**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**Form 10-Q**

-----------------------

| **(Mark One)** |
|----------------|
| **x**          |   | **Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|           |   |
|           | **For the quarterly period ended September 30, 2008** |
|           |   |
|           | **OR** |
|           |   |   |
| **o**          |   | **Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|           |   |
|           | **For the transition period from__________ to__________** |

 

**Commission File Number 1-5354**

**Swank, Inc.**

*(Exact name of registrant as specified in its charter)*

|                                                                         |   |                                                 |
|------------------------------------------------------------------------------|--------|------------------------------------------------------|
| **Delaware***(State or other jurisdiction of incorporation or organization)* |   | **04-1886990***(IRS Employer Identification Number)* |
|                                                                         |   |                                                 |
| **90 Park Avenue****New York, NY***(Address of principal executive offices)* |   | **10016***(Zip code)*                                |

**(212) 867-2600**

*(Registrant's telephone number, including area code)*

**NOT APPLICABLE**

*(Former name, former address and former fiscal year, if changed since last report)*

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

| Yes X  |   | No___ |
|------------------|--------|-------|

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

|   | Large accelerated filer **___** | Accelerated filer **___**   |
|--------|---------------------------------|-----------------------------|
|        |                            |                        |
|        | Non-accelerated filer ___       | Smaller reporting company X |

 

|   | Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). |
|--------|------------------------------------------------------------------------------------------------------------------|

|   | Yes ___ | No _X_ |
|--------|---------|--------|

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

    Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date:

 

| Title of Class               | Shares Outstanding on October 31, 2008 |
|------------------------------|----------------------------------------|
| Common Stock, $.10 par value | 5,927,914                              |

 

 

 

----

 

**SWANK, INC.**

**INDEX**

|                              | Page No.                                                                              |
|-----------------------------------|---------------------------------------------------------------------------------------|
| **Part I. Financial Information** |                                                                                  |
|                              |                                                                                  |   |
| Item 1.                           | Condensed Financial Statements and Related Notes                                      | 3 – 10 |
|                              |                                                                                  |   |
| Item 2.                           | Management's Discussion and Analysis of Financial Condition and Results of Operations | 10 – 16 |
|                              |                                                                                  |   |
| Item 3.                           | Quantitative and Qualitative Disclosures about Market Risk                            | 16 |
|                              |                                                                                  |   |
| Item 4.                           | Controls and Procedures                                                               | 16 |
|                              |                                                                                  |   |
|                              |                                                                                  |   |
| **Part II. Other Information**    |                                                                                  |
|                              |                                                                                  |   |
| Item 2.                           | Unregistered Sales of Equity Securities and Use of Proceeds                           | 17 |
|                              |                                                                                  |   |
| Item 4.                           | Submission of Matters to a Vote of Security Holders                                   | 17 |
|                              |                                                                                  |   |
| Item 6.                           | Exhibits                                                                              | 18 |
|                              |                                                                                  |   |
| Signatures                        | 19                                                                                    |
|                              |                                                                                  |   |
| Exhibit Index                     | 20                                                                                    |
|                                   |                                                                                       |  |  |

 

 

2

 

 

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**Part I. Financial Information**

 

**Item 1.   Financial Statements**

 

**SWANK, INC.**

**CONDENSED BALANCE SHEETS** 

**(Dollars in thousands except share data)**

 

|                                               | **(Unaudited)**

**September 30, 2008** | **December 31, 2007** |         |
|----------------------------------------------------|-----------------------------------------|-----------------------|--------------|
|                                               | **ASSETS**                              |                  |         |   |   |   |
| Current:                                           |                                    |                  |         |   |   |
| Cash and cash equivalents                          |                                    | $ 453                 |         | $ 2,339 |   |
| Accounts receivable, less allowances               |                                    |                  |         |   |   |
| of $5,063 and $5,052, respectively                 |                                    | 17,402                |         | 18,327 |   |
| Inventories, net:                                  |                                    |                  |         |   |   |
| Work in process                                    | 1,258                                   |                  | 1,054        |   |   |
| Finished goods                                     | 27,080                                  |                  | 25,611       |   |   |
|                                               |                                    | 28,338                |         | 26,665 |   |
| Deferred taxes, current                            |                                    | 2,929                 |         | 2,929 |   |
| Prepaid and other current assets                   |                                    | 1,236                 |         | 1,075 |   |
|                                               |                                    |                  |         |   |   |
| Total current assets                               |                                    | 50,358                |         | 51,335 |   |
|                                               |                                    |                  |         |   |   |
| Property, plant and equipment, net of              |                                    |                  |         |   |   |
| accumulated depreciation                           |                                    | 1,232                 |         | 1,117 |   |
| Deferred taxes, noncurrent                         |                                    | 2,106                 |         | 2,106 |   |
| Other assets                                       |                                    | 3,642                 |         | 3,601 |   |
|                                               |                                    |                  |         |   |   |
| Total assets                                       |                                    |                  | **$ 57,338** |   |   | **$ 58,159** |   |
|                                               |                                    |                  |         |   |   |
|                                               | **LIABILITIES**                         |                  |         |   |   |   |
| Current:                                           |                                    |                  |         |   |   |
| Note payable to bank                               |                                    | $ 16,889              |         | $ 13,199 |   |
| Current portion of long-term obligations           |                                    | 627                   |         | 632 |   |
| Accounts payable                                   |                                    | 6,138                 |         | 7,057 |   |
| Accrued employee compensation                      |                                    | 971                   |         | 1,752 |   |
| Other current liabilities                          |                                    | 675                   |         | 2,917 |   |
|                                               |                                    |                  |         |   |   |
| Total current liabilities                          |                                    | 25,300                |         | 25,557 |   |
|                                               |                                    |                  |         |   |   |
| Long-term obligations                              |                                    | 6,488                 |         | 6,321 |   |
|                                               |                                    |                  |         |   |   |
| Total liabilities                                  |                                    | 31,788                |         | 31,878 |   |
|                                               |                                    |                  |         |   |   |
| **STOCKHOLDERS' EQUITY**                           |                                    |                  |         |   |   |
| Preferred stock, par value $1.00:                  |                                    |                  |         |   |   |   |
| Authorized - 1,000,000 shares                      |                                    | -                     |         | - |   |
| Common stock, par value $.10:                      |                                    |                  |         |   |   |
| Authorized - 43,000,000 shares:                    |                                    |                  |         |   |   |
| Issued -- 6,385,379 shares                         |                                    | 639                   |         | 639 |   |
| Capital in excess of par value                     |                                    | 1,974                 |         | 1,826 |   |
| Retained earnings                                  |                                    | 24,900                |         | 25,386 |   |
| Accumulated other comprehensive (loss), net of tax |                                    | (469)                 |         | (469) |   |
| Treasury stock, at cost, 441,704 shares            |                                    | (1,495)               |         | (1,101) |   |
|                                               |                                    |                  |         |   |   |
| Total stockholders' equity                         |                                    | 25,550                |         | 26,281 |   |
|                                               |                                    |                  |         |   |   |
| Total liabilities and stockholders' equity         |                                    |                  | **$ 57,338** |   |   | **$ 58,159** |   |
|                                               |                                    |                  |         |   |   |
|                                               |                                    |                  |         |   |   |
|                                                    |                                         |                       |              |  |  |  |  |

