**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**x ANNUAL REPORT PURSUANT TO        SECTION 13 or 15 (d) OF THE SECURITIES**

**EXCHANGE ACT OF 1934**

         

**For the fiscal year ended December 31, 2007**

         

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:**0-19254**

 

**LIFETIME BRANDS, INC.**

 

(Exact name of registrant as specified in its charter)

 

         

| **Delaware**                                                                          | **11-2682486**                       |
|---------------------------------------------------------------------------------------|--------------------------------------|
| (State or other jurisdiction of incorporation or                        organization) | (I.R.S. Employer Identification No.) |

 

**1000 Stewart Avenue, Garden City, New York 11530**

         

(Address of principal executive offices, including Zip Code)

 

(**516) 683-6000**

 

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

| **Common Stock, $.01 par value** | **The NASDAQ Stock Market LLC**             |
|----------------------------------|---------------------------------------------|
| (Title of each class)            | (Name of each exchange on which registered) |

         

Securities registered pursuant to Section 12(g) of the        Act:**None**

         

Indicate by check mark if the registrant is a well-known seasoned issuer, as        defined in Rule 405 of the Securities Act.

|   | Yes | **o** | No | **x** |
|--------|-----|-------|----|-------|

 

Indicate by check mark if the registrant is not required to file reports        pursuant to Section 13 or Section 15(d) of the Act.

|   | Yes | ****o**** | No | **x** |
|--------|-----|-----------|----|-------|

 

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

|   | Yes | **x** | No | ****o**** |
|--------|-----|-------|----|-----------|

 

 

 

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Indicate        by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is        not contained herein, and will not be contained, to the best of registrant’s        knowledge, in definitive proxy or information statements incorporated by reference in Part        III of this Form 10-K or any amendment to this Form        10-K                o

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

(check        one):       Large accelerated        filer o           Accelerated        filer x            Non-accelerated filero

 

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

 

|   | Yes | **o** | No | **x** |
|--------|-----|-------|----|-------|

 

The        aggregate market value of 11,230,214 shares of the voting stock held by non-affiliates of        the registrant as of June 30, 2007 was approximately $230,000,000. Directors, executive        officers, and trusts controlled by said individuals are considered affiliates for the        purpose of this calculation, and should not necessarily be considered affiliates for any        other purpose.

 

The        number of shares of common stock, par value $.01 per share, outstanding as of March 14,        2008 was 11,964,388.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Parts of        the registrant’s definitive proxy statement for the 2008 Annual Meeting of        Stockholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of        1934 are incorporated by reference in Part III of this Annual Report.

 

 

 

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**LIFETIME BRANDS, INC.**

**FORM 10-K**

**TABLE OF CONTENTS**

 

| **PART I**   |                                                                                                                                                         |   |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 1.           | Business                                                                                                                                                     | 4      |
| 1A.          | Risk Factors                                                                                                                                                 | 10     |
| 1B.          | Unresolved Staff Comments                                                                                                                                    | 19     |
| 2.           | Properties                                                                                                                                                   | 19     |
| 3.           | Legal Proceedings                                                                                                                                            | 19     |
| 4.           | Submission of Matters to a Vote of Security                    Holders                                                                                       | 19     |
| **PART II**  |                                                                                                                                                         |   |
| 5.           | Market for the Registrant’s Common                    Equity, Related Stockholder Matters and Issuer Purchases of Equity                    Securities | 20     |
| 6.           | Selected Financial Data                                                                                                                                      | 22     |
| 7.           | Management’s Discussion and Analysis of                    Financial Condition and Results of Operations                                               | 23     |
| 7A.          | Quantitative and Qualitative Disclosures about                    Market Risk                                                                                | 33     |
| 8.           | Financial Statements and Supplementary                    Data                                                                                               | 33     |
| 9.           | Changes in and Disagreements with Accountants                    on Accounting and Financial Disclosure                                                      | 33     |
| 9A.          | Controls and Procedures                                                                                                                                      | 34     |
| 9B.          | Other Information                                                                                                                                            | 36     |
| **PART III** |                                                                                                                                                         |   |
| 10.          | Directors and Executive Officers and                    Corporate Governance                                                                                 | 36     |
| 11.          | Executive Compensation                                                                                                                                       | 36     |
| 12.          | Security Ownership of Certain Beneficial                    Owners and Management and Related Stockholder Matters                                            | 36     |
| 13.          | Certain Relationships and Related                    Transactions, and Director Independence                                                                 | 36     |
| 14.          | Principal Accounting Fees and                    Services                                                                                                    | 36     |
| **PART IV**  |                                                                                                                                                         |   |
| 15.          | Exhibits and Financial Statement                    Schedules                                                                                                | 37     |
| Signatures   |                                                                                                                                                         | 39     |

 

         

1

 

 

 

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**DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS**

 

This        Annual Report on Form 10-K contains “forward-looking statements” as defined by        the Private Securities Litigation Reform Act of 1995. These forward-looking statements        include information concerning Lifetime Brands, Inc.’s (the        “Company’s”) plans, objectives, goals, strategies, future events, future        revenues, performance, capital expenditures, financing needs and other information that is        not historical information. Many of these statements appear, in particular, under the        headings*Business*and*Management’s Discussion and Analysis of Financial Condition and        Results of Operations*included in Item 1 of Part I and Item 7 of        Part II, respectively. When used in this Annual Report on Form 10-K, the words        “estimates,” “expects,” “anticipates,”        “projects,” “plans,” “intends,” “believes”        and variations of such words or similar expressions are intended to identify        forward-looking statements. All forward-looking statements, including, without limitation,        the Company’s examination of historical operating trends, are based upon the        Company’s current expectations and various assumptions. The Company believes there is        a reasonable basis for its expectations and assumptions, but there can be no assurance that        the Company will realize its expectations or that the Company’s assumptions will        prove correct.

 

There        are a number of risks and uncertainties that could cause the Company’s actual results        to differ materially from the forward-looking statements contained in this Annual Report.        Important factors that could cause the Company’s actual results to differ materially        from those expressed as forward-looking statements are set forth in this Annual Report,        including the risk factors discussed in Part I, Item 1A under the heading*Risk Factors*. Such risks, uncertainties and        other important factors include, among others:

 

|   | **•** | Changes in demand for the Company’s products and the                        success of new products; |
|--------|------------|------------------------------------------------------------------------------------------------------------|

|   | **•** | The level of competition in the Company’s                        industry; |
|--------|------------|----------------------------------------------------------------------------------|

|   | **•** | Changes in general economic and business conditions which                        could affect customer payment practices or consumer spending; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Industry trends; |
|--------|------------|------------------|

|   | **•** | The Company’s dependence on third party foreign                        sources of supply and foreign manufacturing; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Fluctuations in costs of raw materials; |
|--------|------------|-----------------------------------------|

|   | **•** | Increases in costs relating to manufacturing and                        transportation of products; |
|--------|------------|-----------------------------------------------------------------------------------------------------|

|   | **•** | Complexities associated with a multi-channel and multi-brand                        business; |
|--------|------------|-----------------------------------------------------------------------------------------------|

|   | **•** | Limited experience in the tabletop and home décor                        product categories; |
|--------|------------|-----------------------------------------------------------------------------------------------------|

|   | **•** | The Company’s relationship with key                        licensors; |
|--------|------------|-----------------------------------------------------------------------------|

|   | **•** | Encroachments on the Company’s intellectual                        property; |
|--------|------------|------------------------------------------------------------------------------------|

|   | **•** | The Company’s relationship with key                        customers; |
|--------|------------|-----------------------------------------------------------------------------|

|   | **•** | Product liability claims or product recalls; |
|--------|------------|----------------------------------------------|

|   | **•** | The timing of delivery of products to customers; |
|--------|------------|--------------------------------------------------|

|   | **•** | The Company’s restructuring of its direct-to-consumer                        retail business; |
|--------|------------|-----------------------------------------------------------------------------------------------------|

|   | **•** | Departure of key personnel; |
|--------|------------|-----------------------------|

|   | **•** | Internal development of products by the Company’s                        customers; |
|--------|------------|-------------------------------------------------------------------------------------------|

|   | **•** | Noncompliance with applicable regulations including the                        Sarbanes-Oxley Act of 2002; |
|--------|------------|------------------------------------------------------------------------------------------------------------|

|   | **•** | Risks associated with the Company’s Internet                        operations; |
|--------|------------|---------------------------------------------------------------------------------------|

|   | **•** | Future acquisitions and integration of acquired                        businesses; |
|--------|------------|------------------------------------------------------------------------------------|

|   | **•** | Technological risks; |
|--------|------------|----------------------|

|   | **•** | Network security risks; |
|--------|------------|-------------------------|

|   | **•** | Risks associated with indebtedness; and  |
|--------|------------|-----------------------------------------------|

|   | **•** | The seasonal nature of the Company’s                        business. |
|--------|------------|-----------------------------------------------------------------------------|

 

2

 

 

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There        may be other factors that may cause the Company’s actual results to differ materially        from the forward-looking statements. Except as may be required by law, the Company        undertakes no obligation to publicly update or revise forward-looking statements which may        be made to reflect events or circumstances after the date made or to reflect the occurrence        of unanticipated events.

 

**OTHER        INFORMATION**

 

The        Company is required to file its annual reports on Forms 10-K and quarterly reports on Forms        10-Q, and other reports and documents as required from time to time with the United States        Securities and Exchange Commission (the “SEC”). The public may read and copy        any materials that the Company files with the SEC at the SEC’s Public Reference Room        at 100 F Street, NE, Washington, DC 20549. Information may be obtained with respect to the        operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also        maintains an Internet site that contains reports, proxy and information statements, and        other information regarding the Company’s electronic filings with the SEC at*http://www.sec.gov*. The Company also maintains a website at*http://www.lifetimebrands.com*where users can access the Company’s electronic filings free of        charge.

 

3

 

 

 

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**PART I**

 

**Item 1. Business**

 

**OVERVIEW**

 

The Company is one of North America’s leading resources for nationally        branded kitchenware, tabletop and home décor products. The Company markets its        products under some of the most well-respected and widely-recognized brand names in the        U.S. housewares industry including three of the four most recognized brands of        “Kitchen Tool, Cutlery and Gadgets” according to the Home Furnishing News Brand        Survey for 2007 - KitchenAid®, Farberware®, and Cuisinart®. The Company        primarily targets moderate to premium price points through every major level of trade and        generally markets several lines within each of its product categories, often under more        than one brand. At the heart of the Company is a strong culture of innovation and new        product development. The Company has introduced over 3,600 new or redesigned products in        2007 and expects to introduce approximately 4,000 new or redesigned products in        2008.

 

The Company’s three main product categories and the products offered        within the product categories are as follows:

 

| **Food Preparation**                |   | **Tabletop**         |   | **Home Décor**          |
|-------------------------------------|--------|----------------------|--------|--------------------------------|
| Kitchenware                         |   | Flatware             |   | Non-electric Lighting          |
| Cutlery & Cutting Boards        |   | Dinnerware           |   | Wall Décor              |
| Bakeware & Cookware             |   | Tabletop Accessories |   | Picture Frames                 |
| Pantryware & Spices             |   | Giftware             |   | Seasonal Decorations           |
| Fondues & Tabletop Entertaining |   | Glassware            |   | Decorative Accessories         |
| Functional Glassware                |   | Crystal              |   | Lawn & Garden Décor |
|                                |   | Serveware            |   |                           |
|                                |   | Barware              |   |                           |

 

The Company markets several product lines within each of the Company’s        product categories and under each of the Company’s brands. The Company’s        competitive advantage is based on strong brands, an emphasis on innovation and new product        development, and excellent sourcing capabilities. The Company owns or licenses many of the        leading brands in its industry. Over the last several years, the Company’s sales        growth has come from: (i) expanding product offerings within the Company’s        current categories, (ii) developing and acquiring new brands and product categories        and (iii) entering new channels of distribution, primarily in the United States. Key        factors in the Company’s growth strategy have been, and will continue to be, the        selective use and management of the Company’s strong brands and the Company’s        ability to provide a steady stream of new products and designs. A significant element of        this strategy is the Company’s in-house design and development team that currently        consists of 102 professional designers, artists and engineers. This team creates new        products, packaging and merchandising concepts. Utilizing the latest available design        tools, technology and materials, the Company works closely with its suppliers to enable        efficient and timely manufacturing of its products. The Company has been sourcing its        products in Asia for over 45 years and currently sources its products from        approximately 430 suppliers located primarily in China. The Company produces a majority of        its sterling silver products at its manufacturing facility in San German, Puerto        Rico.

