,000) .17
Forfeited - -
Expired (3,334) 2.44
Granted 3,334 1.60
- -----------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2005 363,334 $ .19
- -----------------------------------------------------------------------------------------------------------------------
For options granted in 2005, 2004 and 2003, the Company used the
Black-Scholes model to calculate the estimated weighted average fair values,
assuming no dividends, which were approximately $1.23, $.29, and $.14,
respectively, using a risk-free rate of 6.5%, and an expected volatility of 99%
in each year, and expected lives of 5 years in each of 2005, 2004 and 2003,
respectively.
Options outstanding as of December 31, 2005 were as follows:
- ---------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Exercise Shares Average Average Shares Average
Price Outstanding Life (Years) Price Exercisable Price
- ---------------------------------------------------------------------------------------------------------------------
$.17 350,000 .85 $ .17 350,000 $ .17
$.18 - $1.60 13,334 3.14 $ .59 13,334 $ .59
- ---------------------------------------------------------------------------------------------------------------------
TOTAL 363,334 .93 $ .19 363,334 $ .19
- ---------------------------------------------------------------------------------------------------------------------
At December 31, 2005 and 2004, all outstanding stock options were
exercisable and the weighted-average exercise prices were $.19 and $.18,
respectively.
I. COMMITMENTS AND CONTINGENCIES
We lease certain of our warehousing, sales and office facilities,
automobiles and equipment under non-cancelable long-term operating leases.
Certain of the leases provide renewal options ranging from one to ten years and
escalation clauses covering increases in various costs. Total rental expenses
amounted to $2,241,000, $2,455,000 and $3,248,000 in 2005, 2004 and 2003
respectively.
Future minimum lease payments under non-cancelable operating leases as of
December 31, 2005 are as follows:
(Dollars in thousands)
---------------------------------------------
2006 $ 2,249
2007 2,117
2008 2,117
2009 2,181
2010 1,357
Thereafter 156
---------------------------------------------
TOTAL MINIMUM PAYMENTS $ 10,177
---------------------------------------------
39
During 2001, we completed a sale and lease-back for the Norwalk
manufacturing facility. The sale-leaseback transaction resulted in a deferred
gain of approximately $4,700,000 that was recorded on the Company's consolidated
balance sheet at closing and until April 2004, was being amortized over the
lease term. In 2003, the Company recorded amortization income as an offset to
the related rent expense included in cost of goods sold of $467,000.
As more fully described in Note C, "Restructuring Charges", we
terminated the lease on the Norwalk facility during the first quarter of 2004.
We paid $250,000 to the landlord upon the signing of the termination agreement
and an additional $250,000 on April 30, 2004. The termination agreement also
provided for payments to the landlord of an additional $1,000,000, in
installments, during the period from January 2005 through March 2006. We
recorded a net gain on the termination of $1,090,000 consisting of a $3,348,000
gain associated with the recognition of the remaining balance of a deferred gain
on real estate offset in part by $2,084,000 in costs related to the lease
termination (including $1,500,000 in lease termination costs, $455,000 in asset
impairment charges, and $129,000 for other plant closing expenses), and $174,000
in severance and related expenses recorded in connection with employee
terminations. The net gain was stated separately in our consolidated statement
of operations for the year ended December 31, 2004. During the first quarter of
2005, we paid the landlord $925,000 to settle all of our remaining obligations
under the termination agreement. and recorded a gain of $75,000 to recognize the
difference between the amount of the liability outstanding at December 31, 2004
under the termination agreement and the final amount paid.
We own the rights to various patents, trademarks, trade names and
copyrights and have exclusive licenses in the United States and, in some
instances, in certain other jurisdictions. Our "Kenneth Cole", "Tommy Hilfiger",
"Nautica", "Geoffrey Beene", "Claiborne", "Guess?", "Ted Baker", "City of
London", "Pierre Cardin", "Donald Trump" and "Field & Stream" licenses
collectively may be considered material to our business. At December 31, 2005,
we are obligated to pay minimum royalty and advertising under certain license
agreements (including minimum royalty and advertising obligations on our
"Nautica" and "Donald Trump" licenses which were both executed subsequent to
December 31, 2005 and dated as of January 1, 2006) as follows: 2006 -
$9,046,000; 2007 - $9,152,000; 2008 - $9,362,000; and 2009 - $844,000.
Generally, the license agreements require us to provide various forms of
advertising and promotional support determined as a percentage of annual net
sales of licensed merchandise and licensors generally retain audit rights for a
specified period. We also pay a percentage of net sales to a consulting firm
controlled by one of our directors in connection with license agreements which
that firm introduced to us. Royalty payments due by us in connection with this
agreement were approximately $106,000, $76,000 and $69,000 for the years ended
December 31, 2005, 2004 and 2003, respectively. We regularly assess the status
of our license agreements and anticipate renewing those contracts expiring in
2006, subject to the negotiation of terms and conditions satisfactory to us.
On June 7, 1990, the Company received notice from the United States
Environmental Protection Agency ("EPA") that it, along with fifteen others, had
been identified as a Potentially Responsible Party ("PRP") in connection with
the release of hazardous substances at a Superfund Site located in
Massachusetts. This notice does not constitute the commencement of a proceeding
against the Company or necessarily indicate that a proceeding against the
Company is contemplated. The Company, along with six other PRP's, have
voluntarily entered into an Administrative Order pursuant to which, inter alia,
they have undertaken to conduct a remedial investigation/feasibility study
("RI/FS") with respect to the alleged contamination at the site.
The remedial investigation of the site has been completed and the EPA
has prepared its Record of Decision. The Massachusetts Superfund site is
adjacent to a municipal landfill that is in the process of being closed under
Massachusetts law. Once the EPA and the PRPs resolve an outstanding dispute
regarding certain oversight costs, we expect to receive confirmation from the
EPA that we have fulfilled our obligations under the Administrative Order.
During fiscal 2005, we withdrew from further participation in the PRP group. It
is unlikely that this matter will have a material adverse effect on the
Company's operating results, financial condition or cash flows. Historically,
the Company's share of the costs for the RI/FS was being allocated on an interim
basis at 12.52%. Due to the withdrawal of two PRP's, however, the respective
shares of these costs were reallocated among the remaining members of the group
in 2004, increasing our allocation to 19.5% for any remaining costs. At December
31, 2005 and 2004 we had accrued approximately $966,000 and $1,009,000
respectively in connection with this site based on the assumption that the
remaining issues relating to obligations incurred prior to our withdrawal from
the PRP group, the availability of federal funding and the allocation of costs
relating to the completion of the RI/FS, among others, may not be resolved for
many years and that significant legal and technical fees and expenses may still
be incurred prior to such resolution. We believe that we have adequate reserves
for the potential costs associated with this site.
40
In September 1991, we signed a judicial consent decree relating to the
Western Sand and Gravel site located in Burrillville and North Smithfield, Rhode
Island. The consent decree was entered on August 28, 1992 by the United States
District Court for the District of Rhode Island. The most likely scenario for
remediation of the ground water at this site is through natural attenuation,
which will be monitored until 2017. Estimated cost of remediation by natural
attenuation to 2017 is approximately $1,500,000. Based on current participation,
our share of these costs is approximately $134,000 through 2017. At December 31,
2005 and 2004 we had accrued approximately $369,000 and $374,000 respectively,
in connection with this site based on the results of tests conducted in 2000 and
1999 and the likelihood that the remaining issues associated with the
remediation of the site may not be resolved for several more years. We believe
that the costs related to the remediation of this site will not result in any
material adverse effect on our operating results, financial condition or cash
flows based on the results of periodic tests conducted at the site, and we
believe we have adequately reserved for the potential costs associated with this
site.
The estimated liability for costs associated with environmental sites
is included in long-term obligations in the accompanying consolidated balance
sheets (See Note F), exclusive of additional currently payable amounts of
approximately $50,000 and $55,000 included in other current liabilities in 2005
and 2004, respectively. These amounts have not been discounted. We believe that
the accompanying financial statements include adequate provision for
environmental exposures.