 

 

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

 

3

 

 

----

 

**SWANK, INC.**

**CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)**

**FOR THE QUARTERS ENDED SEPTEMBER 30, 2008 AND 2007**

**(Dollars in thousands except share and per share data)**

**---------------------------------**

 

|                                                             |   | **2008**      |   | **2007**      |
|------------------------------------------------------------------|--------|---------------|--------|---------------|
|                                                             |   |          |   |          |
| Net sales                                                        |   | $ 28,685 |   | $ 31,277 |
|                                                             |   |          |   |          |
| Cost of goods sold                                               |   | 19,723        |   | 21,414        |
|                                                             |   |          |   |          |
| Gross profit                                                     |   | 8,962         |   | 9,863         |
|                                                             |   |          |   |          |
| Selling and administrative expenses                              |   | 8,667         |   | 7,948         |
|                                                             |   |          |   |          |
| Income from operations                                           |   | 295           |   | 1,915         |
|                                                             |   |          |   |          |
| Interest expense                                                 |   | 209           |   | 387           |
|                                                             |   |          |   |          |
| Income before income taxes                                       |   | 86            |   | 1,528         |
|                                                             |   |          |   |          |
| Income tax provision                                             |   | 33            |   | 698           |
|                                                             |   |          |   |          |
| Net income                                                       |   | $ 53     |   | $ 830    |
|                                                             |   |          |   |          |
| Share and per share information:                                 |   |          |   |          |
| Basic net income per weighted average common share outstanding   |   | $ .01    |   | $ .14    |
| Basic weighted average common shares outstanding                 |   | 5,989,095     |   | 6,076,366     |
| Diluted net income per weighted average common share outstanding |   | $ .01         |   | $ .14         |
| Diluted weighted average common shares outstanding               |   | 5,989,677     |   | 6,079,306     |

 

 

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

 

4

 

 

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**SWANK, INC.**

**CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007**

**(Dollars in thousands except share and per share data)**

**---------------------------------**

 

|                                                                    |   | **2008**      |   | **2007**      |
|-------------------------------------------------------------------------|--------|---------------|--------|---------------|
|                                                                    |   |          |   |          |
| Net sales                                                               |   | $ 79,158 |   | $ 85,521 |
|                                                                    |   |          |   |          |
| Cost of goods sold                                                      |   | 54,237        |   | 58,316        |
|                                                                    |   |          |   |          |
| Gross profit                                                            |   | 24,921        |   | 27,205        |
|                                                                    |   |          |   |          |
| Selling and administrative expenses                                     |   | 25,071        |   | 23,326        |
|                                                                    |   |          |   |          |
| (Loss) income from operations                                           |   | (150          | )      | 3,879         |
|                                                                    |   |          |   |          |
| Interest expense                                                        |   | 629           |   | 1,177         |
|                                                                    |   |          |   |          |
| (Loss) income before income taxes                                       |   | (779          | )      | 2,702         |
|                                                                    |   |          |   |          |
| Income tax (benefit) provision                                          |   | (293          | )      | 1,208         |
|                                                                    |   |          |   |          |
| Net (loss) income                                                       |   | $ (486)  |   | $ 1,494  |
|                                                                    |   |          |   |          |
| Share and per share information:                                        |   |          |   |          |
| Basic net (loss) income per weighted average common share outstanding   |   | $ (.08   | )      | $ .25    |
| Basic weighted average common shares outstanding                        |   | 6,004,235     |   | 6,075,255     |
| Diluted net (loss) income per weighted average common share outstanding |   | $ (.08        | )      | $ .25         |
| Diluted weighted average common shares outstanding                      |   | 6,004,235     |   | 6,078,285     |

 

 

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

5

 

 

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**SWANK, INC.**

**CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007**

**(Dollars in thousands)**

**--------------**

 

|                                                                          | **2008**                                                      | **2007**                |
|-------------------------------------------------------------------------------|---------------------------------------------------------------|-------------------------|
| Cash flows from operating activities:                                         |                                                          |                    |
|                                                                          |                                                          |                    |
| Net (loss) income                                                             | $ (486)                                                  | $ 1,494            |
| Adjustments to reconcile net (loss) income to