 

The Company’s top ten brands and their respective product categories        are:

 

| Farberware®                   | Food Preparation and Tabletop  |
|-----------------------------------|--------------------------------|
| KitchenAid®                   | Food Preparation               |
| Elements®                     | Home Décor              |
| Pfaltzgraff®                  | Tabletop and Food Preparation  |
| Wallace Silversmiths®         | Tabletop and Home Décor |
| Cuisinart®                    | Food Preparation and Tabletop  |
| Kamenstein®                   | Food Preparation               |
| International® Silver Company | Tabletop and Home Décor |
| Melannco®                     | Home Décor              |
| Towle Silversmiths®           | Tabletop and Home Décor |

 

 

4

 

 

 

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The        Company sells its products to a diverse nationwide customer base including mass merchants,        specialty stores, national chains, department stores, warehouse clubs, home centers,        supermarkets and off-price retailers, as well as through other channels of distribution.        The Company’s largest retail customers are each serviced by an in-house team that        includes representatives from the Company’s sales, marketing, merchandising and        product development departments. The Company generally collaborates with its retail        customers and in many instances produces specific versions of the Company’s product        lines with exclusive designs and packaging for their stores, which are appropriately priced        for their respective customer bases.

 

The        Company also sells its products directly to the consumer through Company-operated factory        and outlet stores, mail order catalogs, and the Internet. At December 31, 2007 the Company        operated 78 factory and outlet stores in 32 states under the Farberware® and        Pfaltzgraff® names. In December 2007, the Company commenced a plan to close 30        underperforming Farberware® outlet stores and Pfaltzgraff® factory stores by the        end of the first quarter of 2008.

 

The        Company’s principal East Coast distribution center is a modern facility located in        Robbinsville, New Jersey and the Company’s new principal West Coast distribution        center is a modern facility located in Fontana, California that the Company began occupying        in December 2007. The Company also currently operates distribution centers in Mira Loma,        California; East Boston, Massachusetts; Winchendon, Massachusetts; and York, Pennsylvania        and utilizes one distribution facility in California operated by a third-party logistics        provider. The Company utilizes public warehouses to provide additional capacity as needed.        The Company is in the process of consolidating its West Coast distribution centers. During        the third quarter of 2008 the operations of the Company’s Mira Loma, California        distribution center and the facility in California operated by a third-party logistics        provider will be consolidated into the Company’s Fontana, California distribution        center.

 

The        Company has assembled a seasoned management team with experience and talent in the        housewares and consumer products industries. The Company’s management team is focused        on growing the Company’s business by capitalizing on the reputation of the        Company’s well-respected and widely-recognized brands and the Company’s        strengths in product design and innovation, product sourcing experience and expertise and        long-term retail customer and supplier relationships.

 

**BUSINESS SEGMENTS**

 

The        Company operates in two reportable segments—wholesale and direct-to-consumer. The        wholesale segment is the Company’s primary business that designs, markets and        distributes household products to retailers and distributors. The direct-to-consumer        segment is comprised of the Company’s business that sells household products directly        to the consumer through the Company’s factory and outlet stores, mail-order catalogs        and the Internet. The Company has segmented its operations in a manner that reflects how        management reviews and evaluates the results of its operations. While both segments        distribute similar products, the segments are distinct due to their different types of        customers and the different methods used to sell, market and distribute the products.        Additional information regarding the operating performance of the Company’s segments        is discussed in Note J of the Notes to the Consolidated Financial Statements beginning on        page F-7.

 

5

 

 

 

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**ACQUISITIONS**

 

Since        1995 the Company has completed the following 13 acquisitions that have expanded the        Company’s product offerings, allowed the Company to enter new product categories and        added brands:

 

| **Year** |   | **Company or assets acquired**         |   | **Product categories**         |
|----------|--------|----------------------------------------|--------|--------------------------------|
| 1995     |   | Hoffritz®                          |   | Food Preparation               |
| 1998     |   | Roshco, Inc.                      |   | Food Preparation               |
| 2000     |   | M. Kamenstein, Inc.               |   | Food Preparation               |
| 2003     |   | :USE®—Tools for Civilization |   | Bath hardware and accessories  |
|     |   | Gemco Ware, Inc.                  |   | Food Preparation               |
| 2004     |   | Excel Importing Corp.                  |   | Food Preparation and Tabletop  |
| 2005     |   | The Pfaltzgraff Co.                    |   | Tabletop and Food Preparation  |
|     |   | Salton, Inc.                           |   | Tabletop                       |
| 2006     |   | Syratech Corporation                   |   | Tabletop and Home Décor |
| 2007     |   | Pomerantz®                         |   | Food Preparation               |
|     |   | Design for Living®                 |   | Food Preparation               |
|     |   | Gorham®                            |   | Tabletop                       |
|     |   | Ekco S.A.B. (29.99%)                   |   | Food Preparation and Tabletop  |

 

**RECENT ACQUISITIONS**

 

**Pomerantz® and Design for Living®**

 

In April        2007, in two separate, but related, transactions, the Company acquired the Pomerantz®        brand and certain related assets from JP Products, LLC and the Design for Living® brand        and certain related assets from Design for Living, LLC; designers, importers and        distributors of pantryware products.

 

**Gorham®**

 

In July        2007, the Company acquired certain assets from Lenox Group Inc. (“Lenox”).        Concurrently with the execution of the agreement, the Company entered into a long-term        exclusive licensing agreement with Lenox under which the Company licensed the Gorham®,        Kirk Stieff®, WhitingTM and DurginTM trademarks in connection with the        manufacture, sale, distribution and marketing of sterling silver products.

 

**Ekco**

 

In        December 2007, the Company acquired a 29.99% interest in Ekco S.A.B (“Ekco”).        Ekco is one of Mexico’s leading housewares companies and manufactures and sells        cookware, bakeware, kitchenware, cutlery, dinnerware, flatware and related items. Ekco        markets its products in Mexico under the Ekco®, Vasconia®, Regal®, H.        Steele®, Presto® and Thermos® brands.

 

6

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**CUSTOMERS**

 

The        Company’s products are sold primarily in the United States. The Company sells its        products to a diverse nationwide customer base including mass merchants (such as Wal-Mart        and Target), specialty stores (such as Bed Bath & Beyond and Linens’n        Things), national chains (such as JC Penney, Kohl’s, and Sears), department stores        (such as Bloomingdale’s, Macy’s and Saks), warehouse clubs (such as Costco,        BJ’s Wholesale Club and Sam’s Club), home centers (such as Lowe’s and The        Home Depot), supermarkets (such as Stop & Shop and Kroger) and off-price retailers        (such as Marshalls, T.J. Maxx and Ross Stores).

 

During        the years ended December 31, 2007, 2006 and 2005, Wal-Mart Stores, Inc.        (including Sam’s Club) accounted for 21%, 17% and 20% of net sales, respectively. No        other customer accounted for 10% or more of the Company’s net sales during 2007, 2006        or 2005. For the years ended December 31, 2007, 2006 and 2005, the Company’s ten        largest customers accounted for 62%, 49% and 51% of net sales, respectively.

 

At        December 31, 2007 the Company also operated 34 outlet stores in 17 states under the        Farberware® name and 44 factory stores in 25 states under the Pfaltzgraff® name, as        well as,  catalog and Internet operations.

 

**DISTRIBUTION**

 

The        Company operates the following distribution centers:

 

| **Location**               | **Size                    (square feet)** |
|----------------------------|-------------------------------------------|
| Fontana, California        | 753,000                                   |
| Robbinsville, New Jersey   | 700,000                                   |
| York, Pennsylvania         | 473,000                                   |
| Mira Loma, California      | 426,000                                   |
| Winchendon, Massachusetts  | 210,000                                   |
| East Boston, Massachusetts |   11,000                             |

 

The        Company’s principal East Coast distribution center is the Robbinsville, New Jersey        facility and the Company’s principal West Coast distribution center is the Fontana,        California facility.

 

In        addition to the above distribution centers, the Company currently utilizes a 216,000 square        foot distribution center in California operated by a third-party logistics provider and        five public warehouses, two of which are located in New Jersey, two of which are located in        Massachusetts and one of which is located in Pennsylvania that provide additional capacity        as needed.

 

In        December 2007, the Company began the process of consolidating its West Coast distribution        centers. During the third quarter of 2008, the operations of the Mira Loma, California        distribution center and the 216,000 square foot facility in California operated by a        third-party logistics provider will be consolidated into the Fontana, California        distribution facility.

 

7

 

 

 

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**SALES AND MARKETING**

 

The Company maintains separate sales forces for its product categories so as        to provide the specialized expertise and attention necessary to service its customer base.        The Company’s sales and marketing staff coordinates with individual retailers to        devise marketing strategies and merchandising concepts and to furnish advice on advertising        and product promotion. The Company has developed several promotional programs for use in        the ordinary course of business to promote sales throughout the year.

 

The Company’s various sales and marketing efforts are supported from        its principal office and showroom in Garden City, New York. The Company also maintains        showrooms in New York, New York; Boston, Massachusetts; Atlanta, Georgia; Bentonville,        Arkansas; and Menomonee Falls, Wisconsin. The Company’s sales and marketing staff at        December 31, 2007, consisted of 192 employees who are salaried, paid commissions based on        sales or, in some instances, paid a base salary plus commissions. The Company also        distributes certain of its products through independent sales representatives who work on a        commission basis only.

 

The Company’s largest retail customers are each serviced by an        in-house team that includes representatives from the Company’s sales, marketing,        merchandising and product development departments. The Company generally collaborates with        its retail customers and in many instances produces specific versions of the        Company’s product lines with exclusive designs and packaging for their        stores.

 

**SOURCES OF SUPPLY AND MANUFACTURING**

 

The Company primarily sources its products from approximately 430 suppliers        located mainly in the People’s Republic of China, and to a lesser extent in Hong        Kong, the United States, Taiwan, Japan, India, Thailand, Italy, Indonesia, Korea, Vietnam,        Germany, Czech Republic, Malaysia, Portugal, Colombia, Lithuania, Turkey, and Mexico. The        Company’s policy is to maintain several months of supply of inventory and,        accordingly, the Company orders products substantially in advance of the anticipated time        of their sale to the Company’s customers. While the Company does not have any        long-term formal arrangements with any of its suppliers, in certain instances, particularly        with respect to the manufacture of cutlery, the Company places purchase orders for products        several months in advance of receipt of orders from its customers. The Company’s        arrangements with most manufacturers allow for some flexibility in modifying the quantity,        composition and delivery dates of orders. All purchase orders are in United States dollars        and are cancelable.

 

The Company produces a majority of its sterling silver products at its        manufacturing facility in San German, Puerto Rico and operates a spice packing line within        its Winchendon, Massachusetts facility where it assembles spices and spice        racks.

 

**COMPETITION**

 

The markets for Food Preparation, Tabletop and Home Décor products        are highly competitive and include numerous domestic and foreign competitors, some of which        are larger than the Company. The primary competitive factors in selling such products to        retailers are consumer brand name recognition, quality, aesthetic appeal to consumers,        packaging, breadth of product line, distribution capability, prompt delivery and selling        price.

 

**PATENTS**

 

The Company owns 131 design and utility patents on the overall design of        some of its products. The Company believes that the expiration of any of its patents would        not have a material adverse effect on the Company’s business.

 

**BACKLOG**

 

Backlog is not material to the Company’s business because actual        confirmed orders are typically not received until close to the required shipment        dates.

 

8

 

 

 

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**EMPLOYEES**

 

As of        December 31, 2007, the Company had a total of 1,469 employees, 184 of whom are located in        China. In addition, the Company employed 554 people on a part-time basis, predominately in        its direct-to-consumer businesses. None of the Company’s employees are represented by        a labor union. The Company considers its employee relations to be good.