In the ordinary course of business, we are contingently liable for
performance under letters of credit of approximately $223,000 at December 31,
2005. We are required to pay a fee monthly presently equal to 2.0% per annum on
the outstanding letter of credit.
We are also a party to employment agreements with certain of our
executive officers that provide for the payment of compensation and other
benefits during the term of each executives' employment and, under certain
circumstances, for a period of time following their termination.
J. PROMOTIONAL EXPENSES
Substantial expenditures for advertising and promotion are considered
necessary to maintain and enhance our business and, as described in Note I to
the consolidated financial statements, certain license agreements require
specified levels of spending. The Company charges advertising costs to expense
as they are incurred. Total expenditures charged to advertising and promotion
expense, exclusive of cooperative advertising and display expenditures, during
2005, 2004, and 2003 were $2,019,000, $2,367,000, and $1,982,000, respectively.
K. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
We follow SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, which establishes standards for the way that public
business enterprises report information about operating segments. Operating
segments are defined as components of a company for which separate financial
information is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and to assess financial performance. We are
engaged in one business, the sale of men's accessories consisting of belts,
wallets and other small leather goods, suspenders and jewelry. Our company and
our customer relationships are organized around this one business segment. Our
products are sold principally domestically through department stores and to a
lesser extent, through specialty stores and mass merchandisers.
L. QUARTERLY FINANCIAL DATA (UNAUDITED)
We believe that the results of operations are more meaningful on a
seasonal basis (approximately January-June and July-December) than on a
quarterly basis. The timing of shipments can be affected by the availability of
materials, retail sales and fashion trends. These factors may shift volume and
related earnings between quarters within a season differently in one year than
in another.
41
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands) FIRST SECOND THIRD FOURTH
- -----------------------------------------------------------------------------------------------------
2005
- ----
NET SALES $19,243 $22,025 $25,934 $30,712
GROSS PROFIT 6,141 7,478 8,285 10,962
NET INCOME (LOSS) $(871) $89 $915 $3,481
NET INCOME (LOSS) PER COMMON SHARE - BASIC $(.16) $.02 $.16 $.61
NET INCOME (LOSS) PER COMMON SHARE - DILUTED $(.16) $.01 $.15 $.56
- -----------------------------------------------------------------------------------------------------
2004
- ----
Net sales $18,902 $24,765 $22,028 $27,592
Gross profit 5,533 8,438 7,392 9,357
Net income (loss) $(800) $529 $279 $1,563
Net income (loss) per common share - basic $(.14) $.10 $.05 $.28
Net income (loss) per common share - diluted $(.14) $.09 $.05 $.24
M. CONVERTIBLE NOTE DUE TO RELATED PARTY
On April 1, 2004, Marshall Tulin, our former Chairman and a director of
the Company, loaned $350,000 to the Company pursuant to the terms of a
subordinated promissory note, as amended and restated as of June 30, 2004 (the
"Note") issued by the Company to Mr. Tulin. The Note is expressly subordinate in
right of payment to the Company's senior debt, has an original maturity of two
years and bears interest at an annual rate of 7.0%, payable quarterly. Under
certain circumstances, as more fully set forth in the Note, the original
maturity date of the Note will be extended to the earlier of December 31, 2009
or the date the 2004 Loan Agreement shall have been terminated and all
obligations of the Company under the 2004 Loan Agreement shall have been paid in
full in cash.
On November 12, 2005, Mr. Tulin died. John Tulin, President and a
director of the Company, and James Tulin, Senior Vice President and a director
of the Company, both sons of Marshall Tulin, are co-executors of Mr. Tulin's
estate (the "Estate"). The Estate has the option at any time to convert the
principal amount of the Note into shares of our common stock pursuant to a
formula based on the greater of the aggregate market value of the Company or its
going concern value as determined by an investment banking firm or nationally
recognized accounting firm, on the conversion date. The number of shares of our
common stock that may be issued under the Note may not exceed 20% of the then
issued and outstanding shares of our common stock on the conversion date. At our
option and subject to certain provisions of the Note, we may prepay the Note at
any time without premium or penalty.
Five members of Mr. Tulin's family are employed by us in various
positions and are compensated for services rendered by them to us.
We also pay a percentage of net sales to a consulting firm controlled
by one of our directors in connection with license agreements which that firm
introduced to us. Royalty payments due by us in connection with this agreement
were approximately $106,000, $76,000 and $69,000 for the years ended December
31, 2005, 2004 and 2003, respectively.
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
We carried out an evaluation, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer, of the
effectiveness as of December 31, 2005 of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule 13 a-15. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective in alerting
them on a timely basis to material information relating to the Company required
to be included in our periodic SEC filings.
There were no changes to our internal control over financial reporting
identified in connection with the foregoing evaluation that occurred during the
three months ended December 31, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION.
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information called for by this Item 10 with regard to our executive
officers (including executive officers who are also directors of the Company) is
set forth following Part I in this Annual Report on Form 10-K under the caption
"Executive Officers of the Registrant." Our non-employee directors are as
follows:
John J. Macht, who is 69 years old, has been President of The Macht
Group, a marketing and retail consulting firm, since July 1992. From April 1991
until July 1992, Mr. Macht served as Senior Vice President of Jordan Marsh
Department Stores, a division of Federated Department Stores. Mr. Macht became a
director in 1995 and is chairman of the Audit Committee.
Raymond Vise, who is 84 years old, served as Senior Vice President of
the Company for more than five years prior to his retirement in 1987. Mr. Vise
became a director in 1963 and is a member of the Audit Committee.
We do not have an audit committee financial expert, within the meaning
of the rules and regulations under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), serving on the Audit Committee of the Board of
Directors. In light of our operating results through 2003, we did not have much
success in attracting an acceptable audit committee financial expert to serve on
the Board's Audit Committee. We expect that our results in 2004 and 2005 will
aid our efforts, which continue, to add an audit committee financial expert to
the Audit Committee.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Exchange Act requires our executive officers and directors, and
persons who beneficially own more than 10% of the Company's Common Stock, to
file initial reports of ownership, and reports of changes of ownership, of our
equity securities with the Securities and Exchange Commission and furnish copies
of those reports to us. Based solely on a review of the copies of the statements
furnished to us to date, or written representations that no statements were
required, we believe that all statements required to be filed by such persons
with respect to our fiscal year ended December 31, 2005 were all timely filed.
CODE OF ETHICS
43
We have adopted a Code of Conduct that applies to our Chief Executive
Officer, Chief Financial Officer, Controller and all other persons performing
functions similar to those officers from time to time.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth certain summary information for each of
our fiscal years ended December 31, 2005, 2004 and 2003 concerning the
compensation of our chief executive officer, chairman of the board (who passed
away in November 2005) and each of our four other most highly compensated
executive officers:
ANNUAL COMPENSATION LONG TERM
------------------ COMPENSATION
------------
OTHER AWARDS
ANNUAL ------ ALL OTHER
COMPEN- SECURITIES COMPEN-
SATION UNDERLYING SATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (5) OPTIONS/SARs(#) (10)
--------------------------- ---- ------ ----- --- --------------- ----
John Tulin,
President and Chief Executive
Officer (1) 2005 $410,000 $25,000 $86,130(6) --- ---
2004 410,000 --- 57,025(6) --- ---
2003 410,000 --- 55,550(6) --- $586
Eric P. Luft,
Senior Vice President - Men's
Division 2005 $154,000 $294,667(2) --- --- $5,863
2004 154,000 199,403(2) --- --- 5,863
2003 180,000 170,955(2) --- --- 6,449
James Tulin, 2005 $357,000 $1,270 --- --- $5,452
Senior Vice President 2004 285,000 76,242 --- --- 5,452
- - Merchandising (3) 2003 285,000 64,867 $40,159(7) --- 6,038
Melvin Goldfeder, 2005 $130,000 $288,652(4) --- --- $5,472
Senior Vice President - Special 2004 130,000 264,019(4) --- --- 5,472
Markets 2003 130,000 174,062(4) --- --- 6,058
Jerold R. Kassner, 2005 210,000 $20,000 --- --- 7,153
Senior Vice President - 2004 210,000 --- --- --- 7,153
Chief Financial Officer 2003 210,000 --- --- --- 7,153
2005 $260,000 --- $29,345(9) --- $7,153
Marshall Tulin, 2004 260,000 --- --- --- 7,153
former Chairman of the Board (8) 2003 260,000 --- --- --- 7,153
- --------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Tulin is a party to an employment agreement with the Company which is
described below under the caption "Employment Contracts and Severance
Agreements".