net cash (used in) operations: |                                                          |                    |
|                                                                          | Depreciation and amortization                                 | 472                     | 153 |
|                                                                          | Bad debt expense                                              | 794                     | 286 |
|                                                                          |                                                          |                    |
| Changes in assets and liabilities                                             |                                                          |                    |
|                                                                          | Decrease (increase) in accounts receivable                    | 131                     | (3,412) |
|                                                                          | (Increase) in inventory                                       | (1,673)                 | (10,129) |
|                                                                          | (Increase) in prepaid and other assets                        | (141)                   | (367) |
|                                                                          | (Decrease) in accounts payable, accrued and other liabilities | (3,947)                 | (2,226) |
|                                                                          | Increase in other long-term obligations and deferred credits  | 167                     | 321 |
|                                                                          | **Net cash (used in) operations**                             | **(4,683)**             | **(13,880)** |
|                                                                          |                                                          |                    |
| Cash flows from investing activities:                                         |                                                          |                    |
|                                                                          | Capital expenditures                                          | (372)                   | (833) |
|                                                                          | Premiums on life insurance                                    | (127)                   | (129) |
|                                                                          | **Net cash (used in) investing activities**                   | **(499)**               | **(962)** |
|                                                                          |                                                          |                    |
| Cash flows from financing activities:                                         |                                                          |                    |
|                                                                          | Borrowing under revolving credit agreements                   | 41,967                  | 53,873 |
|                                                                          | Payments of revolving credit obligations                      | (38,277)                | (39,827) |
|                                                                          | Treasury stock received                                       | (394)                   | - |
|                                                                          | Proceeds from stock option exercises                          | -                       | 4 |
|                                                                          | **Net cash provided by financing activities**                 | **3,296**               | **14,050** |
|                                                                          |                                                          |                    |
|                                                                          | **Net (decrease) in cash and cash equivalents**               | **(1,886)**             | **(792)** |
|                                                                          |                                                          |                    |   |
|                                                                          | Cash and cash equivalents at beginning of period              | 2,339                   | 899 |
|                                                                          |                                                          |                    |   |
|                                                                          | **Cash and cash equivalents at end of period**                | **$** **453**      | **$** **107** |
|                                                                          |                                                          |                    |   |
| **Cash paid during the nine months for:**                                     |                                                          |                    |
|                                                                          | Interest                                                      | $    629 | $ 1,177 |
|                                                                          | Taxes                                                         | $ 1,746                 | $ 2,493 |
|                                                                               |                                                               |                         |  |  |

 

 

 

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

 

6

 

 

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**SWANK, INC.**

**Notes to Condensed Financial Statements (Unaudited)**

 

| (1) | **Basis of Presentation.**The unaudited information furnished herein reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary to present a fair statement of the results for the periods ended September 30, 2008 and 2007. The financial information contained                            herein represents condensed financial data and, therefore, does not include all footnote disclosures required to be included in financial statements prepared in conformity with generally accepted accounting principles. Footnote information was included in the financial statements included in the Company’s 2007 Annual Report on Form 10-K. The condensed financial data included herein should be read in conjunction with the information in the Annual Report. The                            results of operations for the nine months ended September 30, 2008 may not be indicative of the results that may be expected for the year ended December 31, 2008 or any other period. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | **Net (Loss) Income per Share.**The following table sets forth the computation of the net income (loss) per share for the periods ended September 30, 2008 and September 30, 2007 (in thousands, except for share and per share data): |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|                                                                                                       | Quarter             | Nine Months         |
|------------------------------------------------------------------------------------------------------------|---------------------|---------------------|
|                                                                                                       | Ended September 30, | Ended September 30, |
|                                                                                                       | 2008                | 2007                | 2008 | 2007 |
| Numerator:                                                                                                 |                |                |   |   |
| Net income (loss) income                                                                                   | $ 53                | $ 830               | $ (486) | $ 1,494 |
| Denominators:                                                                                              |                |                |   |   |
| Shares used in computing basic net income (loss) per weighted average common share outstanding             |  

5,989,095   |  

6,076,366   |  

6,004,235 |  

6,075,255 |
| Effect of dilutive securities                                                                              | 582            | 2,940               |     - | 3,030 |
| Shares used in computing net income (loss) per weighted average common share outstanding assuming dilution |                | 5,989,677           |   | 6,079,306 |   | 6,004,235 |   | 6,078,285 |
|                                                                                                       |      |                |   |   |
| Basic net income (loss) per weighted average common share outstanding                                      | $ .01               | $ .14               | $ (.08) | $ .25 |
| Diluted net income (loss) per weighted average common share outstanding                                    | $ .01               | $ .14               | $ (.08) | $ .25 |

 

There were no shares excluded from the computation of diluted earnings per weighted average common share for the quarter ended September 30, 2008 and each of the periods ended September 30, 2007 because their effect would be anti-dilutive. There were 965 shares not included in the computation of diluted (loss) per weighted average common share for the nine months ended September            30, 2008 because their effect would be anti-dilutive.

 

| (3) | **Segment Information.**We presently have one reportable segment, men's accessories, consisting of men's costume jewelry, belts and suspenders and personal leather goods. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| (4) | **Stock Options**. During the first quarter of 2008, we granted options for the remaining 375,000 shares under the 1998 Equity Incentive Compensation Plan (the “1998 Plan”) to certain of our key executives. The 1998 Plan provided for a maximum grant 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. Of the 375,000 shares granted during the first quarter of fiscal 2008, 260,000 incentive stock option shares were granted at an exercise price equal to the fair market price on the date of the grant of $5.05 per share. The remaining 115,000 shares, which were issued to participants owning greater than 10% of                            the Company’s outstanding voting stock, were issued at an exercise price of 110% of the fair market value at the date of the grant, or $5.56 per share. The options expire five years from the date of grant and vest 25% on each of the first four anniversary dates of the grant. The fair value of the option grant was estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility was estimated using the Company’s historical                            volatility, calculated on a trailing 39-month basis. We believe that the significant improvement in the Company’s financial condition during the past several years makes share prices prior to December 2004 not meaningful as indicators of expected future volatility. The expected term of the options is four years, based on the simplified method of calculating expected life pursuant to SFAS 123(R) and Staff Accounting Bulletin No. 107. The risk-free rate of 2.73%                            is based upon the yield of a zero-coupon U.S. Treasury Note with a maturity date close to the expiration date of the expected term of the grant. SFAS 123(R) requires the Company to reflect the benefits of tax deductions in excess of recognized compensation cost to be |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

7

 

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reported as both a financing cash inflow and an operating cash outflow. The Company has recognized no such tax benefits to date.