 

**REGULATORY MATTERS**

 

Certain        of the products the Company manufactures are subject to the jurisdiction of the U.S.        Consumer Product Safety Commission. The Company’s spice container filling operation        in Winchendon, Massachusetts is regulated by the Food and Drug Administration. The        Company’s products are also subject to regulation under certain state laws pertaining        to product safety and liability.

 

9

 

 

 

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**Item 1A. Risk Factors**

 

The        Company’s business, operations, and financial condition are subject to various risks.        Some of these risks are described below. This section does not describe all risks that may        be applicable to the Company, the Company’s industry, or the Company’s        business, and it is intended only as a summary of certain material risk factors.

 

**The        Company must successfully anticipate changing consumer preferences and buying trends and        manage its product line and inventory commensurate with customer demand.**

 

The        Company’s success depends upon its ability to anticipate and respond to changing        merchandise trends and customer demands in a timely manner. Consumer preferences cannot be        predicted with certainty and may change between selling seasons. The Company must make        decisions as to design, development, expansion and production of new and existing product        lines. If the Company misjudges either the market for its products, the purchasing patterns        of the end consumer, or the appeal of the design, functionality or variety of its product        lines, the Company’s sales may decline significantly, and it may be required to mark        down certain products to sell the resulting excess inventory or sell such inventory through        the Company’s factory and outlet stores, or other liquidation channels, at prices        which can be significantly lower than the Company’s normal wholesale prices, each of        which would harm its business and operating results.

 

In        addition, the Company must manage its inventory effectively and commensurate with customer        demand. A substantial portion of the Company’s inventory is sourced from vendors        located outside the United States. The Company generally commits to purchasing products        before it receives firm orders from its retail customers and frequently before trends are        known. The extended lead times for many of the Company’s purchases, as well as the        development time for design and deployment of new products, may make it difficult for the        Company to respond rapidly to new or changing trends. In addition, the seasonal nature of        the Company’s business requires it to carry a significant amount of inventory prior        to the year-end holiday selling season. As a result, the Company is vulnerable to demand        and pricing shifts and to misjudgments in the selection and timing of product purchases. If        the Company does not accurately predict its customers’ preferences and acceptance        levels of its products, the Company’s inventory levels may not be appropriate, and        its business and operating results may be adversely impacted.

 

**The        Company faces intense competition from companies with similar brands or products and from        companies in the retail industry.**

 

The        markets for Food Preparation, Tabletop, and Home Décor products are highly        competitive and include numerous domestic and foreign competitors, some of which are larger        than the Company, have greater financial and other resources than the Company, and may have        more established brand names in some or all of the markets the Company serves. The primary        competitive factors in selling such products to retailers are consumer brand name        recognition, quality, packaging, breadth of product line, distribution capability, prompt        delivery in response to retail customers’ order requirements, and ultimate price to        the consumer.

 

The        competitive challenges facing the Company include:

 

|   | **•** | anticipating and quickly responding to changing consumer                        demands better than the Company’s competitors; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | maintaining favorable brand recognition and achieving end                        consumer perception of value; |
|--------|------------|----------------------------------------------------------------------------------------------------------------|

|   | **•** | effectively marketing and competitively pricing the                        Company’s products to consumers in diverse market segments and price                        levels; and |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | developing innovative, high-quality products in designs and                        styles that appeal to consumers of varying groups, tastes and price level                        preferences, and in ways that favorably distinguishes the Company from its                        competitors. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

10

 

 

 

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In        addition, the Company operates its factory and outlet store, catalog and Internet        businesses under highly competitive conditions. The Company has numerous and varied        competitors at the national and local levels, including conventional and specialty        department stores, other specialty stores, mass merchants, value retailers, discounters,        and Internet and mail order retailers. Competition is characterized by many factors,        including product assortment, advertising, price, quality, service, location, reputation        and credit availability. If the Company does not compete effectively with regard to these        factors, its results of operations could be materially and adversely affected.

 

In light        of the many competitive challenges facing the Company, the Company may not be able to        compete successfully. Increased competition could adversely affect the Company’s        sales, operating results and business, by forcing the Company to lower its prices or sell        fewer units, which could reduce the Company’s gross profit and net income.

 

**The        Company’s business depends, in part, on factors affecting consumer spending that are        out of the Company’s control.**

 

The        Company’s business depends on consumer demand for its products and, consequently, is        sensitive to a number of factors that influence consumer spending, including general        economic conditions, disposable consumer income, recession and inflation, incidents and        fears relating to national security, terrorism and war, hurricanes, floods and other        natural disasters, inclement weather, consumer debt, unemployment rates, interest rates,        sales tax rates, fuel and energy prices, consumer confidence in future economic conditions        and political conditions, and consumer perceptions of personal well-being and security,        generally. Adverse changes in factors affecting discretionary consumer spending could        reduce consumer demand for the Company’s products, change the mix of products the        Company sells to a different mix with a lower average gross margin, slow inventory turnover        and result in greater markdowns on inventory, thus reducing the Company’s sales and        harming its business and operating results.

 

**The        Company depends on key vendors for timely and effective sourcing of its products, and the        Company is subject to various risks and uncertainties that may affect its vendors’        ability to produce quality merchandise.**

 

The        Company sources a significant majority of its products from third-party suppliers with        which the Company may have in many cases established long-term relationships. The        Company’s performance depends on its ability to have its products manufactured to the        Company’s designs and specifications in sufficient quantities at competitive prices.        The Company has no contractual assurances of continued supply, pricing or access to        products, and in general, vendors may discontinue selling to the Company at any time. The        Company may not be able to acquire its products in sufficient quantities, with the quality        assurance that the Company requires, and on terms acceptable to the Company.

 

The        Company primarily sources its products from approximately 430 suppliers located mainly in        the People’s Republic of China, and to a lesser extent in Hong Kong, the United        States, Taiwan, Japan, India, Thailand, Italy, Indonesia, Korea, Vietnam, Germany, Czech        Republic, Malaysia, Portugal, Colombia, Lithuania, Turkey, and Mexico. The Company’s        three largest suppliers in China provided the Company with approximately 40% of the        products it distributed in 2007 and 2006. This concentration of sourcing is a risk to the        Company’s business. Furthermore, because the Company’s product lines cover        thousands of products, many products are produced for the Company by only one or two        manufacturers. An interruption of supply from any of these manufacturers could also have an        adverse impact on the Company’s ability to fill orders on a timely basis.

 

11

 

 

 

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As a result, an interruption of supply from any of the Company’s        suppliers, or the loss of one or more key vendors, could have a negative effect on the        Company’s business and operating results because the Company would be missing        products that could be important to its assortment or to coordinated branded product lines,        unless and until alternative supply arrangements are secured. The Company may not be able        to develop relationships with new vendors, and products from alternative sources, if any,        may be of a lesser quality and/or more expensive than those the Company currently        purchases. Replacement of manufacturing sources would require long lead-times to assure the        vendors’ capability to manufacture to the Company’s designs and specifications,        maintain quality control and achieve the production levels the Company requires. In        addition, some of the Company’s customers demand a certain standard of shipping        fulfillment (usually as a percentage of orders placed) and any disruption in the        manufacturing of its products could result in the Company’s failure to meet such        standards.

 

The Company is also subject to certain risks, including risks relating to        the availability of raw materials, labor disputes, union organizing activity, inclement        weather, natural disasters, and general economic and political conditions, that might limit        the Company’s vendors ability to provide it with quality merchandise on a timely        basis. For these or other reasons, one or more of the Company’s vendors might not        adhere to the Company’s quality control standards, and the Company might not identify        the deficiency before products are shipped to its retail customers. The Company’s        vendors failure to manufacture or ship quality merchandise in a timely and efficient manner        could damage its reputation and that of brands offered by the Company, and could lead to a        loss or reduction in orders by the Company’s retail customers and an increase in        product liability claims or litigation.

 

**Because most of the Company’s vendors are located in foreign        countries, the Company is subject to a variety of additional risks and        uncertainties.**

 

The Company’s dependence on foreign vendors means, in part, that the        Company may be affected by declines in the relative value of the U.S. dollar to other        foreign currencies. Although substantially all of the Company’s foreign purchases of        products are negotiated and paid for in U.S. dollars, changes in currency exchange rates        might negatively affect the profitability and business prospects of the Company’s        foreign vendors. This, in turn, might cause such foreign vendors to demand higher prices        for products, hold up shipments to the Company, or discontinue selling to the Company, any        of which could ultimately reduce the Company’s sales or increase its        costs.

 

The Company is also subject to other risks and uncertainties associated with        changing economic and political conditions in foreign countries. These risks and        uncertainties include import duties and quotas, concerns over anti-dumping, work stoppages,        economic uncertainties (including inflation), foreign government regulations, incidents and        fears involving security, terrorism and wars, political unrest and other trade        restrictions. The Company cannot predict whether any of the countries in which its products        are currently manufactured or may be manufactured in the future will be subject to trade        restrictions imposed by the U.S. or foreign governments or the likelihood, type or effect        of any such restrictions. Any event causing a disruption or delay of imports from foreign        vendors, including the imposition of additional import restrictions, restrictions on the        transfer of funds and/or increased tariffs or quotas, or both, with respect to products for        the home could increase the cost or reduce the supply of products available to the Company        and adversely affect the Company’s business, financial condition and operating        results. Furthermore, some or all of the Company’s foreign vendors’ operations        may be adversely affected by political and financial instability resulting in the        disruption of trade from exporting countries, restrictions on the transfer of funds and/or        other trade disruptions.

 

In addition, there is a risk that one or more of the Company’s foreign        vendors will not adhere to its compliance standards such as fair labor practices and        prohibitions on child labor. Such circumstances might create an unfavorable impression of        the Company’s sourcing practices or the practices of some of its vendors that could        harm the Company’s image. Additionally, certain of the Company’s major retail        customers, including Wal-Mart Stores, Inc., routinely inspect its suppliers’        facilities to determine their compliance with applicable labor laws. A determination by        such customers that one or more of the Company’s suppliers violate such standards        could jeopardize the Company’s sales to such customers if the Company or the        suppliers cannot effectively remedy any such violation in a timely manner. If any of these        occur, the Company could lose sales, customer goodwill and favorable brand recognition,        which could negatively affect the Company’s business and operating        results.

 

12

 

 

 

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**High costs of raw materials and energy may result in increased operating        expenses and adversely affect the Company’s results of operations and cash        flow.**

 

Significant variations in the costs and availability of raw materials and        energy may negatively affect the Company’s results of operations. The Company’s        vendors purchase significant amounts of metals and plastics to manufacture the        Company’s products. They also purchase significant amounts of electricity to supply        the energy required in their production processes. The rising cost of fuel may also        increase the Company’s transportation costs. The cost of these raw materials and        energy, in the aggregate, represents a significant portion of the Company’s operating        expenses. The Company’s results of operations have been and could in the future be        significantly affected by increases in these costs. Price increases increase the        Company’s working capital needs and, accordingly, can adversely affect the        Company’s liquidity and cash flow. Additionally, higher fuel prices may decrease the        number of consumer shopping trips and lower demand for merchandise sold through the        Company’s factory and outlet stores.

 

**The Company must successfully manage the complexities associated with a        multi-channel and multi-brand business.**

 

The Company’s business requires the development, marketing and        production of a wide variety of products in its three product categories: Food Preparation,        Tabletop and Home Décor. Within each of these categories, it is necessary to market        several full lines of branded products targeting different price and prestige levels, and        each of these branded lines must contain an assortment of products and accessories with        matched designs and packaging which are often sold as sets. The Company’s different        product lines are sold under a variety of brand names, some of which are owned and some of        which are licensed. Many of the Company’s products are inherently of the type that        consumers prefer to purchase as part of a branded, matched line. Accordingly, both for        marketing reasons and the requirements of the Company’s license agreements, the        Company must maintain breadth of product lines and it must devote significant resources to        developing and marketing new designs for the Company’s product lines. The inability        to maintain the breadth of the Company’s product lines—whether due to vendor        difficulties, design issues, retail orders for less than all of the products in a line, or        other problems—could result in competitive disadvantages as well as the potential        loss of valuable license arrangements.