(2) Mr. Luft's bonus amounts represent sales commissions. Mr. Luft is a party to
an employment agreement with the Company which is described below under the
caption "Employment Contracts and Severance Agreements."
(3) Mr. Tulin's bonus amounts represent sales commissions. Mr. Tulin is a party
to an employment agreement with the Company which is described below under the
caption "Employment Contracts and Severance Agreements".
(4) Mr. Goldfeder's bonus amounts represent sales commissions.
(5) Except as set forth for Marshall Tulin, John Tulin and James Tulin for the
years indicated, perquisites and other personal benefits during 2005, 2004, and
2003 did not exceed the lesser of $50,000 or 10% of reported annual salary and
bonus for any of the Named Officers.
44
(6) These amounts include a special allowance of $43,200 in each of 2005, 2004,
and 2003.
(7) These amounts include automobile lease payments of $19,288 and a travel
allowance of $10,800 in 2003.
(8) Mr. Tulin passed away on November 12, 2005.
(9) These amounts include financial counseling expenses of $9,170
automobile-related costs of $11,667.
(10) Amounts in this column for the fiscal years ended December 31, 2005 and
2004 represent premiums paid by the Company on certain life insurance policies
owned by the Company on the lives of the Named Officers (as defined below).
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUE
TABLE
During the fiscal year ended December 31, 2005, no stock options were
granted to any of our executive officers named in the table under the caption
"Summary Compensation Table" above (the "Named Officers"). The following table
sets forth information with respect to the number and value of unexercised
options held by the Named Officers as of the end of fiscal 2005. The closing
price of a share of our Common Stock on December 31, 2005 was $1.40.
AGGREGATED OPTION EXERCISES IN FISCAL 2005
AND 2005 FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED ON OPTIONS AT FY-END (#) FY-END ($) EXERCISABLE/
NAME EXERCISE (#) VALUE REALIZED ($) (1) EXERCISABLE/ UNEXERCISABLE UNEXERCISABLE (2)
- ---- ------------ ---------------------- -------------------------- -----------------
John Tulin 100,000 $ 133,000 50,000 / 0 $ 61,500
Eric P. Luft - - 75,000 / 0 $ 92,250
James Tulin - - 75,000 / 0 $ 92,250
Melvin Goldfeder 75,000 $ 103,500 0 / 0 $ -
Jerold R. Kassner - - 75,000 / 0 $ 92,250
(1) Aggregate market value of the shares of Common Stock acquired at exercise
date less the exercise price of the options.
(2) Aggregate market value of the shares of Common Stock covered by the options
at fiscal year end less the exercise price of such options.
COMPENSATION OF DIRECTORS
During 2005, each director who is not a full-time employee of or
consultant to the Company received an annual director's fee of $3,000 per
meeting of the Board and $3,000 per Board committee meetings attended by him in
person. Each director who is not a full-time employee of or consultant to the
Company also received an annual director's fee of $1,500 per meeting of the
Board and $1,500 per Board committee meetings attended by him via
teleconference. In addition, pursuant to the terms of our 1994 Non-Employee
Director Stock Option Plan (the "1994 Plan"), each director who is not a
full-time employee of the Company or any subsidiary of the Company and who is in
office immediately following each annual meeting of stockholders at which
directors are elected, will, as of the date such meeting is held, automatically
be granted an option to purchase 1,667 shares of Common Stock. During fiscal
2005, Messrs. Macht and Vise were each granted an option to purchase 1,667
shares of Common Stock at an exercise price per share of $1.60, the fair market
value per share of Common Stock on the date of the grant.
EMPLOYMENT CONTRACTS AND SEVERANCE AGREEMENTS
We were a party to an employment agreement with Marshall Tulin, our
former Chairman of the Board who passed away in November 2005, under which he
received a base salary of $250,000 per annum. We are a party to an employment
agreement with John Tulin, which terminates on December 31, 2006. Under this
agreement, Mr. Tulin is employed as Chief Executive Officer and initially
received a base salary of $410,000 per year, plus such additional compensation,
if any, as the Board of Directors determine. Mr. Tulin's base salary is
presently $460,000. In addition, the we are a party to an employment agreement
with James Tulin, which terminates on December 31, 2006, and under which he is
employed as Senior Vice President-Merchandising, and receives a base salary of
$285,000 per year, plus such additional compensation, if any, as the Board of
Directors shall determine. Mr. Tulin's base salary is presently $357,000.
45
We are also a party to an amended and restated employment agreement, as
amended to date, with Eric P. Luft, pursuant to which Mr. Luft is employed as
Senior Vice President - Men's Division until September 30, 2006. The term of the
employment agreement will automatically be extended until June 30, 2007, and
then for successive additional periods of one year until the next June 30,
unless at least 30 days prior to the then current expiration date (on or prior
to September 15, 2006 with regard to the September 30, 2006 expiration date)
either we or Mr. Luft shall determine not to extend the term. Under the
agreement, Mr. Luft is entitled to receive a base salary of $144,000 per year,
such additional compensation, if any, as the Board of Directors shall determine,
for each calendar year thereafter, plus annual commission compensation in an
amount equal to the greater of (i) $128,000 and (ii) commission compensation
calculated and payable in accordance with any commission compensation
arrangement that may exist from time to time between us and Mr. Luft.
Furthermore, in the event we terminate Mr. Luft's employment without cause, we
have agreed to pay to Mr. Luft $272,000 plus an additional amount equal to a pro
rata portion of $272,000 for the number of months from the preceding July 1 to
the last day of the calendar month in which his employment is terminated.
However, the agreement provides that if his employment is terminated and he is
entitled to receive amounts under his termination agreement with us (described
in the next paragraph), Mr. Luft must choose to receive either (i) the amounts
he may be entitled to under his employment agreement, or (ii) the amounts he may
be entitled to under his termination agreement, but not both amounts. In
addition, we are parties to an agreement with Jerold R. Kassner under which, if
we terminate Mr. Kassner's employment for any reason other than cause,
disability or death, he will be entitled to receive, among other things, his
base salary (subject to reduction in certain circumstances) plus certain medical
benefits for him and his family for up to one-year after termination.
The Company has entered into termination agreements with Messrs. John
Tulin, James Tulin, Eric P. Luft, Melvin Goldfeder, and Jerold R. Kassner, and
was a party to a termination agreement with Marshall Tulin before his death.
Each termination agreement contains an automatic annual extension on each
December 31 unless the Company shall have given 30 days written notice prior to
the then current expiration date that there shall be no extension. In the event
of a change in control of the Company (as defined in such agreements) during the
term of such agreements, followed by a significant change in the duties, powers
or conditions of employment of any such officer, the officer may within 2 years
thereafter terminate his employment and receive a lump sum payment equal to 2.99
times the officer's "base amount" (as defined in Section 280G (b)(3) of the
Internal Revenue Code of 1986, as amended).
TERMINATED PENSION PLANS
In 1983, we terminated our pension plans covering salaried employees
and salesmen and purchased annuities from the assets of those plans to provide
for the payment (commencing at age 62) of accrued benefits of those employees
who were not entitled to or did not elect to receive lump sum payments. The
accrued annual benefits for Messrs. John Tulin, James Tulin, and Melvin
Goldfeder are $13,116, $10,407, and $12,230, respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Executive Compensation Committee of the Board of Directors is
charged with recommending the annual compensation, including bonuses, for our
executive officers who are also directors and for our Chief Financial Officer.