 

The following assumptions were used to estimate the fair value of stock option shares granted to employees using the Black-Scholes option-pricing model during the nine months ended September 30, 2008:

|   | GrantedNine months ended |
|--------|--------------------------|

|   | September 30, 2008 |
|--------|--------------------|

 

|   | Expected volatility                 | 70%      |
|--------|-------------------------------------|----------|
|   | Risk-free interest rate        | 2.73%    |
|   | Expected option life           | 4 years  |
|   | Expected dividend yield   | N/A      |
|   | Assumed forfeiture rate        |  0% |

The weighted average grant date fair value of share options granted during the nine months ended September 30, 2008 was $2.70. No shares were granted during the nine months ended September 30, 2007. There were no stock options exercised and the Company did not recognize any related tax benefits during the nine months ended September 30, 2008 or 2007. As of September 30, 2008,            there was $866,000 in total unrecognized compensation cost related to outstanding options granted after the adoption of SFAS 123(R) that is expected to be recognized over the vesting period of the grant.

 

Option activity under the stock-based compensation plans during the nine months ended September 30, 2008 is summarized below:

 

|                              | Number of Shares                                                          | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate

Intrinsic

Value

(in thousands) * |
|-----------------------------------|---------------------------------------------------------------------------|---------------------------------|-----------------------------------------------------|-----------------------------------------------|
| Outstanding at December 31, 2007  | 1,667                                                                     | $1.60                           | 2.61                                                | $ 6                                           |
| Granted                           | 375,000                                                                   | 5.21                            | 4.42                                                | -                                             |
| Exercised                         | -                                                                         | -                               | -                                                   | -                                             |
| Forfeited/ Expired                |             - | -                               | -                                                   | -                                             |
| Outstanding at September 30, 2008 |                                                                      | 376,667                         | $5.19                                               | 4.41                                          | $  - |
|                              |                                                                      |                            |                                                |                                          |
|                              |                                                                      |                            |                                                |                                          |
| Exercisable at September 30, 2008 | 1,667                                                                     | $1.60                           | 1.94                                                | $ 4                                           |

 

 

* The aggregate intrinsic value on this table was calculated based on the positive difference between the market value of our common stock and the exercise price of the underlying options.

 

All options granted under the 1994 Director Plan are vested as of September 30, 2008.

 

The above table reflects the 375,000 option shares issued under the 1998 Plan and 1,667 option shares issued, outstanding, and exercisable at $1.60 per share under the 1994 Director Plan.

 

| (5) | **Income Taxes**. We adopted the provisions of FIN 48, “*Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109*”, on January 1, 2007. We performed a comprehensive review of our tax positions in accordance with recognition                            standards established by FIN 48. In this regard, an uncertain tax position represents our treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of our review, we do not believe that we have included any “uncertain tax positions” in our federal income tax return or in any state income tax returns. With                            few exceptions, we are no longer subject to federal income tax examinations for years prior to 2002. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

8

 

 

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| (6) | **Fair Value Measurements**. In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, "*Fair Value Measurements*" ("SFAS 157"). We adopted SFAS 157 on January 1, 2008 for our financial assets                            and financial liabilities. However, the FASB deferred the effective date of SFAS 157 for one year as it relates to fair value measurement requirements for nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value on a recurring basis. The adoption of SFAS 157 for our financial assets and financial liabilities did not have a material impact on our financial statements. We are evaluating the effect the implementation of SFAS                            157 for our nonfinancial assets and nonfinancial liabilities will have on our financial statements. SFAS 157 defines fair value, provides guidance for measuring fair value and requires certain disclosures. This statement applies under other accounting pronouncements that require or permit fair value measurements. The statement indicates, among other things, that a fair value measurement assumes that a transaction to sell an asset or transfer a liability occurs in the                            principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. SFAS 157 defines fair value based upon an exit price model. SFAS 157 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The                            statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

**•**  Level 2: Inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

**•** Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

 

Our cash and cash equivalents consist of cash on deposit at various financial institutions at September 30, 2008. We do not have any financial assets or liabilities that require disclosure of fair value at September 30, 2008.

 

| (7) | **Recent Accounting Pronouncements**. In February 2007, the FASB issued SFAS No. 159, "*The Fair Value Option for Financial Assets and Financial Liabilities*" ("SFAS 159"). SFAS 159 permits entities to choose to measure certain financial instruments and other eligible items at                            fair value when the items are not otherwise currently required to be measured at fair value. We adopted SFAS 159 effective January 1, 2008. Upon adoption, we did not elect the fair value option for any items within the scope of SFAS 159 and, therefore, the adoption of SFAS 159 did not have an impact on our consolidated financial statements. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “*Business Combinations*” (“SFAS 141R”). SFAS 141R addresses the recognition and accounting for identifiable assets acquired, liabilities assumed, and noncontrolling interests in business combinations. SFAS 141R also establishes expanded disclosure            requirements for business combinations. SFAS 141R is effective for us on January 1, 2009, and we will apply SFAS 141R prospectively to all business combinations subsequent to the effective date.

 

In December 2007, the FASB issued SFAS No.160, “*Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51*” (“SFAS No. 160”), to improve the relevance, comparability, and transparency of the financial information a reporting entity provides in its consolidated financial            statements. SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for noncontrolling interests in subsidiaries and to make certain consolidation procedures consistent with the requirements of SFAS No. 141R. It defines a noncontrolling interest in a subsidiary as an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 changes the way the consolidated income statement is presented by            requiring consolidated net income to include amounts attributable to the parent and the noncontrolling interest. SFAS No. 160 establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary which do not result in deconsolidation. SFAS No. 160 also requires expanded disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners of a subsidiary. SFAS No. 160 is effective            for financial statements issued for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years.  We do not believe that the adoption of SFAS No. 160 will have a material effect on our financial condition, results of operations or cash flows.

 

In March 2008, the FASB issued SFAS No. 161, “*Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133*” (“SFAS 161”). SFAS 161 amends and expands the disclosure

 

9

 

 

 

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requirements of Statement 133 to provide a better understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and their effect on an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008. We do not believe that            the adoption of SFAS No. 161 will have a material effect on our financial condition, results of operations or cash flows.