 

In addition, the Company sells its products through several different        distribution channels (mass merchants, specialty stores, national chains, department        stores, warehouse clubs, home centers, supermarkets, off-price retailers, factory and        outlet stores, catalogs and over the Internet) and the Company must manage the selective        deployment of branded lines within these channels so as to achieve maximum revenue and        profitability. Failure to properly align brands and product lines to the price and prestige        levels associated with particular channels of distribution could result in product line        failures, damage to the Company’s reputation, and lost sales and profits.

 

**The Company has limited experience operating in the Tabletop category,        which is the Company’s second largest product category, and limited experience in the        Home Décor product category.**

 

The Company acquired from Pfaltzgraff, Salton, Syratech and Lenox certain        brands and product lines in the Tabletop and Home Décor product categories in which        the Company has limited experience. The Company may encounter delays or difficulties in        transitioning these product lines and the related brands and may not achieve the expected        growth or cost savings. In particular, sales in the Tabletop and Home Décor product        categories tend to rely significantly more on the appeal to consumers of the aesthetic        design of the products than the Company’s other products lines, the sales of which        tend to depend more upon the product’s functionality. Additionally, under their        previous ownership, the Pfaltzgraff, Salton, Syratech and Lenox businesses suffered        material operating losses. The Company cannot assure that these product categories will be        profitable.

 

**Many of the Company’s leading product lines are manufactured under        licensed trademarks and any failure to retain such licenses on acceptable terms may have an        adverse effect on the Company’s business.**

 

The Company promotes and markets some of its most successful product lines        under trademarks the Company licenses from third-parties. Several of these license        agreements are subject to termination by the licensor.

 

 

13

 

 

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The        Company’s license agreement with Whirlpool Corporation allows it to design,        manufacture and market an extensive range of food preparation products under the        KitchenAid® brand name. Whirlpool Corporation may terminate this license for cause if        the Company is in default or upon the occurrence of a change of control of the Company. In        addition, Whirlpool Corporation may terminate the agreement if, based on certain        statistical parameters, a customer survey conducted by it shows that customers are        dissatisfied with the products the Company markets under the license. Products marketed        under the KitchenAid® name accounted for a substantial portion of the Company’s        revenues in 2007. The Company may not be successful in maintaining or renewing the        KitchenAid® license, which has significant commercial value to the Company, on terms        that are acceptable to the Company or at all. The loss of the KitchenAid® license, or        an increase in the royalties the Company pays under such license upon renewal, could have a        material adverse affect on the Company’s results of operations.

 

In        addition, any of the licensors of the Company’s trade names may encounter problems        that would potentially diminish the prestige of the licensed trade names. In turn, this        could negatively reflect on the Company’s line of products that are marketed under        the applicable trade name. In the event that this occurs with respect to one of the        Company’s leading product lines, the Company’s sales and financial results may        be adversely affected. In addition, certain of the Company’s licenses have minimum        sales requirements. If the Company is unable to achieve the minimum sales requirements        under these licenses, the Company may incur a loss related to these licenses.

 

**If        the Company fails to adequately protect or enforce its intellectual property rights,        competitors may produce and market products similar to the Company’s. In addition,        the Company may be subject to intellectual property litigation and infringement claims by        third parties.**

 

The        success of the Company’s products is inherently dependent on new and original designs        that appeal to consumer tastes and trends at various price and prestige levels. The        Company’s trademarks, service marks, patents, trade dress rights, trade secrets and        other intellectual property are valuable assets that are critical to the Company’s        success. Although the Company attempts to protect its proprietary properties through a        combination of trademark, patent and trade secret laws and non-disclosure agreements, these        laws and agreements may be insufficient. Although the Company has trademarks and certain        patents issued or licensed to it for its products, the Company may not always be able to        successfully protect or enforce its trademarks and patents against competitors or against        challenges by others. The Company sources substantially all of its products from foreign        vendors, and the ability to protect the Company’s intellectual property rights in        foreign countries may be far more difficult than in the United States. Many foreign        jurisdictions provide less legal protection of intellectual property rights than the United        States and it is difficult to even detect infringing products in such jurisdictions until        they are already in widespread distribution. The costs of enforcing the Company’s        intellectual property may adversely affect its operating results.

 

In        addition, the Company may be subject to intellectual property litigation and infringement        claims, which could cause it to incur significant expenses or prevent the Company from        selling its products. A successful claim of trademark, patent or other intellectual        property infringement against the Company could adversely affect the Company’s growth        and profitability, in some cases materially. Others may claim that the Company’s        proprietary or licensed products are infringing their intellectual property rights, and the        Company’s products may infringe those intellectual property rights. The Company may        be unaware of intellectual property rights of others that may cover some of its products.        If someone claims that the Company’s products infringe their intellectual property        rights, any resulting litigation could be costly and time consuming and would divert the        attention of management and key personnel from other business issues. The Company also may        be subject to significant damages or injunctions preventing it from manufacturing, selling        or using some aspect of the Company’s products in the event of a successful claim of        patent or other intellectual property infringement. Any of these adverse consequences could        have a material adverse effect on the Company’s business and        profitability.

 

14

 

 

 

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**The Company has a single customer that accounted for 21% of its net sales        in 2007.**

 

The Company distributes its products through a diverse nationwide base of        retail customers including mass merchants, specialty stores, national chains, department        stores, warehouse clubs, home centers, supermarkets and off-price retailers, as well as        through other channels of distribution, including its factory and outlet store, catalog and        Internet businesses. During the years ended December 31, 2007, 2006 and 2005, Wal-Mart        Stores, Inc. (including Sam’s Club) accounted for 21%, 17% and 20% of the        Company’s net sales, respectively. Any material reduction of product orders by        Wal-Mart Stores, Inc. could have significant adverse effects on the Company’s        business and operating results, including the loss of predictability and volume production        efficiencies associated with such a large customer. In addition, any pressure by Wal-Mart        Stores, Inc. to reduce the price of the Company’s products could result in the        reduction of the Company’s operating margin.

 

**If the Company’s products are found to be defective, the        Company’s credibility and that of its brands may be harmed, market acceptance of the        Company’s products may decrease and the Company may be exposed to liability in excess        of its product liability insurance coverage***.*

 

The marketing of certain of the Company’s consumer products, such as        tabletop cookware, involve an inherent risk of product liability claims or recalls or other        regulatory or enforcement actions initiated by the U.S. Consumer Product Safety Commission,        by state regulatory authorities or through private causes of action. Any defects in        products the Company markets could harm the Company’s credibility, adversely affect        its relationship with its customers and decrease market acceptance of the Company’s        products and the strength of the brand names under which the Company markets such products.        In addition, potential product liability claims may exceed the amount of the        Company’s insurance coverage under the terms of the Company’s policies. In the        event that the Company is held liable for a product liability claim for which it is not        insured, or for damages exceeding the limits of the Company’s insurance coverage,        such claim could materially damage the Company’s business and its financial        condition.

 

**The Company’s ability to deliver products to its customers in a        timely manner and to satisfy its customers’ fulfillment standards is subject to        several factors, some of which are beyond the Company’s control.**

 

Retailers place great emphasis on timely delivery of the Company’s        products for specific selling seasons and to fulfill consumer demand throughout the year.        The Company cannot control all of the various factors that might affect product delivery to        retailers. Vendor production delays, difficulties encountered in shipping from overseas as        well as customs clearance are on-going risks of the Company’s business. The Company        also relies upon third-party carriers for its product shipments from the Company’s        warehouse facilities to customers, and it relies on the shipping arrangements the        Company’s suppliers have made in the case of products shipped directly to retailers        from the supplier. Accordingly, the Company is subject to risks, including labor disputes        such as the West Coast port strike of 2002, union organizing activity, inclement weather,        natural disasters, possible acts of terrorism, availability of shipping containers and        increased security restrictions, associated with such carriers’ ability to provide        delivery services to meet the Company’s shipping needs. Failure to deliver products        in a timely and effective manner to retailers could damage the Company’s reputation        and brands and result in a loss of customers or reduced orders. In addition, fuel costs        have increased substantially, which will likely result in increased shipping expenses.        Increased transportation costs and any disruption in the Company’s distribution        process, especially during the second half of the year, which is the Company’s        busiest selling period, could adversely affect the Company’s business and operating        results.

 

**The restructuring of the Company’s direct-to-consumer segment may        not be successful.**

 

The Company’s direct-to-consumer segment has not been profitable in        recent years. In 2006, the Company restructured the management of its direct-to-consumer        segment and in December 2007, the Company commenced a plan to close 27 underperforming        Farberware® outlet stores and 3 underperforming Pfaltzgraff® factory stores. The        Company continues to evaluate its factory and outlet store operations and will continue to        close underperforming stores and may introduce new store formats. There can be no assurance        that the Company’s efforts will result in the profitability of the direct-to-consumer        segment.

 

15

 

 

 

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**Loss of key employees may negatively impact the Company’s        success.**

 

The Company’s success depends on its ability to identify, hire and        retain skilled personnel. The Company’s industry is characterized by a high level of        employee mobility and aggressive recruiting among competitors for personnel with successful        track records. The Company may not be able to attract and retain skilled personnel or may        incur significant costs in order to do so. If Jeffrey Siegel, the Company’s Chairman,        President and Chief Executive Officer, were to leave the Company, it would have a material        adverse effect on the Company.

 

**The Company’s customers’ internal efforts to design and        manufacture products may compete with similar products of the Company.**

 

Some of the Company’s existing and potential customers continuously        evaluate whether to design and manufacture their own products or purchase them directly        from outside vendors and distribute them under their own brand names. Although, based on        the Company’s past experience, such products usually target the lower price point        portion of the market, if any of the Company’s customers or potential customers        pursue such options it may adversely affect the Company’s business.

 

**The Company’s corporate compliance program cannot assure that it        will be in complete compliance with all potentially applicable regulations, including the        Sarbanes-Oxley Act of 2002.**

 

As a publicly traded company, the Company is subject to significant        regulations, including the Sarbanes-Oxley Act of 2002. In connection with the        Company’s and the Company’s independent registered public accounting        firm’s assessment of the effectiveness of its internal control over financial        reporting as of December 31, 2007, neither the Company nor its independent registered        public accounting firm identified any deficiencies in the Company’s internal control        over financial reporting that constituted a “material weakness” as defined by        the Public Company Accounting Oversight Board. The Company cannot assure that it will not        find material weaknesses in the future or that the Company’s independent registered        public accounting firm will then conclude that the Company’s internal control over        financial reporting is operating effectively.

 

**The Company experiences business risks as a result of the Company’s        Internet business.**

 

The Company competes with Internet businesses that handle similar lines of        merchandise. These competitors have certain advantages, including the inapplicability of        sales tax and the absence of retail real estate and related costs. As a result, increased        Internet sales by the Company’s competitors could result in increased price        competition and decreased margins adversely affecting the Company’s factory and        outlet stores, catalog and Internet businesses as well as the Company’s wholesale        business. The Company’s Internet operations are subject to numerous risks, including        reliance on third-party hosting and computer software and hardware providers and online        security breaches and/or credit card fraud. The Company’s inability to effectively        address these risks and any other risks that it faces in connection with its Internet        business could adversely affect the profitability of the Company’s Internet        business.

 

**The Company may not be able to successfully identify, manage or integrate        future acquisitions.**

 

Since 1995 the Company has completed thirteen acquisitions. Although the        Company has grown significantly through acquisitions and intends to continue to pursue        additional acquisitions in the future, the Company may not be able to identify appropriate        acquisition candidates or, if it does, it may not be able to successfully negotiate the        terms of an acquisition, finance the acquisition or integrate the acquired business        effectively and profitably into the Company’s existing operations. Integration of an        acquired business could disrupt the Company’s business by diverting management away        from day-to-day operations. Furthermore, failure to successfully integrate any acquisition        may cause significant operating inefficiencies and could adversely affect the        Company’s profitability.

 

**The Company may not be able to adapt quickly enough to changing customer        requirements and e-commerce industry standards.**

 

Technology in the e-commerce industry changes rapidly. The Company may not        be able to adapt quickly enough to changing customer requirements and preferences and        e-commerce industry standards. These changes and the emergence of new e-commerce industry        standards and practices could render the Company’s existing websites        obsolete.