The Executive Compensation Committee consists of John Macht and Raymond Vise.
The Stock Option Committee of the Board of Directors administers our
compensation plans under which stock and stock-based compensation have been
awarded other than for our 1998 Equity Incentive Compensation Plan (the "1998
Plan"), which is administered by the entire Board of Directors. The Stock Option
Committee consists of John Macht and Raymond Vise.
Under agreements between the us and The Macht Group, a marketing and
retail consulting firm of which John J. Macht serves as President, The Macht
Group is entitled to receive compensation based on net sales of products under
license agreements entered into between us and licensors introduced to us by The
Macht Group, and in certain instances, based on net sales of specified private
label products. Aggregate compensation earned by The Macht Group under this
arrangement during 2005 was $105,511.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
OWNERSHIP OF VOTING SECURITIES
46
The following table sets forth information as of February 28, 2006 with
respect to each person (including any "group" as that term is used in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended ("the Exchange
Act")) who is known to the Company to be the beneficial owner of more than 5% of
the Common Stock:
NAME AND ADDRESS OF AMOUNT AND NATURE OF BENEFICIAL PERCENT
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP OF CLASS
-------------- ---------------- --------- --------
Common Stock The New Swank, Inc. 2,987,822 (1)(2) 51.9%
Retirement Plan
90 Park Avenue
New York, NY 10016
Common Stock John Tulin 2,588,817 (3)(4)(5) 43.3%
90 Park Avenue
New York, NY 10016
Common Stock Raymond Vise 1,947,390 (3)(6) 33.8%
8 El Paseo
Irvine, CA 92715
- ---------------------
(1) This amount includes 1,049,234 shares of Common Stock allocated to
participants' accounts in The New Swank, Inc. Retirement Plan (the
"Retirement Plan") and as to which such participants may direct the trustees
of the Retirement Plan as to voting on all matters.
(2) This amount also includes 1,704,341 shares of Common Stock allocated to
participants' accounts in the Retirement Plan as to which participants may
direct the trustees as to voting only on certain significant corporate
events and as to which the trustees may vote on all other matters in their
discretion, and 39,337 unallocated shares which the trustees may vote in
their discretion. Shares allocated to such accounts as to which no voting
instructions are received are required to be voted in the same proportion as
shares allocated to accounts as to which voting instructions are received.
This amount also includes 194,910 shares held in accounts under the
Retirement Plan as to which participants may direct the trustees as to
voting on all matters and may be disposed of in the discretion of the
trustees.
(3) John A. Tulin, President and a director of the Company and Raymond Vise,
a director of the Company, are co-trustees of the Retirement Plan. This
amount includes 1,704,341 shares held in accounts as to which the trustees
have sole voting power as to certain matters (see footnote 2 above); 39,337
unallocated shares which the trustees may vote in their discretion; and
194,910 shares held in accounts under the Retirement Plan which may be
disposed of in the discretion of the trustees (see footnote 2 above).
(4) This amount includes 1,060 shares owned by Mr. Tulin's wife, 10,000
shares held jointly by Mr. Tulin and his wife, and 2,333 shares held by Mr.
Tulin's daughter. Mr. Tulin disclaims beneficial ownership of these shares.
This amount also includes 50,000 shares which Mr. Tulin has the right to
acquire within 60 days through the exercise of stock options granted under
the 1998 Plan and 25,978 shares allocated to his accounts under the
Retirement Plan.
(5) This amount includes 366,403 shares of Common Stock (the "Estate
Shares") held by the Estate of Marshall Tulin (the "Estate"), as to which
Mr. Tulin acts as a co-executor. Mr. Tulin shares voting and dispositive
power as to the Estate Shares. The Estate Shares include (a) 14,546 shares
of Common Stock held in Marshall Tulin's accounts under the Retirement Plan,
and (c) 167,464 shares issuable to the Estate within 60 days upon conversion
of the Note as more particularly described below under the caption "Certain
Relationships and Related Transactions." At the Estate's option, the Note
may be converted into a number of shares equal to (i) the outstanding
principal amount of the Note on the conversion date divided by (ii) the
quotient a (A) the going concern value of the Company (as defined in the
Note) divided by (B) the number of issued and outstanding common shares as
of that date. The maximum number of shares that may be issued pursuant to
the Note is 20% of the issued and outstanding shares of the Company (the
number of shares of Common Stock into which the Note is convertible is based
assumes a going concern value of the Corporation on February 28, 2006 of
$12,031,804 based on the closing price per share of Common Stock in the
over-the-counter market on the last trading day prior to such date). Mr.
Tulin disclaims beneficial ownership of the Estate Shares.
(6) This amount includes 6,667 shares which Mr. Vise has the right to
acquire within 60 days through the exercise of stock options granted under
the 1994 Plan.
47
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information at February 28, 2006 as to the
ownership of shares of our Common Stock, our only outstanding class of equity
securities, with respect to (a) each of our directors (b) each Named Officer,
and (c) all of our directors and executive officers as a group (8 persons).
Unless otherwise indicated, each person named below and each person in the group
named below has sole voting and dispositive power with respect to the shares of
Common Stock indicated as beneficially owned by such person or such group.
AMOUNT AND NATURE OF BENEFICIAL
BENEFICIAL OWNER OWNERSHIP PERCENT OF CLASS
---------------- --------- ----------------
John J. Macht 31,667 (1) *
James Tulin 523,647 (2) 9.0%
John Tulin 2,588,817 (3) 43.3%
Raymond Vise 1,947,390 (4) 33.8%
Eric P. Luft 98,370 (5) 1.7%
Melvin Goldfeder 216,764 (6) 3.8%
Jerold R. Kassner 80,692 (7) 1.4%
All directors and officers as a
group (8 persons) 3,284,217 (8) 52.9%
* Less than one (1%) percent.
- -----------------------------------
(1) Includes 6,667 shares which Mr. Macht has the right to acquire within 60
days through the exercise of stock options under the 1994 Plan.
(2) Includes the Estate Shares referred to in footnote 5 to the first table
above under the caption "Ownership of Voting Securities," as to which he
disclaims beneficial ownership. Also includes 75,000 shares which Mr. Tulin has
the right to acquire within 60 days through the exercise of stock options
granted under the 1998 Plan, an aggregate of 142 shares held by his children and
an aggregate of 24,933 shares of Common Stock allocated to his accounts under
the Retirement Plan.
(3) Includes the shares referred to in footnotes 3, 4, and 5 to the first table
above under the caption "Ownership of Voting Securities."
(4) Includes the shares referred to in footnotes 3 and 6 to the first table
above under the caption "Ownership of Voting Securities."
(5) Includes 75,000 shares which Mr. Luft has the right to acquire within 60
days through the exercise of stock options granted under the 1998 Plan and an
aggregate of 19,370 shares of Common Stock allocated to his accounts under the
Retirement Plan.
(6) Includes an aggregate of 20,532 shares of Common Stock allocated to Mr.
Goldfeder's accounts under the Retirement Plan.
(7) Includes 75,000 shares which Mr. Kassner has the right to acquire within 60
days through the exercise of stock options granted under the 1998 Plan and an
aggregate of 5,692 shares of Common Stock allocated to his accounts under the
Retirement Plan.
(8) Reference is made to footnotes (1) through (7) above. This amount also
includes 288,334 shares of Common Stock which directors and executive officers
as a group have the right to acquire within 60 days through the exercise of
stock options granted under the 1994 Plan and the 1998 Plan and 92,185 shares of
Common Stock allocated to their respective accounts under the Retirement Plan.