 

In May 2008, the FASB issued SFAS No. 162,*“Hierarchy of Generally Accepted Accounting Principles”*(“SFAS 162”). This statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements of            nongovernmental entities that are presented in conformity with GAAP. This statement will be effective 60 days following the U.S. Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendment to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. We believe that FAS 162 will have no effect on our financial statements.

 

**Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations**

 

***Overview***

 

We are currently engaged in the importation, sale and distribution of men's 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 four factory outlet stores primarily to distribute excess and out of line merchandise.

 

Our net sales during the quarter ended September 30, 2008 decreased 8.3% to $28,685,000 compared to $31,277,000 for the corresponding period in 2007 and, for the nine-month period, decreased 7.4% to $79,158,000 compared to $85,521,000 last year. The decrease during the quarter was mainly due to lower shipments of our personal leather goods merchandise which was offset in part by            increases in belt shipments. Net sales of our personal leather goods last year benefited from the launch of our new Tumi collection, which resulted in significant shipments of that merchandise during the quarter ended September 30, 2007 leading to unfavorable sales comparisons compared to this year’s third quarter. For the year-to-date period, the decrease in net sales was due primarily to lower shipments of personal leather goods, jewelry, and belts as well as to a            significant increase in certain promotional costs which are accounted for as a reduction to net sales. The increase in in-store markdown and cooperative advertising expense resulted from an extremely promotional retail environment combined with our aggressive efforts to maintain or expand market share during a challenging economic period.

 

Gross profit dollars for the quarter and nine-month periods decreased 9.1% and 8.4%, respectively, compared to the same periods last year. Gross profit expressed as a percentage of net sales for the quarter fell to 31.2% from 31.5% last year and for the nine-month period, fell to 31.5% from 31.8%. The decreases in gross profit dollars were mainly due to lower net sales partially            offset by reductions in product costs and certain inventory-related expenses. Selling and administrative expenses for the quarter and nine-month periods ended September 30, 2008 increased $719,000, or 9.1%, and $1,745,000, or 7.5%, respectively, compared to the same periods last year. The increases were primarily due to higher compensation and related costs associated with product development and sourcing, increased travel expenses and professional fees, and costs incurred in            connection with the operation of our Luxury Division, which was first established during the spring of 2007. The increase for the nine-month period was also due to expenses associated with the bankruptcy filings of two of our customers.

 

***Critical Accounting Policies and Estimates***

 

We believe that the accounting policies discussed below are important to an understanding of our financial statements because they require management to exercise judgment and estimate the effects of uncertain matters in the preparation and reporting of financial results. Accordingly, management cautions that these policies and the judgments and estimates they involve are subject to            revision and adjustment in the future.

 

 

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***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. We record 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. 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.

 

***Allowance for Doubtful Accounts***

We determine 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.

 

***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***

We utilize the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Net deferred tax assets are recorded when it is more likely than not            that such tax benefits will be realized. When necessary, a valuation allowance is recorded to reflect the estimated realization of the deferred tax asset. We determine if a valuation allowance for deferred tax assets is required based upon projections of taxable income or loss for future tax years in which the temporary differences that created the deferred tax asset are anticipated to reverse and the likelihood that the deferred tax assets will be recovered.

 

***Results of Operations***

 

As is customary in the fashion accessories industry, we make modifications to our merchandise lines coinciding with our Spring (January - June) and Fall (July - December) selling seasons. We believe that the results of operations are more meaningful on a seasonal basis than on a quarterly basis. The timing of shipments can be affected by the availability of materials, retail sales,            and fashion trends. These factors may shift volume between quarters within a season differently in one year than in another. Due to seasonality and other factors, the results for the quarter are not necessarily indicative of the results to be expected for the full year.

 

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***Net Sales***

 

Our net sales during the quarter ended September 30, 2008 decreased 8.3% to $28,685,000 compared to $31,277,000 for the corresponding period in 2007. The recent turmoil in the financial markets, accompanied by the sluggishness in domestic and foreign economies and fear of recession, has hit department store retailers particularly hard and has negatively impacted retail sales for a            number of our customers which, in turn, has adversely affected our wholesale shipments to them relative to last year. The decrease in net sales during the quarter was mainly due to lower shipments of our personal leather goods merchandise, offset in part by increases in belt shipments. During last year’s third quarter, our personal leather goods business benefited from initial shipments of our new “Tumi” merchandise which was launched in August 2007. Net sales to            international customers for our personal leather goods also trended down during the quarter due to lower shipments of branded merchandise to certain licensor affiliates. The increase in belt net sales resulted principally from higher shipments to certain customers in connection with the introduction of new private brand merchandise and the launch of our new “U.S. Polo Association” collection. Expenses associated with in-store promotional activity, which are accounted for            as a reduction to net sales, increased 19.0% during the quarter as we continued to move aggressively to maintain or expand market share during a difficult economy.

 

For the nine-month period, net sales decreased 7.4% to $79,158,000 compared to $85,521,000 last year. The decrease was due to lower gross shipments of our personal leather goods, jewelry, and belt merchandise as well as an increase in in-store promotional costs. Expenses associated with in-store markdowns increased 32.9% during the nine months ended September 30, 2008 reflecting            both an extremely promotional retail environment and our efforts to stimulate retail sales to maintain or boost our market share.

 

Net sales to international customers (including certain military accounts) decreased $1,056,000 or 25.5% during the quarter and $642,000 or 6.8% for the nine-month period ended September 30, 2008 compared to the same periods last year. The decreases were primarily due to lower shipments of personal leather goods and, for the quarterly period, belts, to foreign affiliates of certain            of our licensors, and we believe reflect the global nature of recent market disruptions and the slowdown of economies worldwide.

 

Included in net sales for the nine months ended September 30, 2008 and 2007 are annual second quarter adjustments to record the variance between customer returns of prior year shipments actually received in the current year and the allowance for customer returns which was established at the end of the preceding fiscal year. This adjustment increased net sales by $872,000 for the            nine-month period ended September 30, 2008, compared to an increase of $637,000 for the comparable period in 2007. The favorable adjustments result from actual returns experience during both the spring 2008 and spring 2007 seasons being better than anticipated compared to the reserves established at December 31, 2007 and December 31, 2006. The reserves at December 31, 2007 and 2006 were established in consideration of shipments made during the fall 2007 and 2006 seasons,            respectively, generally associated with the holiday selling seasons. During the spring 2008 and 2007 seasons, customer returns of all men’s merchandise were lower than expected. During the past few seasons, the Company has reduced its level of customer returns by assisting retailers in promoting excess and discontinued merchandise following the holiday season to accelerate retail sales of these goods.