 

16

 

 

 

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**Government regulation of the Internet and e-commerce is evolving and        unfavorable changes could harm the Company’s business.**

 

The Company is subject to general business regulations and laws, as well as        regulations and laws specifically governing the Internet and e-commerce. Such existing and        future laws and regulations may impede the growth of the Internet or other online services.        These regulations and laws may cover taxation, user privacy, data protection, pricing,        content, copyrights, distribution, electronic contracts and other communications, consumer        protection, the provision of online payment services, broadband residential Internet        access, and the characteristics and quality of products and services. It is not clear how        existing laws governing issues such as property ownership, sales and other taxes, and        personal privacy apply to the Internet and e-commerce. Unfavorable resolutions of these        issues would harm the Company’s business. This could, in turn, diminish the demand        for the Company’s products on the Internet and increase the Company’s cost of        doing business.

 

**The Company’s business is subject to technological        risks.**

 

The Company relies on several different information technology systems for        the operation of its principal business functions, including the Company’s        enterprise, warehouse management, inventory and re-ordering, point of sale and call center        systems. In the case of the Company’s inventory forecast and re-ordering system, most        of the Company’s orders are received directly through electronic connections with the        Company’s largest customers. The failure of any one of these systems or the        integration of any one of these systems could have a material adverse effect on the        Company’s business and results of operations.

 

**The Company’s business may be adversely affected if the        Company’s network security is compromised.**

 

The Company has made significant efforts to secure its computer network.        However, the Company’s computer network could be compromised and confidential        information such as customer credit card information could be misappropriated. This could        lead to adverse publicity, loss of sales and profits, or cause the Company to incur        significant costs to reimburse third parties for damages which could impact profits.        Although, the Company has upgraded its systems and procedures to meet the Payment Card        Industry (“PCI”) data security standards, failure by the Company to maintain        compliance with the PCI security requirements or rectify a security issue may result in        fines and the imposition of restrictions on the Company’s ability to accept payment        cards.

 

**Risks associated with        indebtedness.** 

 

The Company has substantial indebtedness. As of December 31, 2007, the        Company’s total indebtedness was $143.7 million, including $68.7 million under its        $150 million secured credit facility, with an accordion feature for an additional $50        million, which expires in April 2011 (the “Credit Facility”) and $75 million of        4.75% Convertible Notes due 2011 (the “Notes”). Borrowings under the Credit        Facility are secured by all of the assets of the Company. Under the terms of the Credit        Facility, the Company is required to satisfy certain financial covenants, including        covenants providing limitations on indebtedness, sale of assets and capital expenditures, a        maximum leverage ratio and a minimum interest coverage ratio. Increased financial leverage        resulting from borrowings under the Credit Facility or a decline in earnings could have        certain material adverse effects on the Company, including, but not limited to the        following: (i) the Company’s ability to obtain additional financing in the        future for acquisitions, working capital, capital expenditures, and general corporate or        other purposes could be impaired, or any such financing may not be available on terms        favorable to the Company; (ii) a substantial portion of the Company’s cash flows        could be required for debt service and, as a result, might not be available for its        operations or other purposes; (iii) any substantial decrease in net operating cash        flows could make it difficult for the Company to meet its debt service requirements or        force the Company to modify its operations or sell assets; (iv) the Company’s        ability to withstand competitive pressures may be decreased; and (v) the        Company’s level of indebtedness may make the Company more vulnerable to economic        downturns, and reduce its flexibility in responding to changing business, regulatory and        economic conditions. The Company’s ability to repay expected borrowings under its        Credit Facility and the Notes, and to meet its other debt or contractual obligations        (including compliance with applicable financial covenants) will depend upon the        Company’s future performance and its cash flows from operations, both of which are        subject to prevailing economic conditions and financial, business, and other known and        unknown risks and uncertainties, certain of which are beyond the Company’s        control.

 

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**The        Company’s quarterly results of operations might fluctuate due to a variety of        factors, including ordering patterns of the Company’s customers and the seasonality        of the Company’s business.**

 

The        Company’s quarterly results have fluctuated in the past and may fluctuate in the        future, depending upon a variety of factors, including, but not limited to the ordering        patterns and timing of promotions of the Company’s major retail customers, which may        differ significantly from period to period or from the Company’s original forecasts.        A significant portion of the Company’s revenues and net earnings are realized during        the second half of the calendar year, as order volume from the Company’s retail        customer base reaches its peak as the Company’s customers increase their inventories        for the end of year holiday season. If, for any reason, the Company were to realize        significantly lower-than-expected sales during the September through December selling        season, the Company’s business and results of operations would be materially        adversely affected.

 

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**Item 1B. Unresolved Staff Comments**

 

None

 

**Item 2. Properties**

 

The        following table describes the principal properties at which the Company operated its        business at December 31, 2007:

 

| **Location**               | **Description**                                                                  | **Size                        (square feet)** | **Owned/**

**Leased** |
|----------------------------|----------------------------------------------------------------------------------|-----------------------------------------------|------------------------|
| Fontana, California        | Main West Coast warehouse and distribution                        facility       | 753,000                                       | Leased                 |
| Robbinsville, New Jersey   | Main East Coast warehouse and distribution                        facility       | 700,000                                       | Leased                 |
| York, Pennsylvania         | Warehouse and distribution facility                                              | 473,000                                       | Leased                 |
| Mira Loma, California      | Warehouse and distribution facility (1)                                          | 426,000                                       | Leased                 |
| Winchendon, Massachusetts  | Warehouse and distribution facility                                              | 210,000                                       | Owned                  |
| East Boston, Massachusetts | Office, showroom, warehouse and distribution facility                        (2) | 118,000                                       | Leased                 |
| Garden City, New York      | Corporate headquarters/main showroom                                             | 114,000                                       | Leased                 |
| York, Pennsylvania         | Offices                                                                          | 60,000                                        | Leased                 |
| San German, Puerto Rico    | Sterling silver manufacturing facility                                           | 55,000                                        | Leased                 |
| New York, New York         | Showroom                                                                         | 26,000                                        | Leased                 |
| Guangdong, China           | Offices                                                                          | 18,000                                        | Leased                 |
| Atlanta, Georgia           | Showroom                                                                         | 11,000                                        | Leased                 |
| Shanghai, China            | Offices                                                                          | 11,000                                        | Leased                 |
| Bentonville, Arkansas      | Showroom                                                                         | 10,000                                        | Leased                 |

 

Notes:

|   | (1) | The Company is in the process of consolidating its West                        Coast distribution centers and the operations of the Mira Loma, California                        distribution center will be consolidated into the Fontana, California                        facility in the third quarter of 2008. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | In January 2008, the Company entered into a lease agreement                        for 69,000 square feet of office, showroom and warehouse space located in                        Medford, Massachusetts that will replace the East Boston, Massachusetts                        facility. The Company plans to occupy this new space in October                        2008. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

In        addition to the properties listed above, at December 31, 2007 the Company’s        direct-to-consumer segment leased 78 stores located in 32 states throughout the United        States. The square footage of the stores range from 2,000 square feet to 18,600 square        feet. The terms of these leases ranged from month-to-month to 10 years. The Company plans        to close 30 of these stores by the end of the first quarter of 2008.

 

**Item 3. Legal Proceedings**

 

The Company        has, from time to time, been involved in various legal proceedings. The Company believes        that all current litigation is routine in nature and incidental to the conduct of its        business, and that none of this litigation, if determined adversely to it, would have a        material adverse effect on the Company’s consolidated financial position, results of        operations or cash flows.

 

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

 

None

 

19

 

 

 

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**PART        II**

 

**Item 5. Market For The Registrant’s Common Equity,        Related Stockholder Matters and Issuer Purchases of Equity Securities**

 

| (a) | The Company’s common stock is traded under the symbol                        “LCUT” on The NASDAQ Global Select Market                        (“NASDAQ”). |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

The following table sets forth the high and low sales prices for the common        stock of the Company for the fiscal periods indicated as reported by NASDAQ.

         

 

|           |   | **2007** |   |    |   | **2006** |   |
|----------------|--------|----------|--------|---------|--------|----------|--------|
|           |   | **High** |   | **Low** |   |     |   | **High** |   | **Low** |   |
| First quarter  |   | $        | 20.94  |    | $      | 16.41    |   |   |   | $ | 28.19 |   | $ | 20.97 |   |
| Second quarter |   |     | 23.43  |    |   | 20.00    |   |   |   |   | 30.00 |   |   | 20.98 |   |
| Third quarter  |   |     | 21.27  |    |   | 17.77    |   |   |   |   | 22.11 |   |   | 18.52 |   |
| Fourth quarter |   |     | 21.15  |    |   | 11.95    |   |   |   |   | 20.49 |   |   | 15.83 |   |

 

At December 31, 2007, the Company estimates that there were approximately        3,550 registered holders of the common stock of the Company.

         

The Company is authorized to issue 100 shares of Series A Preferred stock        and 2,000,000 shares of Series B Preferred stock, none of which is issued or        outstanding.

         

The Company paid quarterly cash dividends of $0.0625 per share, or a total        annual cash dividend of $0.25 per share, on its common stock during 2007 and 2006. The        Board of Directors currently intends to continue to pay quarterly cash dividends of $0.0625        per share of common stock for the foreseeable future, although the Board of Directors may        in its discretion determine to modify or eliminate such dividends at any time.

         

The following table summarizes the Company’s equity compensation plans        as of December 31, 2007

         

| **Plan category**                                                                 | **Number of shares of common stock to be issued upon                        exercise of outstanding options** | **Weighted- average exercise price of outstanding                        options** | **Number of shares of common stock remaining available for                        future issuance** |
|-----------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
| Equity compensation plans approved by security                        holders     | 1,808,900                                                                                                     | $22.69                                                                             | 241,231                                                                                             |
| Equity compensation plans not approved by security                        holders | ―                                                                                                       | ―                                                                            | ―                                                                                             |
| Total                                                                             | 1,808,900                                                                                                     | $22.69                                                                             | 241,231                                                                                             |

 

 

20

 

 

 

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**PERFORMANCE GRAPH**

 

The following graph compares the cumulative total return on the        Company’s common stock with NASDAQ and the Housewares Index. The comparisons in this        table are required by the SEC and are not intended to forecast or be indicative of the        possible future performance of the Company’s common stock.

         

**LIFETIME BRANDS, INC.**

 

Cumulative total stockholder return for the periods December 31, 2002        through December 31, 2007(1)

         

         

         

         

         

|                    | Note:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    | (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Assumes $100 invested on December 31,                        2002 and assumes dividends reinvested. Measurement points are at the last                        trading day of each of the fiscal years ended December 2007, 2006, 2005,                        2004 and 2003. The material in this chart is not soliciting material, is                        not deemed filed with the Securities and Exchange Commission and is not                        incorporated by reference in any filing of the Company under the Securities                        Act of 1933, as amended, or the Securities Exchange Act of 1934, as                        amended, whether or not made before or after the date of this Annual Report                        on Form 10-K and irrespective of any general incorporation language in such                        filing. A list of the companies included in the Housewares Index will be                        furnished by the Company to any stockholder upon written request to the                        Chief Financial Officer of the Company. |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (c)                | The Board of Directors of the Company has authorized a                        program to repurchase up to $40.0 million of the Company’s common                        stock through open market purchases or privately-negotiated transactions.                        As of December 31, 2007 the Company had purchased in the open market and                        retired a total of 1,362,505 shares of its common stock for a total cost of                        $22.7 million under the program. |

         

The following table summarizes the Company’s stock repurchase activity        for the quarter ended December 31, 2007 and the approximate dollar value of shares that may        yet be purchased under the program:

 

| **Period**    |   | **Total number of shares purchased** |   | **Average price paid per share** |   | **Total number of shares purchased as part of publicly                        announced program** |   | **Approximate dollar value of shares that may yet be                        purchased under the program** |
|---------------|--------|--------------------------------------|--------|----------------------------------|--------|---------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------|
| November 2007 |   | 598,940                              |   | $12.70                           |   | 598,940                                                                                           |   | $17,369,466                                                                                               |

 

 

21

 

 

 

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**Item 6. Selected Financial Data**

 

The        selected consolidated statement of income data for the years ended December 31, 2007, 2006        and 2005, and the selected consolidated balance sheet data as of December 31, 2007 and        2006, have been derived from the Company’s audited consolidated financial statements        included elsewhere in this Annual Report on Form 10-K. The selected consolidated statement        of income data for the years ended December 31, 2004 and 2003, and the selected        consolidated balance sheet data at December 31, 2005, 2004 and 2003, have been derived from        the Company’s audited consolidated financial statements included in the        Company’s Annual Reports on Form 10-K for those respective years, which are not        included in this Annual Report on Form 10-K.