EQUITY COMPENSATION PLAN INFORMATION
48
The following table sets forth certain information as of December 31,
2005 concerning our equity compensation plans:
---------------------------- ----------------------- --------------------------------- -----------------------------------
NUMBER OF SECURITIES
REMAINING
NUMBER OF AVAILABLE FOR
SECURITIES TO FUTURE ISSUANCE
BE ISSUED UNDER EQUITY
UPON COMPENSATION
EXERCISE OF WEIGHTED-AVERAGE PLANS
OUTSTANDING EXERCISE PRICE OF (EXCLUDING
OPTIONS, OUTSTANDING SECURITIES
WARRANTS AND OPTIONS, WARRANTS REFLECTED IN
PLAN CATEGORY RIGHTS AND RIGHTS COLUMN (a))
---------------------------- ----------------------- --------------------------------- -----------------------------------
(a) (b) (c)
EQUITY COMPENSATION
PLANS APPROVED BY
SECURITY HOLDERS 363,334 $.19 375,000
---------------------------- ----------------------- --------------------------------- -----------------------------------
EQUITY COMPENSATION
PLANS NOT APPROVED BY
SECURITY HOLDERS 0 0 0
---------------------------- ----------------------- --------------------------------- -----------------------------------
TOTAL 363,334 $.19 375,000
---------------------------- ----------------------- --------------------------------- -----------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
A portion of the information called for by this Item 13 is set forth in
Item 11 Executive Compensation under the caption "Compensation Committee
Interlocks and Insider Participation", which information is incorporated by
reference herein.
Christine Tulin (who is the daughter of John Tulin) was employed by us
during 2005 as Merchandise Manager -- men's jewelry. Ms. Tulin is responsible
for the development of merchandise design and packaging concepts for our various
licensed and private label men's jewelry collections. Aggregate compensation
earned by Christine Tulin for services rendered during 2005 amounted to
$143,333.
Kathryn Figueroa (who is the sister of John Tulin) was employed by us
during 2005 as southeast regional factory outlet manager. Ms. Figueroa is
responsible for the operation of our factory store operations covering the
southeastern United States. Aggregate compensation earned by Kathryn Figueroa
for services rendered during 2005 amounted to $71,617.
On April 1, 2004, Marshall Tulin, our former Chairman of the Board,
loaned $350,000 to the Company pursuant to the terms of a subordinated
promissory note, as amended and restated as of June 30, 2004 (the "Note") issued
by the Company to Mr. Tulin. The Note is expressly subordinate in right of
payment to the Company's senior debt, has an original maturity of two years and
bears interest at an annual rate of 7.0%, payable quarterly. Under certain
circumstances, as more fully set forth in the Note, the original maturity date
of the Note will be extended to the earlier of December 31, 2009 or the date our
present bank loan agreement is terminated and all obligations of the Company
under that loan agreement are paid in full in cash. The Estate has the option at
any time to convert the principal amount of the Note into shares of the
Company's common stock pursuant to a formula based on the greater of the
aggregate market value of the Company or its going concern value as determined
by an investment banking firm or nationally recognized accounting firm, on the
conversion date. The number of shares of our common stock that may be issued
under the Note may not exceed 20% of the then issued and outstanding shares of
the Company's common stock on the conversion date. At our option and subject to
certain provisions of the Note, we may prepay the Note at any time without
premium or penalty.
49
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
---------------------------------------
AUDIT FEES
Aggregate audit fees billed and expected to be billed by BDO Seidman,
LLP ("BDO") for its audit of the Company's consolidated financial statements for
the years ended December 31, 2005 and December 31, 2004, and for its review of
the consolidated financial statements included in the Company's Quarterly
Reports on Form 10-Q filed with the Securities and Exchange Commission for
fiscal 2005 and fiscal 2004, were $201,000 and $194,500, respectively.
AUDIT-RELATED FEES
Aggregate fees billed and expected to be billed by BDO for assurance
and related services performed by BDO and reasonably related to the audit and
review services performed by BDO described above under the caption "Audit Fees"
totaled $26,400 and $23,400 for fiscal 2005 and 2004, respectively.
TAX FEES
In addition to the fees described above, aggregate fees of $30,800 and
$27,390 respectively, were billed by BDO during the years ended December 31,
2005 and December 31, 2004, respectively, for income tax compliance and related
tax services.
ALL OTHER FEES
None.
All audit-related services, tax services and other services were
pre-approved by the Audit Committee of the Board of Directors. The Audit
Committee's pre-approval policies and procedures are to pre-approve, on a
case-by-case basis, all audit, audit-related, tax and other services to be
performed by our independent auditors.
50
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) Documents filed as part of this Report
1. Financial Statements filed as part of this Report:
The following consolidated financial statements of the Company
are included in Item 8:
Consolidated Balance Sheets -- As of December 31, 2005 and
2004.
Consolidated Statements of Operations -- Years ended December
31, 2005, 2004, and 2003.
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income (Loss) -- Years ended December 31, 2005,
2004, and 2003.
Consolidated Statements of Cash Flows -- Years ended December
31, 2005, 2004, and 2003.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules filed as part of this Report:
The following consolidated financial statement schedule and
the reports of independent accountants thereon are submitted
in response to Item 14(d) of this Annual Report.
Financial Statement Schedule for the years ended December 31,
2005, 2004 and 2003.
Schedule II. Valuation and Qualifying Accounts
(b) Reports on Form 8-K
The Company furnished a Current Report on Form 8-K on November
9, 2005 with respect to an event reported under Item 2.02 -
"Results of Operations and Financial Condition".
(c) Exhibits
Exhibit Description
3.01 Restated Certificate of Incorporation of the Company dated May
1, 1987, as amended to date. (Exhibit 3.01 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1999, File No. 1-5354, is incorporated herein by
reference.)
3.02 By-laws of the Company, as amended to date. (Exhibit 3.02 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001, File No. 1-5354, is incorporated
herein by reference.)
4.01 Rights Agreement, dated as of October 26, 1999, between the
Company and American Stock Transfer & Trust Company, as Rights
Agent. (Exhibit 4.1 to the Company's Current Report on Form
8-K dated October 29, 1999, File No. 1-5354, is incorporated
herein by reference.)
4.02 Convertible Subordinated Promissory Note dated as of April 1,
2004 and Amended and Restated as of June 30, 2004 between the
Company and Marshall Tulin (Exhibit 1 to the Company's
Schedule 13D/A dated as of September 9, 2004, File No. 1-5354,
is incorporated herein by reference.)
51
4.03 Loan and Security Agreement dated as of June 30, 2004 between
the Company and Wells Fargo Foothill, Inc. (Exhibit 4.1 to the
Company's Current Report on Form 8-K dated as of July 7, 2004,
File No. 1-5354, is incorporated herein by reference.)
10.01 Employment Agreement dated June 20, 1991 between the Company
and Marshall Tulin. (Exhibit 10.01 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1991, File No. 1-5354, is incorporated herein by reference.)+
10.01.1 Amendment dated as of September 1, 1993 to Employment
Agreement between the Company and Marshall Tulin. (Exhibit
10.01.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, File No. 1-5354, is
incorporated herein by reference.)+
10.01.2 Amendment effective as of October 30, 1995 to Employment
Agreement between the Company and Marshall Tulin. (Exhibit
10.01.2 to the Company's Annual Report on Form 10K for the
fiscal year ended December 31, 1996, File No. 1-5354, is
incorporated herein by reference.)+
10.01.3 Amendment effective as of January 1, 1992 to Employment
Agreement between the Company and Marshall Tulin. (Exhibit
10.01.3 to the Company's Annual Report on Form 10K for the
fiscal year ended December 31, 1998, File No. 1-5354, is
incorporated herein by reference.)+
10.01.4 Amendment dated as of May 4, 1998 to Employment Agreement
between the Company and Marshall Tulin. (Exhibit 10.0 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1998, File No. 1-5354, is incorporated herein
by reference.)+
10.01.5 Amendment dated as of May 30, 2001 to Employment Agreement
between the Company and Marshall Tulin. (Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 2001, File No. 1-5354, is incorporated
herein by reference.)+
10.01.6 Amendment dated as of June 20, 2001 to Employment Agreement
between the Company and Marshall Tulin. (Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 2001, File No. 1-5354, is incorporated
herein by reference.)+
10.02 Employment Agreement dated as of January 1, 1990 between the
Company and John Tulin. (Exhibit 10-03 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1989, File No. 1-5354, is incorporated herein by reference.)+
10.02.1 Amendments dated as of September 1, 1993 and September 2,
1993, respectively, between the Company and John Tulin.