 

***Gross profit***

 

Gross profit for the quarter ended September 30, 2008 decreased $901,000, or 9.1%, and, for the nine-month period, decreased $2,284,000, or 8.4%, both as compared to the corresponding periods last year. Gross profit expressed as a percentage of net sales for the quarter was 31.2% compared to 31.5% last year and, for the nine-month period was 31.5% compared to 31.8% for the previous            year.

 

The decreases in gross profit dollars during both the three and nine-month periods were mainly due to lower net sales, partially offset by reductions in merchandise cost and certain inventory-related expenses. The small reduction in gross profit as a percentage of net sales was attributable primarily to the decrease in net sales which to a large extent was due to the increase in            in-store promotional expenses. Merchandise cost as a percentage of net shipments (gross shipments less estimated return accruals) decreased during both the three and nine-month periods for belts, and for the nine-month period, for jewelry and personal leather goods. The improvement in merchandise margin was due primarily to increased utilization of more economical shipping modes as well as improved efficiency generally in our sourcing and product development organizations.            Inventory-related expenses declined during both the quarter and nine months ended September 30, 2008 relative to the prior year due to a reduction in markdowns incurred on estimated merchandise returns.

 

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Included in gross profit for the nine months ended September 30, 2008 and 2007 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 $682,000 and $783,000 for the nine-month periods ended September 30, 2008 and September 30, 2007, respectively. As discussed above, customer returns were lower than anticipated during both the spring 2008 and spring 2007 seasons due mainly to our efforts to more aggressively promote excess and discontinued merchandise to stimulate retail sales and minimize returns.

 

***Selling and Administrative Expenses***

 

Selling and administrative expenses for the quarter ended September 30, 2008 increased $719,000 or 9.0% and, for the nine-month period, increased $1,745,000 or 7.5%, both as compared to the same periods last year. Selling and administrative expenses expressed as a percentage of net sales were 30.2% and 25.4% for the quarters ended September 30, 2008 and 2007 respectively, and 31.7%            and 27.3% for the nine months ended September 30, 2008 and 2007, respectively.

 

Selling expenses for the quarter increased $391,000 or 6.5% compared to last year and, as a percentage of net sales, increased to 22.4% from 19.3%. For the nine-month period ended September 30, 2008, selling expenses increased $747,000 or 4.2% and, as a percentage of net sales increased to 23.3% compared to 20.6% for the same period last year. The increases were primarily due to            higher compensation and related costs associated with our product development and sourcing functions, increased travel expenses, certain national advertising, and costs incurred in connection with the operation of our Luxury Division, which was first established during the spring of 2007. These increases were partially offset by decreases in variable sales expenses, primarily compensation, associated with the reduction in net sales.

 

We routinely make expenditures for advertising and promotion as necessary to maintain and enhance our business. Certain of our license agreements also require specified levels of spending. These expenditures, which consist primarily of media and print advertising, image fund contributions and other promotional costs, are included in selling and administrative expenses as incurred.            In addition, we frequently make expenditures in connection with cooperative advertising programs to support various marketing initiatives sponsored by our customers. Accruals associated with cooperative advertising expenditures are recorded as a reduction to net sales. Expenditures for advertising and promotion, including cooperative advertising, totaled $987,000 or 3.5% percent of net sales compared to $879,000 or 2.9% of net sales for the quarters ended September 30, 2008 and            2007, respectively. Advertising and promotion expenses, including cooperative advertising, for the nine months ended September 30, 2008, were $2,726,000 or 3.5% of net sales compared to $2,600,000 or 3.1% of net sales for the corresponding period last year.

 

For the quarter and nine-months ended September 30, 2008, administrative expenses increased $328,000 or 17.0% and $998,000 or 17.6%, respectively, compared to the same periods last year. Administrative expenses expressed as a percentage of net sales were 7.9% and 6.2% for the quarters ended September 30, 2008 and 2007, respectively, and 8.4% and 6.5% for the nine months ended            September 30, 2008 and 2007, respectively. The increase in administrative expenses for both the quarter and nine-month periods was mainly due to higher professional fees, travel expenses, and depreciation costs. In addition, administrative expenses for the year-to-date period reflect a significant increase in bad debt expense associated with reserves recorded during the second quarter in connection with the bankruptcy filings of two of our department store customers.

 

***Interest Expense***

 

Net interest expense for the quarter and nine-month periods ended September 30, 2008 decreased by $178,000 and $548,000 respectively, compared to the same periods in 2007. For both periods, the decrease was due to lower average borrowings and lower interest rates. Average outstanding borrowings decreased 9.7% and 12.2% during the quarter and nine-month periods, respectively, due to            decreases in average inventory and accounts receivable investment. Our average borrowing cost decreased more than 360 basis points during both the quarter and nine-month periods ended September 30, 2008, compared to the same periods last year. The decrease in both periods was due to lower short-term interest rates generally and, for the nine-month period, a reduction in our contractual interest rate pursuant to an amendment under our revolving credit agreement that was effective            July 2, 2007.

 

 

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***Income Taxes***

 

We recorded an income tax provision for the quarter ended September 30, 2008 of $33,000 and a tax benefit of $293,000 for the nine months ended September 30, 2008, both periods reflecting an effective tax rate of approximately 38%. We recorded an income tax provision on our net income during the quarter and nine months ended September 30, 2007 of $698,000 and $1,208,000,            respectively, or an effective rate of approximately 45%. The effective income tax rate during the quarter and nine-month periods last year was impacted by an adjustment associated with the reconciliation of certain net operating loss carryforwards available to the Company. As of September 30, 2008, there have been no material changes to our uncertain tax positions disclosure as provided in Note E to the financial statements included in our fiscal 2007 Form 10-K. We do not anticipate            that our unrecognized tax benefits will significantly change during the next 12 months.