 

This        information should be read together with the discussion in*Management’s Discussion and Analysis of Financial Condition and        Results of Operations*and the Company’s consolidated        financial statements and notes to those statements included elsewhere in this Annual Report        on Form 10-K.

 

 

|                                                                       |   | **Year ended December 31,**               |    |
|----------------------------------------------------------------------------|--------|-------------------------------------------|---------|
|                                                                       |   | **2007**                                  |    | **2006** |   | **2005** |   | **2004** |   | **2003** |   |
| **Statement of income                        data (1)**                    |   | **(in thousands -except per share data)** |    |
| Net sales                                                                  |   | $                                         | 493,725 |   | $ | 457,400 |   | $ | 307,897 |   | $ | 189,458 |   | $ | 160,355 |   |
| Cost of sales                                                              |   |                                      | 288,997 |   |   | 265,749 |   |   | 178,295 |   |   | 111,497 |   |   | 92,918 |   |
| Distribution expenses                                                      |   |                                      | 53,493  |   |   | 49,729 |   |   | 34,539 |   |   | 22,830 |   |   | 21,030 |   |
| Selling, general and administrative expenses                               |   |                                      | 128,527 |   |   | 112,122 |   |   | 69,891 |   |   | 40,282 |   |   | 31,762 |   |
| Asset impairment and restructuring expenses                                |   |                                      | 1,924   |   |   | ― |   |   | ― |   |   | ― |   |   | ― |   |
| Income from operations                                                     |   |                                      | 20,784  |   |   | 29,800 |   |   | 25,172 |   |   | 14,849 |   |   | 14,645 |   |
| Interest expense                                                           |   |                                      | 8,397   |   |   | 4,576 |   |   | 2,489 |   |   | 835 |   |   | 724 |   |
| Other income, net                                                          |   |                                      | (3,935  | ) |   | (31 | ) |   | (73 | ) |   | (60 | ) |   | (68 | ) |
| Income before income taxes                                                 |   |                                      | 16,322  |   |   | 25,255 |   |   | 22,756 |   |   | 14,074 |   |   | 13,989 |   |
| Income tax provision                                                       |   |                                      | 7,430   |   |   | 9,723 |   |   | 8,647 |   |   | 5,602 |   |   | 5,574 |   |
| Net income                                                                 |   | $                                         | 8,892   |   | $ | 15,532 |   | $ | 14,109 |   | $ | 8,472 |   | $ | 8,415 |   |
| Basic income per common share                                              |   | $                                         | 0.69    |   | $ | 1.18 |   | $ | 1.25 |   | $ | 0.77 |   | $ | 0.79 |   |
| Weighted-average shares outstanding – basic                          |   |                                      | 12,969  |   |   | 13,171 |   |   | 11,283 |   |   | 10,982 |   |   | 10,628 |   |
| Diluted income per common share                                            |   | $                                         | 0.68    |   | $ | 1.14 |   | $ | 1.23 |   | $ | 0.75 |   | $ | 0.78 |   |
| Weighted-average shares outstanding –                        diluted |   |                                      | 13,099  |   |   | 14,716 |   |   | 11,506 |   |   | 11,226 |   |   | 10,754 |   |
|                                                                       |   |                                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash dividends per common share                                            |   | $                                         | 0.25    |   | $ | 0.25 |   | $ | 0.25 |   | $ | 0.25 |   | $ | 0.25 |   |

 

 

|                       |   | **December 31,**   |
|----------------------------|--------|--------------------|
|                       |   | **2007**           |   | **2006** |   | **2005** |   | **2004** |   | **2003** |
| **Balance sheet data (1)** |   | **(in thousands)** |
| Current assets             |   | $                  | 228,078 |   | $ | 231,633 |   | $ | 155,750 |   | $ | 103,425 |   | $ | 88,528 |
| Current liabilities        |   |               | 71,283 |   |   | 89,727 |   |   | 69,907 |   |   | 52,913 |   |   | 46,974 |
| Working capital            |   |               | 156,795 |   |   | 141,906 |   |   | 85,843 |   |   | 50,512 |   |   | 41,554 |
| Total assets               |   |               | 371,415 |   |   | 343,064 |   |   | 222,648 |   |   | 157,217 |   |   | 136,980 |
| Short-term borrowings      |   |               | 13,500 |   |   | 21,500 |   |   | 14,500 |   |   | 19,400 |   |   | 16,800 |
| Long-term debt             |   |               | 55,200 |   |   | 5,000 |   |   | 5,000 |   |   | 5,000 |   |   | ― |
| Convertible Notes          |   |               | 75,000 |   |   | 75,000 |   |   | ― |   |   | ― |   |   | ― |
| Stockholders’ equity |   |               | 147,240 |   |   | 161,611 |   |   | 140,487 |   |   | 92,938 |   |   | 86,081 |

 

Note:

 

|   | (1) | The Company acquired the business and certain assets of:                        :USE in October 2003, Gemco Ware, Inc. in November 2003, Excel Importing                        Corp. in July 2004, Pfaltzgraff Co. in July 2005, Salton, Inc. in September                        2005 and Syratech Corporation in April 2006. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

22

 

 

 

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**Item 7. Management’s Discussion and Analysis of        Financial Condition and Results of Operations**

 

*The following discussion should be read in conjunction with the        consolidated financial statements for the Company and notes thereto set forth in Item 8.        This discussion contains forward-looking statements relating to future events and the        future performance of the Company based on the Company’s current expectations,        assumptions, estimates and projections about it and the Company’s industry. These        forward-looking statements involve risks and uncertainties. The Company’s actual        results and timing of various events could differ materially from those anticipated in such        forward-looking statements as a result of a variety of factors, as more fully described in        this section and elsewhere in this Annual Report. The Company undertakes no obligation to        update publicly any forward-looking statements for any reason, even if new information        becomes available or other events occur in the future*.

 

**ABOUT THE COMPANY**

 

The Company is one of North America’s leading resources for nationally        branded kitchenware, tabletop and home décor products. The Company’s three        major product categories are Food Preparation, Tabletop and Home Décor. The Company        markets several product lines within each of these product categories and under each of the        Company’s brands, primarily targeting moderate to premium price points, through every        major level of trade. The Company’s competitive advantage is based on strong brands,        an emphasis on innovation and new product development and excellent sourcing capabilities.        The Company owns or licenses many of the leading brands in its industries including        Farberware®, KitchenAid® and Cuisinart®. Over the last several years, the        Company’s sales growth has come from expanding product offerings within the        Company’s current categories by developing existing brands, and acquiring new brands        and product categories. Key factors in the Company’s growth strategy have been, and        will continue to be, the selective use and management of the Company’s strong brands,        and the Company’s ability to provide a steady stream of new products and designs. A        significant element of this strategy is the Company’s in-house design and development        team that creates new products, packaging and merchandising concepts.

 

**BUSINESS SEGMENTS**

 

The Company operates in two reportable business segments —        wholesale and direct-to-consumer. The wholesale segment is the Company’s primary        business that designs, markets and distributes household products to retailers and        distributors. The direct-to-consumer segment is comprised of the Company’s business        that sells household products directly to the consumer through 78 Company-operated factory        and outlet stores operated under the Pfaltzgraff® and Farberware® names, and its        catalog and Internet operations.

 

In December 2007, the Company commenced a plan to close 27 underperforming        Farberware® outlet stores and 3 underperforming Pfaltzgraff® factory stores. The        closings are expected to be completed by the end of the first quarter of 2008. The Company        has recognized $1.9 million in pre-tax charges related to these store closings as of        December 31, 2007 representing primarily non-cash write-downs of the stores’ fixed        assets. The Company estimates it will record pre-tax charges related to these store        closings of up to $5.0 million in 2008 consisting of store lease obligations, retention        bonuses, severance payments and other expenses without taking into account the results of        inventory clearance sales or any mitigation of its store lease obligations.

 

**RECENT ACQUISITIONS**

 

**Ekco**

 

In December 2007, the Company acquired a 29.99% interest in Ekco S.A.B        (“Ekco”). Ekco is one of Mexico’s leading housewares companies and        manufactures and sells cookware, bakeware, kitchenware, cutlery, dinnerware, flatware and        related items. Ekco markets its products in Mexico under the Ekco®, Vasconia®,        Regal®, H. Steele®, Presto® and Thermos® brands. Due to the timing of the        investment, the Company’s proportionate share of Ekco’s result of operations        for the year ended December 31, 2007 was not material to the Company’s 2007        consolidated financial statements.

 

23

 

 

 

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**Gorham®**

 

In July        2007, the Company acquired certain assets from Lenox Group, Inc. (“Lenox”).        Concurrently with the execution of the agreement, the Company entered into a long-term        exclusive licensing agreement with Lenox under which the Company licensed the Gorham®,        Kirk Stieff®, WhitingTM and DurginTM trademarks in connection with the        manufacture, sale, distribution and marketing of sterling silver products.

 

**Pomerantz® and Design for Living®**

 

In April        2007, in two separate, but related transactions, the Company acquired the Pomerantz®        brand and certain related assets from JP Products, LLC and the Design for Living® brand        and certain related assets from Design for Living, LLC; designers, importers and        distributors of pantryware products.

 

**SEASONALITY**

 

The        Company’s business and working capital needs are highly seasonal, with a majority of        sales occurring in the third and fourth quarters. In 2007, 2006 and 2005, net sales for the        third and fourth quarters accounted for 61%, 65% and 71% of total annual net sales,        respectively. Operating profits earned in the third and fourth quarters of 2007, 2006 and        2005 accounted for 111%, 99% and 83% of total annual operating profits, respectively. In        anticipation of the pre-holiday shipping season, inventory levels increase primarily in the        June through October time period.

 

**RESULTS OF OPERATIONS**

 

The        following table sets forth statement of income data of the Company as a percentage of net        sales for the periods indicated below.

 

 

|                                         |   | **Year Ended December 31,** |        |
|----------------------------------------------|--------|-----------------------------|--------|
|                                         |   | **2007**                    |   |   |   | **2006** |   |   |   | **2005** |   |
| Net sales                                    |   | 100.0                       | %      |   |   | 100.0 | % |   |   | 100.0 | % |
| Cost of sales                                |   | 58.5                        |   |   |   | 58.1 |   |   |   | 57.9 |   |
| Distribution expenses                        |   | 10.8                        |   |   |   | 10.9 |   |   |   | 11.2 |   |
| Selling, general and administrative expenses |   | 26.0                        |   |   |   | 24.5 |   |   |   | 22.7 |   |
| Asset impairment and restructuring expenses  |   | 0.4                         |   |   |   | ― |   |   |   | ― |   |
| Income from operations                       |   | 4.3                         |   |   |   | 6.5 |   |   |   | 8.2 |   |
| Interest expense                             |   | 1.7                         |   |   |   | 1.0 |   |   |   | 0.8 |   |
| Other income, net                            |   | (0.8                        | )      |   |   | ― |   |   |   | ― |   |
| Income before income taxes                   |   | 3.4                         |   |   |   | 5.5 |   |   |   | 7.4 |   |
| Income tax provision                         |   | 1.6                         |   |   |   | 2.1 |   |   |   | 2.8 |   |
| Net income                                   |   | 1.8                         | %      |   |   | 3.4 | % |   |   | 4.6 | % |

 

 

24

 

 

 

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**MANAGEMENT’S DISCUSSION AND ANALYSIS**

 

**2007        COMPARED TO 2006**

 

**Net        Sales**

 

Net        sales for the year were $493.7 million, an increase of 7.9% over net sales of $457.4        million in 2006.