(Exhibit 10.02.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993, File No. 1-5354,
is incorporated herein by reference.)+
10.02.2 Amendment dated as of January 1, 1997 to Employment Agreement
between the Company and John Tulin. (Exhibit 10.02.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, File No. 1-5354, is incorporated herein by
reference.)+
10.02.3 Amendment dated as of January 1, 1992 to Employment Agreement
between the Company and John Tulin. (Exhibit 10.02.3 to the
Company's Annual Report on Form 10K for the fiscal year ended
December 31, 1998, File No. 1-5354, is incorporated herein by
reference.)+
10.02.4 Amendment dated as of December 10, 1998 to Employment
Agreement between the Company and John Tulin. (Exhibit 10.02.4
to the Company's Annual Report on Form 10K for the fiscal year
ended December 31, 1998, File No. 1-5354, is incorporated
herein by reference.)+
10.02.5 Amendment dated as of December 27, 2001 to Employment
Agreement between the Company and John Tulin. (Exhibit
10.02.05 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001, File No. 1-5354, is
incorporated herein by reference.)+
52
10.02.6 Amendment dated as of January 1, 2005 to Employment Agreement
between the Company and John Tulin. (Exhibit 10.01 to the
Company's Current Report on Form 8-K dated as of March 28,
2005 File No. 1-5354, is incorporated herein by reference.)+
10.03 Employment Agreement dated as of March 1, 1989 between the
Company and James Tulin. (Exhibit 10.05 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1988, File No. 1-5354, is incorporated herein by
reference.)+
10.03.1 Amendment dated as of January 4, 1990 to Employment Agreement
between the Company and James Tulin. (Exhibit 10.05 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 1-5354, is incorporated herein by
reference.)+
10.03.2 Amendment dated as of September 1, 1993 to Employment
Agreement between the Company and James Tulin. (Exhibit
10.03.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, File No. 1-5354, is
incorporated herein by reference.)+
10.03.3 Amendment dated as of January 1, 1997 to Employment Agreement
between the Company and James Tulin. (Exhibit 10.03.3 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, File No. 1-5354, is incorporated herein by
reference.)+
10.03.4 Amendment dated as of January 1, 1992 to Employment Agreement
between the Company and James Tulin. (Exhibit 10.03.4 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, File No. 1-5354, is incorporated herein by
reference.)+
10.03.5 Amendment dated as of December 10, 1998 to Employment
Agreement between the Company and James Tulin. (Exhibit
10.03.5 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, File No. 1-5354, is
incorporated herein by reference.)+
10.03.6 Amendment dated as of January 1, 2003 to Employment Agreement
between the Company and James Tulin. (Exhibit 10.03.06 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, File No. 1-5354, is incorporated herein by
reference.)+
10.03.7 Amendment dated as of January 1, 2005 to Employment Agreement
between the Company and James Tulin. (Exhibit 10.02 to the
Company's Current Report on Form 8-K dated as of March 28,
2005 File No. 1-5354, is incorporated herein by reference.)+
10.04 Amended and Restated Employment Agreement dated as of December
18, 2003 between the Company and Eric P. Luft (Exhibit 10.04
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2004, File No. 1-5354, is incorporated
herein by reference.)+
10.04.1 Letter Agreement dated as of May 26, 2004 amending the Amended
and Restated Employment Agreement dated as of December 18,
2003 between the Company and Eric P. Luft (Exhibit 10.01 to
the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2004, File No. 1-5354, is incorporated
herein by reference.)+
10.04.2 Letter Agreement dated as of September 23, 2004 amending the
Amended and Restated Employment Agreement dated as of December
18, 2003 between the Company and Eric P. Luft (Exhibit 10.01
to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2004, File No. 1-5354, is
incorporated herein by reference.)+
10.04.3 Letter Agreement dated as of March 9, 2005 amending the
Amended and Restated Employment Agreement dated as of December
18, 2003 between the Company and Eric P. Luft (Exhibit 10.01
to the Company's Current Report on Form 8-K dated as of March
11, 2005, File No. 1-5354, is incorporated herein by
reference.)+
10.04.4 Letter Agreement dated as of February 28, 2006 amending the
Amended and Restated
53
Employment Agreement dated as of December 18, 2003 between the
Company and Eric P. Luft (Exhibit 1.01 to the Company's
Current Report on Form 8-K dated as of March 8, 2006, File No.
1-5354, is incorporated herein by reference.)+
10.05 Form of Termination Agreement effective January 1, 1999
between the Company and each of the Company's officers listed
on Schedule A thereto. (Exhibit 10.05 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1998, File No. 1-5354, is incorporated herein by reference.)+
10.06 Deferred Compensation Plan of the Company dated as of January
1, 1987. (Exhibit 10.12 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1988, File No.
1-5354, is incorporated herein by reference.)+
10.07 Agreement dated as of July 14, 1981 between the Company and
Marshall Tulin, John Tulin and Raymond Vise as investment
managers of the Company's pension plans. (Exhibit 10.12(b) to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1981, File No. 1-5354, is incorporated
herein by reference.)
10.08 The New Swank, Inc. Retirement Plan Trust Agreement dated as
of January 1, 1994 among the Company and Marshall Tulin, John
Tulin and Raymond Vise, as co-trustees. (Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, File No. 1-5354, is incorporated herein by
reference.)
10.08.01 The New Swank, Inc. Retirement Plan as amended and restated,
effective January 1, 1999 (Exhibit 1 to Amendment No. 12 to
the Schedule 13D of the New Swank, Inc. Retirement Plan,
Marshall Tulin, John Tulin, and Raymond Vise, filed on
December 14, 2001, is incorporated herein by reference.)
10.09 Plan of Recapitalization of the Company dated as of September
28, 1987, as amended (Exhibit 2.01 to Post-Effective Amendment
No.1 to the Company's S-4 Registration Statement, File
No.33-19501, filed on February 9, 1988, is incorporated herein
by reference.)
10.10 First Amendment effective January 1, 1997 to Key Employee
Deferred Compensation Plan. (Exhibit 10.14.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996, File No. 1-5354, is incorporated herein by
reference.)+
10.11 1994 Non-Employee Director Stock Option Plan. (Exhibit 10.15
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994, File No. 1-5354, is incorporated
herein by reference.)+
10.12 Letter Agreement effective August 1, 1996 between the Company
and John J. Macht. (Exhibit 10.18 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1996, File No. 1-5354, is incorporated herein by reference.)+
10.13 Letter Agreement effective August 1, 1998 between the Company
and The Macht Group. (Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1998, File No. 1-5354, is incorporated herein by reference.)+
10.14 Letter Agreement effective May 1, 2000 between the Company and
The Macht Group. (Exhibit 10.1 to the Company's Quarterly
Report on Form 10-K for the fiscal quarter ended June 30,
2000, File No. 1-5354, is incorporated herein by reference.)+
10.15 Swank, Inc. 1998 Equity Incentive Compensation Plan (Exhibit
10.0 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1998, File No. 1-5354, is
incorporated herein by reference.)+
10.16 Agreement dated as of July 10, 2001 between the Company and
K&M Associates L.P. (Exhibit
54
10.22 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 2001, File No. 1-5354, is
incorporated herein by reference.)+
10.17 Agreement dated as of October 17, 2003 between the Company and
Jerold R. Kassner.+*
14.01 Code of Ethics for Finance Professionals of the Company
(Exhibit 14.01 to the Company's Annual Report on Form 10-Q for
the fiscal year ended December 31, 2003, File No. 1-5354, is
incorporated herein by reference.)