 

***Liquidity and Capital Resources***

 

As is customary in the fashion accessories industry, substantial percentages of our sales and earnings occur in the months of September, October and November, when we make significant shipments of our products to retailers for sale during the holiday season. As a result, accounts receivable peak in the fourth quarter. We build inventory during the year to meet the demand for the            holiday season. The required cash is provided by a revolving credit facility.

 

Our working capital decreased by $720,000 during the nine-month period ended September 30, 2008 compared to an increase of $1,089,000 for the nine months ended September 30, 2007. The decrease during the nine-month period ended September 30, 2008 was mainly due to a reduction in cash and net accounts receivable, as well as an increase in bank borrowings, offset in part by increases            in inventory and decreases in accounts payable, and other accrued liabilities. The increase in working capital during the nine-month period ended September 30, 2007 was mainly due to an increase in net accounts receivable and inventory as well as decreases in income tax payable and other accrued liabilities, all offset in part by an increase in bank borrowings. Inventories increased at a somewhat greater rate than is customary during the first nine months of 2007 in advance of the            launch of our “Tumi” merchandise collections which first shipped during last year’s third quarter and in anticipation of increased sales during the fall season.

 

Cash used in operations during the nine months ended September 30, 2008 totaled $4,683,000 compared to cash used in operations of $13,880,000 for the corresponding period last year. Cash was used during both years primarily to fund increases in inventory and decreases in accounts payable and other accrued liabilities during the nine-month period. Cash was also used last year to            support an increase in accounts receivable resulting from higher net sales. Inventories customarily increase during our third quarter in anticipation of the holiday shipping period. However, inventories increased at a greater rate than usual during the nine-month period ended September 30, 2007 due to the planned launch of our new “Tumi” merchandise collections and the expectation of generally higher shipments during the 2007 holiday season.

 

Cash used in investing activities was $499,000 for the nine-month period ended September 30, 2008 compared to cash used of $962,000 for the nine-month period ended September 30, 2007. In both periods, cash was used for capital expenditures and premiums on certain life insurance contracts owned by us.

 

Cash provided by financing activities for the nine months ended September 30, 2008 was $3,296,000, which consisted of net borrowings under our revolving credit agreement. Cash provided by financing activities for the nine months ended September 30, 2007 was $14,050,000, reflecting an increase in net borrowings. The significant increase in net borrowings during the nine months ended            September 30, 2007 was primarily due to a substantial increase in inventory investment associated with the launch of our new “Tumi” merchandise collections and in anticipation of a relatively strong fall shipping season. The smaller inventory build during 2008 reflects a more conservative view of the upcoming holiday season in light of current economic conditions.

 

In the ordinary course of business, we are contingently liable for performance under letters of credit. At September 30, 2008, outstanding letters of credit totaled $84,000. We presently are required to pay a fee quarterly equal to 2.00% per annum on outstanding letters of credit.

 

Working capital financing is provided primarily by cash flows from operating activities and a $32,000,000 Loan and Security Agreement signed on June 30, 2004, as amended (the "Loan Agreement") with Wells Fargo Foothill, Inc ("WFF"), which has a maturity date of June 29, 2012. The Loan Agreement permits 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 .50% or at WFF's LIBOR rate plus 2.25%. The Loan Agreement is collateralized by substantially all of our assets,

 

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including accounts receivable, inventory, and machinery and equipment. The 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 “EBITDA            Covenant”).  We were in compliance with all applicable financial covenants as at September 30, 2008 and October 31, 2008. The Loan Agreement contemplates that WFF and we will enter into an annual amendment to the Loan Agreement to set forth minimum monthly earnings before interest, taxes, depreciation, and amortization levels to be contained in the EBITDA Covenant for each calendar year, or a pre-set level will be used. WFF and we are in the process of finalizing an            amendment to the Loan Agreement to, among other things, set the applicable levels for the EBITDA Covenant for the remainder of fiscal 2008 and the pre-set level for fiscal 2009. Although the amendment has not been completed or signed as of the date of filing of this Form 10-Q, the Company anticipates doing so shortly.

 

We are also a party to employment agreements with certain of our executive officers that provide for the payment of compensation and other benefits during the term of each executive’s employment and, under certain circumstances, for a period of time following their termination. Please see the information set forth in Item 11 of our fiscal 2007 Form 10-K under the caption            “Executive Compensation – Employment Contracts and Severance Agreements.”

 

We are subject to legal proceedings and claims that arise in the ordinary course of our business. Although there can be no assurance as to the disposition of these proceedings, we do not anticipate that these matters will have a material impact on our results of operations or financial condition.

 

Recent turmoil in the financial markets, accompanied by sluggishness in domestic and foreign economies and fear of recession, has resulted in reduced consumer spending and has negatively impacted retail sales by our core customer groups, including department store retailers. These reduced retail sales have, in turn, adversely affected wholesale shipments to our customers of our            product offerings relative to last year.

 

In addition, several of our department store customers have experienced financial difficulties during fiscal 2008 leading some to seek protection under applicable bankruptcy and insolvency laws. Our bad debt expense during the nine-month period ended September 30, 2008 increased $512,000 in connection with the bankruptcy filings of two of these customers. It is possible that if the            current challenging retail environment and general economic conditions continue, other of our customers may seek bankruptcy protection. The recent disruption in the worldwide credit markets may also have a significant adverse impact on financial institutions that furnish bank borrowings and other credit accommodations to our customers, or may result in the general tightening of the availability of credit to these customers, in each case impacting their liquidity.

 

We note that net sales to our three largest customers totaled approximately 42% of our net sales during 2007, and we believe that a similar percentage of net sales in the current fiscal year also may be made to a relatively narrow group of customers. Any meaningful reduction in net sales to these and our other customers, whether as a result of general economic conditions, our            customers’ financial difficulty, bankruptcy or insolvency, or otherwise, along with any resulting increase in bad debt expenses and other reserves and charges, could have a material adverse affect on our financial condition and results of operations.