 

Net        sales for the wholesale segment in 2007 were $416.9 million, an increase of $42.8 million        or 11.4% over net sales of $374.1 million for 2006. The increase was primarily due to the        2007 full year inclusion of Syratech which was acquired in April 2006. Excluding Syratech,        net sales were $289.2 million in 2007 and $280.8 million in 2006, an increase of 3.0%. The        increase was attributable to growth in the Food Preparation product category, particularly        with respect to Farberware® brand products and new retail programs.

 

Net        sales for the direct-to-consumer segment in 2007 were $76.8 million compared to $83.3        million for 2006. The decrease was primarily due to a decline in outlet store sales,        slightly offset by a modest improvement in catalog and Internet volume. The decrease in        outlet stores sales was due to the planned reductions in promotional events that occurred        in 2006 and a reduction in the number of stores from 83 stores at year end 2006 to 78        stores at year end 2007.

 

**Cost        of sales**

 

Cost of        sales for 2007 was $289.0 million compared to $265.7 million for 2006. Cost of sales as a        percentage of net sales was 58.5% for 2007 compared to 58.1% for 2006.

 

Cost of        sales as a percentage of net sales for the wholesale segment was 62.1% for 2007 compared to        61.4% for 2006. The wholesale segment’s cost of sales, excluding Syratech, was 59.0%        for 2007 compared to 58.3% for 2006. The increase in cost of sales as a percentage of net        sales was primarily attributable to changes in product mix and distribution        strategy.

 

Cost of        sales as a percentage of net sales for the direct-to-consumer segment decreased to 39.1% in        2007 from 43.7% in 2006.  The decrease was primarily due to the planned reductions in        promotional events that occurred in 2006.

 

**Distribution expenses**

 

Distribution expenses for 2007 were $53.5 million compared to $49.7 million        for 2006. Distribution expenses as a percentage of net sales were 10.8% in 2007 and 10.9%        for 2006.

 

Distribution expenses as a percentage of net sales for the wholesale segment        improved to 9.5% in 2007 from 10.2% for 2006. The improvement resulted, in part, from the        full year inclusion of Syratech which had a higher proportion of its sales shipped directly        from overseas suppliers than the Company’s other major product lines. The improvement        also came from improved labor management and an improved warehouse management        system.

 

Distribution expenses for the direct-to-consumer segment were approximately        $13.7 million for the year ended December 31, 2007 compared to $11.7 million for 2006. The        increase in distribution expenses was primarily attributable to the higher receiving and        storage costs associated with higher inventory levels.

 

25

 

 

----

**Selling, general and administrative expenses**

 

Selling,        general and administrative expenses for 2007 were $128.5 million, an increase of 14.6% over        the $112.1 million in 2006.

 

Selling,        general and administrative expenses for 2007 for the wholesale segment were $75.2 million,        an increase of $15.3 million or 25.5% over the $59.9 million in 2006. As a percentage of        net sales, selling, general and administrative expenses were 18.0% for 2007 compared to        16.0% for 2006. The increase resulted from the inclusion of Syratech for a full year in        2007, occupancy costs for the new leased headquarters and showroom in Garden City,        consulting and depreciation expense for the new SAP business enterprise system, the costs        of maintaining the Company’s former headquarters until its sale in November 2007,        compensation expense and additional selling expenses.

 

Selling, general and administrative expenses for 2007 for the        direct-to-consumer segment were $41.2 million compared to $43.3 million for 2006. The        decrease is primarily due to Farberware® store closings during 2007 and reductions in        divisional staffing. Selling, general and administrative expenses as a percentage of net        sales was 53.6% for 2007 compared to 52.0% for 2006.  The increased percentage results        from the decline in net sales.

Unallocated corporate expenses for 2007 and 2006 were $12.2 million and $8.9        million, respectively. The increase was primarily due to a one-time charge related to the        termination of a licensing agreement, higher stock option expense and professional        expenses.

 

**Restructuring**

 

In        December 2007, the Company commenced a plan to close 30 underperforming outlet stores by        the end of the first quarter of 2008. In connection with this plan, the Company recorded an        asset impairment charge of $1.6 million for fixed assets in the stores to be closed and a        restructuring charge of $289,000 for liquidation expenses. The Company expects to record up        to $5.0 million of additional charges in the first quarter of 2008 primarily related to the        remaining lease obligations.

 

**Interest expense**

Interest expense for 2007 was $8.4 million compared to $4.6 million for        2006. The increase in interest expense was primarily attributable to an increase in the        amount outstanding under the Company’s Credit Facility in 2007 compared to 2006 and        interest on the Company’s convertible notes issued in June 2006. The additional        borrowings under the Company’s Credit Facility were in support of capital        expenditures- net, repurchases of the Company’s common stock and business        acquisitions. The Company used the proceeds from the convertible notes to repay outstanding        borrowings under the Company’s Credit Facility.

**Other        income, net**

 

Other        income, net for 2007 was $3.9 million compared to $31,000 for 2006. The increase in other        income, net was primarily attributable to the gain that the Company recognized on the sale        of its former corporate headquarters and to a lesser extent the gain on the sale of a        foreign currency forward during 2007.

 

**Income tax provision**

 

The        income tax provision for 2007 was $7.4 million, compared to $9.7 million for 2006. The        Company’s effective income tax rate was 45.5% for 2007 and 38.5% for 2006. The        increase is attributable principally to stock option expense that is not deductible for        income tax purposes.

 

26

 

 

 

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**2006 COMPARED TO 2005**

 

**Net sales**

 

Net sales for 2006 were $457.4 million, an increase of 48.6% over net sales        of $307.9 million in 2005.

 

Net sales for the Company’s wholesale segment were $374.1 million, an        increase of $132.5 million or 54.8% over net sales of $241.6 million for 2005.        Year-over-year sales comparisons for the wholesale segment were impacted by acquisitions in        2005 and 2006. Net sales for the Pfaltzgraff and Salton businesses that were acquired in        the third quarter of 2005 were $33.2 million in 2006 compared to $24.2 million in 2005. Net        sales in 2006 for the Syratech business acquired in April 2006 were $93.3 million.        Excluding net sales for these acquired businesses, wholesale net sales were $247.6 million        in 2006, 13.9% higher than net sales of $217.4 million in 2005. The 13.9% increase in net        sales was primarily attributable to sales growth in the Company’s Food Preparation        product category, particularly Farberware® and KitchenAid® branded kitchenware and        Cuisinart® and KitchenAid® branded cutlery & cutting boards.

 

Net sales for the direct-to-consumer segment for 2006 were $83.3 million        compared to net sales of $66.3 million for 2005. The increase was attributable to a full        year of net sales in 2006 from the Pfaltzgraff® factory store, catalog and Internet        operations that were acquired in the third quarter of 2005. Net sales in the        Company’s Pfaltzgraff® factory stores and Farberware® outlet stores were        lower in the second half of 2006 than in the comparable period in 2005 primarily because of        shortages and misalignment of retail inventories and because promotional sales events that        occurred in 2005 were not repeated in 2006.

 

**Cost of sales**

 

Cost of sales for 2006 was $265.7 million, compared to $178.3 million for        2005. Cost of sales as a percentage of net sales was slightly higher at 58.1% for 2006        compared to 57.9% for 2005.

 

Cost of sales as a percentage of net sales in the wholesale segment was        61.4% for 2006 compared to 59.9% for 2005. The decrease in gross profit margin was        primarily attributable to the impact of the Syratech business acquired in April 2006, as        Syratech’s products generally are sold at lower gross profit margins than the average        margin of the Company’s other major product categories. Excluding Syratech, cost of        sales as a percentage of net sales for the wholesale business improved to 58.3% in 2006        compared to 59.9% in 2005. This improvement in gross margin was attributable to product        mix.

 

Cost of sales as a percentage of net sales in the direct-to-consumer segment        decreased to 43.7% for 2006 compared to 50.4% for 2005. The increase in gross profit margin        was due primarily to the impact of planned reductions of the aggressive sale promotions        that occurred in 2005 and to the higher gross profit margins generated by the        Pfaltzgraff® catalog and Internet operations that were acquired in the third quarter of        2005.

 

**Distribution expenses**

 

Distribution expenses for 2006 were $49.7 million, an increase of $15.2        million or 44.1% over distribution expenses of $34.5 million in 2005. Distribution expenses        as a percentage of net sales were 10.9% for 2006 compared to 11.2% for 2005.

 

Distribution expenses as a percentage of net sales in the Company’s        wholesale segment improved to 10.2% in 2006 compared to 12.1% in 2005. This improvement was        due principally to the impact of the Syratech business acquired in April 2006, which has a        much higher proportion of their sales shipped direct to retailers from overseas suppliers        than the Company’s other major product lines, and to a lesser extent, the continued        benefits of labor savings and efficiencies generated by the Company’s main        distribution center in Robbinsville, New Jersey.

 

Distribution expenses for the direct-to-consumer business were $11.7 million        for 2006 compared to $5.4 million for 2005. The increase was attributable to the        acquisition of the Pfaltzgraff® factory store, catalog and Internet operations in the        third quarter of 2005 which significantly expanded the Company’s direct-to-consumer        operations.

 

27

 

 

 

----

**Selling, general and administrative expenses**

 

Selling,        general and administrative expenses for 2006 were $112.1 million, an increase of $42.2        million or 60.4% over the $69.9 million of expenses in 2005.

 

The        Company measures operating income by segment excluding certain unallocated corporate        expenses that are included in selling, general and administrative expenses. Unallocated        corporate expenses for 2006 and 2005 were $8.9 million and $7.5 million, respectively.        Unallocated corporate expenses for 2006 included $1.2 million of stock option        expense.

 

Selling,        general and administrative expenses for 2006 in the Company’s wholesale segment were        $59.9 million, an increase of $25.4 million or 73.6% over the $34.5 million of expenses for        2005 and as a percentage of net sales was 16.0% in 2006 compared to 14.3% in 2005. The        increase in selling, general and administrative expenses reflects the added personnel        related costs in establishing the Company’s internal infrastructure to support future        growth, in particular for the Pfaltzgraff and Salton businesses that were acquired in 2005        and the Syratech business that was acquired in 2006 and, to a lesser extent, the higher        selling costs associated with increased sales volume.

 

Selling,        general and administrative expenses in the Company’s direct-to-consumer segment        increased by $15.4 million in 2006 to $43.3 million and as a percentage of net sales was        52.0% in 2006 compared to 42.1% in 2005. The increase in expenses was due to the        acquisition of the Pfaltzgraff® factory store, catalog and Internet operations in 2005,        which significantly expanded the Company’s direct-to-consumer operations.

 

**Interest expense**

 

Interest        expense for 2006 was $4.6 million compared with $2.5 million for 2005. The increase in        interest expense was due primarily to an increase in debt levels in 2006.

 

**Income tax provision**

 

The        income tax provision for 2006 was $9.7 million, compared to $8.6 million in 2005. The        Company’s effective income tax rate was 38.5% for 2006 and 38.0% for 2005. The        increase in the effective tax rate was due to income taxes related to stock option expense        and a change in the state tax allocations.

 

28

 

 

 

----

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

*Management’s Discussion and Analysis of Financial Condition and        Results of Operations*discusses the Company’s consolidated        financial statements which have been prepared in accordance with U.S. generally accepted        accounting principles and with the instructions to Form 10-K and Article 10 of Regulation        S-X. The preparation of these financial statements requires management to make estimates        and assumptions that affect the reported amounts of assets and liabilities and the        disclosure of contingent assets and liabilities at the date of the financial statements and        the reported amounts of revenues and expenses during the reporting period. On an on-going        basis, management evaluates its estimates and judgments based on historical experience and        on various other factors that are believed to be reasonable under the circumstances, the        results of which form the basis for making judgments about the carrying values of assets        and liabilities that are not readily apparent from other sources. The Company evaluates        these estimates including those related to revenue recognition, allowances for doubtful        accounts, reserves for sales returns and allowances and customer chargebacks, inventory        mark-down provisions, impairment of tangible and intangible assets, including goodwill,        stock option expense and accruals related to the Company’s tax positions. Actual        results may differ from these estimates using different assumptions and under different        conditions. The Company’s significant accounting policies are more fully described in        Note A to the consolidated financial statements. The Company believes that the following        discussion addresses its most critical accounting policies, which are those that are most        important to the portrayal of the Company’s consolidated financial condition and        results of operations and require management’s most difficult, subjective and complex        judgments.