21.01 Subsidiaries of the Company. (Exhibit 21.01 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1998, File No. 1-5354, is incorporated herein by
reference.)+
31.01 Rule 13a-14(a) Certification of John Tulin, President and
Chief Executive Officer of the Company.*
31.02 Rule 13a-14(a) Certification of Jerold R. Kassner, Principal
Financial Officer of the Company.*
32.01 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
- -------------------------------------------------
*Filed herewith.
+Management contract or compensatory plan or arrangement.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 31, 2006 SWANK, INC.
(Registrant)
By:
-------------------------------------------
Jerold R. Kassner, Senior Vice President,
Chief Financial Officer, Treasurer and
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
- -----------------------------------
John A. Tulin President and Director (principal executive March 31, 2006
officer)
- -----------------------------------
Jerold R. Kassner Senior Vice President Chief Financial March 31, 2006
Officer, Treasurer and Secretary (principal
financial and accounting officer)
- -----------------------------------
John J. Macht Director March 31, 2006
- -----------------------------------
Eric P. Luft Senior Vice President and Director March 31, 2006
- -----------------------------------
James E. Tulin Senior Vice President and Director March 31, 2006
- -----------------------------------
Raymond Vise Director March 31, 2006
56
SWANK, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- -------- -------- --------
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED AT END
OF PERIOD TO EXPENSE DEDUCTIONS OF PERIOD
FOR THE YEAR ENDED DECEMBER 31, 2005
RESERVE FOR RECEIVABLES
Allowance for doubtful accounts $ 755,000 $ 259,000 (G) $ 214,000 (A) (I) $ 800,000
Allowance for cash discounts 90,000 181,000 (H) 216,000 (B) 55,000
Allowance for customer returns 2,013,000 2,715,000 (F) 2,883,000 (C) 1,845,000
Allowance for cooperative advertising 164,000 564,000 (H) 362,000 (D) 366,000
Allowance for in-store markdowns 2,573,000 5,514,000 (H) 5,912,000 (E) 2,175,000
--------- --------- --------- ---------
TOTAL $ 5,595,000 $ 9,233,000 $ 9,587,000 $ 5,241,000
=========== =========== =========== ===========
RESERVE FOR RESTRUCTURING $ 0 $ 0 $0 $ 0
- ------------------------- === ==== == ===
FOR THE YEAR ENDED DECEMBER 31, 2004
RESERVE FOR RECEIVABLES
Allowance for doubtful accounts $ 875,000 $ 106,000 (G) $ 226,000 (A) (I) $ 755,000
Allowance for cash discounts 109,000 362,000 (H) 381,000 (B) 90,000
Allowance for customer returns 2,125,000 2,697,000 (F) 2,809,000 (C) 2,013,000
Allowance for cooperative advertising 458,000 242,000 (H) 536,000 (D) 164,000
Allowance for in-store markdowns 2,235,000 5,746,000 (H) 5,408,000 (E) 2,573,000
--------- --------- --------- ---------
TOTAL $ 5,802,000 $ 9,153,000 $ 9,360,000 $ 5,595,000
============ =========== =========== ===========
RESERVE FOR RESTRUCTURING $ 0 $ 174 (J) $ 174 (K) $ 0
- ------------------------- === ===== ===== ===
FOR THE YEAR ENDED DECEMBER 31, 2003
RESERVE FOR RECEIVABLES
Allowance for doubtful accounts $ 1,238,000 $ 58,000 (G) $ 421,000 (A) (I) $ 875,000
Allowance for cash discounts 115,000 275,000 (H) 281,000 (B) 109,000
Allowance for customer returns 2,615,000 5,013,000 (F) 5,503,000 (C) 2,125,000
Allowance for cooperative advertising 616,000 626,000 (H) 784,000 (D) 458,000
Allowance for in-store markdowns 2,790,000 4,527,000 (H) 5,082,000 (E) 2,235,000
--------- --------- --------- ---------
TOTAL $ 7,374,000 $ 10,499,000 $ 12,071,000 $ 5,802,000
=========== ============ ============ ===========
RESERVE FOR RESTRUCTURING $ 0 $ 0 $ 0 $ 0
- ------------------------- === === === ===
(A) Bad debts charged off as uncollectable, net of reserves.
(B) Cash discounts taken by customers.
(C) Customer returns.
(D) Credits issued to customers for cooperative advertising.
(E) Credits issued to customers for in-store markdowns.
(F) Net reduction in sales and cost of sales.
(G) Recorded in selling and administrative.
(H) Recorded in net sales.
(I) Includes accounts receivable recoveries in excess of charge-offs.
(J) Recorded in restructuring expenses
(K) Payments made to beneficiaries
57
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
ANNUAL REPORT ON FORM 10K
FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2005
SWANK, INC.
58
EXHIBIT INDEX
Exhibit Description
3.01 Restated Certificate of Incorporation of the Company dated May
1, 1987, as amended to date. (Exhibit 3.01 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1999, File No. 1-5354, is incorporated herein by
reference.)
3.02 By-laws of the Company, as amended to date. (Exhibit 3.02 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001, File No. 1-5354, is incorporated
herein by reference.)
4.01 Rights Agreement, dated as of October 26, 1999, between the
Company and American Stock Transfer & Trust Company, as Rights
Agent. (Exhibit 4.1 to the Company's Current Report on Form
8-K dated October 29, 1999, File No. 1-5354, is incorporated
herein by reference.)
4.02 Convertible Subordinated Promissory Note dated as of April 1,
2004 and Amended and Restated as of June 30, 2004 between the
Company and Marshall Tulin (Exhibit 1 to the Company's
Schedule 13D/A dated as of September 9, 2004, File No. 1-5354,
is incorporated herein by reference.)
4.03 Loan and Security Agreement dated as of June 30, 2004 between
the Company and Wells Fargo Foothill, Inc. (Exhibit 4.1 to the
Company's Current Report on Form 8-K dated as of July 7, 2004,
File No. 1-5354, is incorporated herein by reference.)
10.01 Employment Agreement dated June 20, 1991 between the Company
and Marshall Tulin. (Exhibit 10.01 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1991, File No. 1-5354, is incorporated herein by reference.)+
10.01.1 Amendment dated as of September 1, 1993 to Employment
Agreement between the Company and Marshall Tulin. (Exhibit
10.01.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, File No. 1-5354, is
incorporated herein by reference.)+
10.01.2 Amendment effective as of October 30, 1995 to Employment
Agreement between the Company and Marshall Tulin. (Exhibit
10.01.2 to the Company's Annual Report on Form 10K for the
fiscal year ended December 31, 1996, File No. 1-5354, is
incorporated herein by reference.)+
10.01.3 Amendment effective as of January 1, 1992 to Employment
Agreement between the Company and Marshall Tulin. (Exhibit
10.01.3 to the Company's Annual Report on Form 10K for the
fiscal year ended December 31, 1998, File No. 1-5354, is
incorporated herein by reference.)+
10.01.4 Amendment dated as of May 4, 1998 to Employment Agreement
between the Company and Marshall Tulin. (Exhibit 10.0 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1998, File No. 1-5354, is incorporated herein
by reference.)+
10.01.5 Amendment dated as of May 30, 2001 to Employment Agreement
between the Company and Marshall Tulin. (Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 2001, File No. 1-5354, is incorporated
herein by reference.)+
10.01.6 Amendment dated as of June 20, 2001 to Employment Agreement
between the Company and Marshall Tulin. (Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 2001, File No. 1-5354, is incorporated
herein by reference.)+
10.02 Employment Agreement dated as of January 1, 1990 between the
Company and John Tulin. (Exhibit 10-03 to the Company's Annual
Report on Form 10-K for the fiscal year ended
59
December 31, 1989, File No. 1-5354, is incorporated herein by
reference.)+
10.02.1 Amendments dated as of September 1, 1993 and September 2,
1993, respectively, between the Company and John Tulin.