 

 

***"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, including the current disruption in financial markets and the accompanying adverse effect on economies worldwide, 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.

 

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You are urged to consider all such factors. In light of the uncertainty inherent in such forward-looking statements, you should not consider their inclusion to be a representation that such forward-looking matters will be achieved. We assume no obligation for updating any such forward-looking statements to reflect actual results, changes in assumptions or changes in other factors            affecting such forward-looking statements.

 

****Item 3.**    Quantitative and Qualitative Disclosures about Market Risk**

 

|   | Not applicable. |
|--------|-----------------|

 

****Item 4.**    Controls and Procedures**

 

At the end of the period covered by this report, we carried out an evaluation, with the participation of our management including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and            procedures were effective. There was no change in our internal control over financial reporting during the quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

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**PART II - OTHER INFORMATION**

 

****Item 2.**    Unregistered Sales of Equity Securities and Use of Proceeds**

 

|   | (a) | Not applicable. |
|--------|-----|-----------------|

 

|   | (b) | Not applicable. |
|--------|-----|-----------------|

 

|   | (c) | Issuer Purchases of Equity Securities. |
|--------|-----|----------------------------------------|

 

The following table provides certain information as to repurchases of shares of our Common Stock during the three months ended September 30, 2008:

 

| **Period**                             | **(a) Total**

**Number of**

**Shares (or**

**Units )**

**Purchased (1)** | **(b)**

**Average**

**Price Paid**

**per Share (or Unit)** | **(c) Total Number**

**of Shares (or Units)**

**Purchased as Part**

**of Publicly**

**Announced Plans**

**or Programs** | **(d) Maximum Number**

**(or Approximate Dollar**

**Value) of Shares (or**

**Units) that May Yet Be**

**Purchased Under the**

**Plans or Programs** |
|----------------------------------------|------------------------------------------------------------------------------|---------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                   |                                                                         |                                                          |                                                                                                                         |                                                                                                                                                     |
| July 1, 2008-July 31, 2008             | --                                                                           | --                                                            | --                                                                                                                           | --                                                                                                                                                       |
| August 1, 2008-

August 31, 2008       | --                                                                           | --                                                            | --                                                                                                                           | --                                                                                                                                                       |
| September 1, 2008-

September 30, 2008 | 68,130                                                                       | $5.76                                                         | ---                                                                                                                          | ---                                                                                                                                                      |
| Total                                  | 68,130                                                                       | $5.76                                                         | --                                                                                                                           | --                                                                                                                                                       |

|   | ______________________ |
|--------|------------------------|

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

 

****Item 4.**    Submission of Matters to a Vote of Security Holders**

 

Our 2008 Annual Meeting of Stockholders (the "Annual Meeting") was held on August 21, 2008. At the Annual Meeting, stockholders:

 

| (a)    | Elected the following directors to serve as Class I directors of the Company until our 2011 Annual Meeting of Stockholders and until election and qualification of their respective successors by the following vote: |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                  |   |   |   |
|   | Director                                                                                                                                                                                                              | For | Withheld | Broker Non-Votes |
|   | Eric Luft                                                                                                                                                                                                             | 5,244,563 | 111,058 | 0 |
|   | James E. Tulin                                                                                                                                                                                                        | 5,158,258 | 197,363 | 0 |
|   |                                                                                                                                                                                                                  |   |   |   |
|   |                                                                                                                                                                                                                  |   |   |   |
| (b)    | Approved the appointment of BDO Seidman LLP as the independent registered public accounting firm of the Company for the fiscal year ended December 31, 2008 by the following vote:                                    |
|   |                                                                                                                                                                                                                  |   |   |   |
|   | For                                                                                                                                                                                                                   | Against | Abstain | Broker Non-Votes |
|   | 5,298,962                                                                                                                                                                                                             | 24,233 | 32,426 | 0 |
|   |                                                                                                                                                                                                                  |   |   |   |
|   |                                                                                                                                                                                                                  |   |   |   |
| (c)    | Approved the Swank, Inc. 2008 Stock Incentive Plan by the following vote:                                                                                                                                             |
|   |                                                                                                                                                                                                                  |   |   |   |
|   | For                                                                                                                                                                                                                   | Against | Abstain | Broker Non-Votes |
|   | 3,623,810                                                                                                                                                                                                             | 644,966 | 9,909 | 1,064,900 |

 

 

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****Item 6.**    Exhibits**

 

| ExhibitNumber | Description                                                                                                             |
|---------------|-------------------------------------------------------------------------------------------------------------------------|
|          |                                                                                                                    |
| 31.01         | Rule 13a-14(a) Certification of John Tulin, Chief Executive Officer of the Company.                                     |
|          |                                                                                                                    |
| 31.02         | Rule 13a-14(a) Certification of Jerold R. Kassner, Executive Vice President and Chief Financial Officer of the Company. |
|          |                                                                                                                    |
| 32.01         | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

 

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**** 

**SIGNATURES**

 

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

 

                                                                                                                           

 

 

|   | SWANK, INC.                                                                      |
|--------|----------------------------------------------------------------------------------|
|   | Registrant                                                                       |
|   |                                                                             |
|   |                                                                             |
|   |                                                                             |
|   | /s/ Jerold R. Kassner                                                            |
|   | Jerold R. Kassner,Executive Vice President,Chief Financial Officer and Treasurer |
|   |                                                                             |
|   |                                                                             |
|   |                                                                             |
|   |                                                                             |

                                                                                                                           

|   | Date:   | November 14, 2008 |
|--------|-------------------|-------------------|

 

 

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----

 

**EXHIBIT INDEX**

 

 

| ExhibitNumber | Description                                                                                                             |
|---------------|-------------------------------------------------------------------------------------------------------------------------|
|          |                                                                                                                    |
| 31.01         | Rule 13a-14(a) Certification of John Tulin, Chief Executive Officer of the Company.                                     |
|          |                                                                                                                    |
| 31.02         | Rule 13a-14(a) Certification of Jerold R. Kassner, Executive Vice President and Chief Financial Officer of the Company. |
|          |                                                                                                                    |
| 32.01         | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

 

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