(Exhibit 10.02.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993, File No. 1-5354,
is incorporated herein by reference.)+
10.02.2 Amendment dated as of January 1, 1997 to Employment Agreement
between the Company and John Tulin. (Exhibit 10.02.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, File No. 1-5354, is incorporated herein by
reference.)+
10.02.3 Amendment dated as of January 1, 1992 to Employment Agreement
between the Company and John Tulin. (Exhibit 10.02.3 to the
Company's Annual Report on Form 10K for the fiscal year ended
December 31, 1998, File No. 1-5354, is incorporated herein by
reference.)+
10.02.4 Amendment dated as of December 10, 1998 to Employment
Agreement between the Company and John Tulin. (Exhibit 10.02.4
to the Company's Annual Report on Form 10K for the fiscal year
ended December 31, 1998, File No. 1-5354, is incorporated
herein by reference.)+
10.02.5 Amendment dated as of December 27, 2001 to Employment
Agreement between the Company and John Tulin. (Exhibit
10.02.05 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001, File No. 1-5354, is
incorporated herein by reference.)+
10.02.6 Amendment dated as of January 1, 2005 to Employment Agreement
between the Company and John Tulin. (Exhibit 10.01 to the
Company's Current Report on Form 8-K dated as of March 28,
2005 File No. 1-5354, is incorporated herein by reference.)+
10.03 Employment Agreement dated as of March 1, 1989 between the
Company and James Tulin. (Exhibit 10.05 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1988, File No. 1-5354, is incorporated herein by
reference.)+
10.03.1 Amendment dated as of January 4, 1990 to Employment Agreement
between the Company and James Tulin. (Exhibit 10.05 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 1-5354, is incorporated herein by
reference.)+
10.03.2 Amendment dated as of September 1, 1993 to Employment
Agreement between the Company and James Tulin. (Exhibit
10.03.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, File No. 1-5354, is
incorporated herein by reference.)+
10.03.3 Amendment dated as of January 1, 1997 to Employment Agreement
between the Company and James Tulin. (Exhibit 10.03.3 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, File No. 1-5354, is incorporated herein by
reference.)+
10.03.4 Amendment dated as of January 1, 1992 to Employment Agreement
between the Company and James Tulin. (Exhibit 10.03.4 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, File No. 1-5354, is incorporated herein by
reference.)+
10.03.5 Amendment dated as of December 10, 1998 to Employment
Agreement between the Company and James Tulin. (Exhibit
10.03.5 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, File No. 1-5354, is
incorporated herein by reference.)+
10.03.6 Amendment dated as of January 1, 2003 to Employment Agreement
between the Company and James Tulin. (Exhibit 10.03.06 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, File No. 1-5354, is incorporated herein by
reference.)+
60
10.03.7 Amendment dated as of January 1, 2005 to Employment Agreement
between the Company and James Tulin. (Exhibit 10.02 to the
Company's Current Report on Form 8-K dated as of March 28,
2005 File No. 1-5354, is incorporated herein by reference.)+
10.04 Amended and Restated Employment Agreement dated as of December
18, 2003 between the Company and Eric P. Luft (Exhibit 10.04
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2004, File No. 1-5354, is incorporated
herein by reference.)+
10.04.1 Letter Agreement dated as of May 26, 2004 amending the Amended
and Restated Employment Agreement dated as of December 18,
2003 between the Company and Eric P. Luft (Exhibit 10.01 to
the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2004, File No. 1-5354, is incorporated
herein by reference.)+
10.04.2 Letter Agreement dated as of September 23, 2004 amending the
Amended and Restated Employment Agreement dated as of December
18, 2003 between the Company and Eric P. Luft (Exhibit 10.01
to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2004, File No. 1-5354, is
incorporated herein by reference.)+
10.04.3 Letter Agreement dated as of March 9, 2005 amending the
Amended and Restated Employment Agreement dated as of December
18, 2003 between the Company and Eric P. Luft (Exhibit 10.01
to the Company's Current Report on Form 8-K dated as of March
11, 2005, File No. 1-5354, is incorporated herein by
reference.)+
10.04.4 Letter Agreement dated as of February 28, 2006 amending the
Amended and Restated Employment Agreement dated as of December
18, 2003 between the Company and Eric P. Luft (Exhibit 1.01 to
the Company's Current Report on Form 8-K dated as of March 8,
2006, File No. 1-5354, is incorporated herein by reference.)+
10.05 Form of Termination Agreement effective January 1, 1999
between the Company and each of the Company's officers listed
on Schedule A thereto. (Exhibit 10.05 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1998, File No. 1-5354, is incorporated herein by reference.)+
10.06 Deferred Compensation Plan of the Company dated as of January
1, 1987. (Exhibit 10.12 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1988, File No.
1-5354, is incorporated herein by reference.)+
10.07 Agreement dated as of July 14, 1981 between the Company and
Marshall Tulin, John Tulin and Raymond Vise as investment
managers of the Company's pension plans. (Exhibit 10.12(b) to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1981, File No. 1-5354, is incorporated
herein by reference.)
10.08 The New Swank, Inc. Retirement Plan Trust Agreement dated as
of January 1, 1994 among the Company and Marshall Tulin, John
Tulin and Raymond Vise, as co-trustees. (Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, File No. 1-5354, is incorporated herein by
reference.)
10.08.01 The New Swank, Inc. Retirement Plan as amended and restated,
effective January 1, 1999 (Exhibit 1 to Amendment No. 12 to
the Schedule 13D of the New Swank, Inc. Retirement Plan,
Marshall Tulin, John Tulin, and Raymond Vise, filed on
December 14, 2001, is incorporated herein by reference.)
61
10.09 Plan of Recapitalization of the Company dated as of September
28, 1987, as amended (Exhibit 2.01 to Post-Effective Amendment
No.1 to the Company's S-4 Registration Statement, File
No.33-19501, filed on February 9, 1988, is incorporated herein
by reference.)
10.10 First Amendment effective January 1, 1997 to Key Employee
Deferred Compensation Plan. (Exhibit 10.14.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996, File No. 1-5354, is incorporated herein by
reference.)+
10.11 1994 Non-Employee Director Stock Option Plan. (Exhibit 10.15
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994, File No. 1-5354, is incorporated
herein by reference.)+
10.12 Letter Agreement effective August 1, 1996 between the Company
and John J. Macht. (Exhibit 10.18 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1996, File No. 1-5354, is incorporated herein by reference.)+
10.13 Letter Agreement effective August 1, 1998 between the Company
and The Macht Group. (Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1998, File No. 1-5354, is incorporated herein by reference.)+
10.14 Letter Agreement effective May 1, 2000 between the Company and
The Macht Group. (Exhibit 10.1 to the Company's Quarterly
Report on Form 10-K for the fiscal quarter ended June 30,
2000, File No. 1-5354, is incorporated herein by reference.)+
10.15 Swank, Inc. 1998 Equity Incentive Compensation Plan (Exhibit
10.0 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1998, File No. 1-5354, is
incorporated herein by reference.)+
10.16 Agreement dated as of July 10, 2001 between the Company and
K&M Associates L.P. (Exhibit 10.22 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30,
2001, File No. 1-5354, is incorporated herein by reference.)+
10.17 Agreement dated as of October 17, 2003 between the Company and
Jerold R. Kassner.+*
14.01 Code of Ethics for Finance Professionals of the Company
(Exhibit 14.01 to the Company's Annual Report on Form 10-Q for
the fiscal year ended December 31, 2003, File No. 1-5354, is
incorporated herein by reference.)
21.01 Subsidiaries of the Company. (Exhibit 21.01 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1998, File No. 1-5354, is incorporated herein by
reference.)+
31.01 Rule 13a-14(a) Certification of John Tulin, President and
Chief Executive Officer of the Company.*
31.02 Rule 13a-14(a) Certification of Jerold R. Kassner, Principal
Financial Officer of the Company.*
32.01 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
- -------------------------------------------------
*Filed herewith.
+Management contract or compensatory plan or arrangement.
62