 

**Inventory**

 

Inventory consists principally of finished goods sourced from third-party        suppliers. Inventory also includes finished goods, work in process and raw materials        related to the Company’s manufacture of sterling silver products. Inventory is priced        by the lower of cost (first-in, first-out basis) or market method. Consistent with the        seasonality of the Company’s business, inventory generally increases, beginning late        in the first quarter of the year, and reaches a peak at the end of the third quarter or        early in the fourth quarter, and declines thereafter. The Company periodically reviews and        analyzes inventory based on a number of factors including, but not limited to, future        product demand for items and estimated profitability of merchandise. When appropriate, the        Company writes down inventory to net realizable value.

 

**Revenue recognition**

 

The        Company sells products wholesale to retailers and distributors and retail, direct to the        consumer through the Company’s factory and outlet store, catalog and Internet        operations. Wholesale sales are recognized when title passes to and the risks and rewards        of ownership have transferred to the customer. Factory and outlet store sales are        recognized at the time of sale while catalog and Internet sales are recognized upon receipt        by the customer. Shipping and handling fees that are billed to customers in sales        transactions are recorded in net sales. Net sales exclude taxes that are collected from        customers and remitted to the taxing authorities.

 

**Receivables**

 

The        Company periodically reviews the collectibility of its accounts receivable and establishes        allowances for estimated losses that could result from the inability of its customers to        make required payments. A considerable amount of judgment is required to assess the        ultimate realization of these receivables including assessing the credit-worthiness of each        wholesale customer. The Company also maintains an allowance for sales returns and customer        chargebacks. To evaluate the adequacy of the sales returns and customer chargeback        allowances the Company analyzes currently available information and historical trends. If        the financial conditions of the Company’s customers were to deteriorate, resulting in        an impairment of their ability to make payments, or the Company’s estimate of sales        returns was determined to be inadequate, additional allowances may be required.

 

29

 

 

 

----

**Goodwill and intangible assets**

 

Goodwill        and intangible assets deemed to have indefinite lives are not amortized but instead are        subject to annual impairment tests in accordance with the provisions of Statement of        Financial Accounting Standard (“SFAS”) No.142, *Goodwill and Other Intangible        Assets*. Long-lived assets are reviewed for impairment in accordance with SFAS No. 144,        *Accounting for the Impairment or Disposal of Long-lived Assets.* Other intangible        assets are amortized over their respective useful lives and reviewed for impairment        whenever events or changes in circumstances indicate that such amounts may have been        impaired. Impairment indicators include among other conditions, cash flow deficits,        historic or anticipated declines in revenue or operating profit or material adverse changes        in the business climate that indicate that the carrying amount of an asset may be impaired.        When impairment indicators are present, the Company compares the carrying value of the        asset to the estimated undiscounted future cash flows expected to be generated by the        assets. If the assets are considered to be impaired, the impairment to be recognized is        measured by the amount by which the carrying amount of the assets exceeds the fair value of        the assets.

 

**Employee stock options**

 

Effective January 1, 2006, the Company adopted SFAS        No. 123(R),*Share-Based Payment*.        SFAS 123(R) requires that the expense resulting from all share-based payment transactions        be recognized in the financial statements. SFAS 123(R) also requires that excess tax        benefits associated with share-based payments be classified as a financing activity in the        statement of cash flows, rather than as operating cash flows as required by previous        accounting standards. The Company adopted SFAS 123(R) using the modified-prospective        transition method. The Company values stock options using the Black-Scholes option        valuation model. However, the Black-Scholes option valuation model, as well as other        available models, were developed for use in estimating the fair value of traded options,        which have no vesting restrictions and are fully transferable. In addition, option        valuation models require the input of highly subjective assumptions including the expected        stock price volatility. Because the Company’s stock options have characteristics        significantly different from those of traded options, and because changes in the subjective        input assumptions can materially affect the fair value estimate, in management’s        opinion, the existing models do not provide a reliable measure of the fair value of its        stock options.

 

**Income taxes**

 

In July 2006, the FASB        issued FASB Interpretation (“FIN”) No. 48, *Accounting for Uncertainty in        Income Taxes*. FIN No. 48 provides detailed guidance for the financial statement        recognition, measurement and disclosure of uncertain tax positions recognized in an        enterprise’s financial statements in accordance with FASB Statement No. 109,        *Accounting for Income Taxes.* Tax positions must meet a more-likely-than-not        recognition threshold and measurement attribute for the financial statement recognition and        measurement of a tax position taken upon the adoption of FIN No. 48 or in subsequent        periods. The Company adopted FIN No. 48 on January 1, 2007.

 

30

 

 

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company’s principal sources of cash to fund liquidity needs are:        (i) cash provided by operating activities and (ii) borrowings available under its Credit        Facility. The Company’s primary uses of funds consist of working capital        requirements, capital expenditures, payment of principal and interest on its debt, payment        of cash dividends and business acquisitions. In addition, in 2007 the Company expended        $22.7 million to purchase 1,362,505 shares of its common stock.

 

At December 31, 2007, the Company had cash and cash equivalents of $4.2        million, compared to $150,000 at December 31, 2006, working capital was $156.8 million at        December 31, 2007 compared to $141.9 million at December 31, 2006 and the current ratio was        3.20 to 1 at December 31, 2007 compared to 2.58 to 1 at December 31, 2006.

 

Borrowings under the Company’s Credit Facility increased to $68.7        million at December 31, 2007 compared to $26.5 million at December 31, 2006. The increase        was primarily due to the Company’s investment in Ekco S.A.B in December 2007, the        share repurchases during 2007, the Gorham®, Pomerantz® and Design for Living®        acquisitions and capital expenditures related to the Company’s new corporate        headquarters, Robbinsville, New Jersey distribution center and new Fontana, California        distribution center. The Company believes that its cash and cash equivalents plus        internally generated funds and its credit arrangements will be sufficient to finance its        operations for the next twelve months.

 

**Share repurchase program**

 

The Board of Directors of the Company has authorized a program to repurchase        up to $40.0 million of the Company’s common stock through open market purchases or        privately-negotiated transactions. As of December 31, 2007 the Company had purchased in the        open market and retired a total of 1,362,505 shares of its common stock for a total cost of        $22.7 million under the program.

 

**Credit facility**

 

The Company has a $150 million secured credit facility, with an accordion        feature for an additional $50 million, that expires in April 2011 (the “Credit        Facility”). Borrowings under the Credit Facility are secured by all assets of the        Company. Under the terms of the Credit Facility, the Company is required to satisfy certain        financial covenants, including covenants providing limitations on indebtedness, sale of        assets and capital expenditures, a maximum leverage ratio and a minimum interest coverage        ratio. At December 31, 2007, the Company was in compliance with these covenants. Borrowings        under the Credit Facility have different interest rate options that are based either on (i)        an alternate base rate, (ii) the Libor rate, or (iii) the lender’s cost of funds        rate, plus in each case a margin based on a leverage ratio. At December 31, 2007, the        Company had $2.7 million of open letters of credit and $68.7 million of borrowings        outstanding under its Credit Facility. The availability under the Credit Facility at        December 31, 2007 was $73.6 million. Interest rates on outstanding borrowings at December        31, 2007 ranged from 5.50% to 6.12%. The Company has entered into interest rate swap and        collar agreements with aggregate notional amounts of $55.2 million at December 31, 2007.        The Company entered into these agreements to effectively fix the interest rate on a portion        of its borrowings under the Credit Facility. The agreements have maturity dates that exceed        one year as the Company does not intend to repay an equivalent amount of debt within one        year. Accordingly, $55.2 million of debt outstanding under the Credit Facility at December        31, 2007 has been classified as long-term debt.

 

**Convertible Notes**

 

The Company has outstanding $75 million aggregate principal amount of 4.75%        Convertible Senior Notes due 2011 (the “Notes”). The Notes are convertible into        shares of the Company’s common stock at a conversion price of $28.00 per share,        subject to adjustment in certain events. The Notes bear interest at 4.75% *per annum*,        payable semiannually in arrears on January 15th and July 15th of each year and are        unsubordinated except with respect to the Company’s debt to the extent secured by the        Company’s assets. The Notes mature on July 15, 2011.

 

31

 

 

 

----

**Operating activities**

 

Cash        provided by operating activities was $31.6 million in 2007 compared to a use of cash of        $11.5 million in 2006. The change was due to a reduction in 2007 of $9.6 million in working        capital invested primarily through management’s inventory reduction initiative        compared to an increase in working capital in 2006 of $37.0 million primarily due to growth        in inventory levels. The improvement in cash provided from operating activities in 2007 was        partially offset by lower net income.

 

**Investing activities**

 

Cash        used in investing activities was $43.7 million in 2007 compared to $64.9 million in 2006.        The 2007 reduction results from lower expenditures used for business acquisitions and        investments and the proceeds received from the Company’s sale of its former corporate        headquarters. In 2007, business acquisitions and investments included $1.9 million paid in        the connection with the acquisitions of Pomerantz® and Design for Living®, $8.3        million paid in connection with the acquisition of Gorham® and $23.0 million paid in        connection with the Company’s acquisition of a 29.99% interest in Ekco S.A.B. In        2006, the Company paid cash of $43.8 million to acquire Syratech Corporation. Capital        expenditures in 2007 were $19.0 million compared to $21.1 million in 2006. The decrease is        primarily the result of a decrease in the amount of capital expenditures related to the        Company’s new corporate headquarters in Garden City, New York, most of which occurred        in 2006. The Company’s 2008 planned capital expenditures are estimated at $7.0        million. These expenditures are expected to be funded from current operations and, if        necessary, borrowings under the Company’s Credit Facility.

 

**Financing activities**

 

Cash        provided by financing activities was $16.1 million in 2007 compared to $75.7 million in        2006. In 2007, the Company received net cash proceeds from borrowings under the        Company’s Credit Facility of $42.2 million which were offset by cash of $22.7 million        the Company paid to repurchase its common stock. In 2006, the Company received proceeds of        $75 million from the sale of its 4.75% Convertible Notes.

 

**Contractual obligations**

 

As of        December 31, 2007, the Company’s contractual obligations were as follows (in        thousands):

 

 

|                       | **Payment due by period** |
|----------------------------|---------------------------|
|                       | **Total**                 | **Less than**

**1 year** | **1-3 years** | **3-5 years** | **More than**

**5 years** |
| Operating leases           | $                         | 149,640 | $ | $20,955 | $ | $ 31,159 | $ | 24,430 | $ | 73,096 |
| Long-term debt             |                      | 130,200 |   | ― |   | 55,200 |   | 75,000 |   | ― |
| Minimum royalty payments   |                      | 24,878 |   | 9,591 |   | 11,883 |   | 1,240 |   | 2,164 |
| Interest on long-term debt |                      | 33,939 |   | 10,234 |   | 20,143 |   | 3,563 |   | ― |
| Post retirement benefits   |                      | 3,400 |   | 148 |   | 296 |   | 296 |   | 2,660 |
| Capitalized leases         |                      | 909 |   | 413 |   | 412 |   | 84 |   | ― |
| Total                      | $                         | 342,966 | $ | 41,341 | $ | 119,093 | $ | 104,613 | $ | 77,920 |

 

 

 

 

 

32

 

 

 

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**Item 7A. Quantitative and Qualitative Disclosures About        Market Risk**

 

Market risk represents the risk of loss that may impact the consolidated        financial position, results of operations or cash flows of the Company. The Company is        exposed to market risk associated with changes in interest rates. The Company’s        Credit Facility bears interest at variable rates and, therefore, the Company is subject to        increases and decreases in interest expense resulting from fluctuations in interest rates.        The Company has entered into interest rate swap agreements with an aggregate notional        amount of $50 million and interest rate collar agreements with an aggregate notional amount        of $40.2 million to manage interest rate exposure in connection with these variable        interest rate borrowings. There have been no changes in interest rates that would have a        material impact on the consolidated financial position, results of operations or cash flows        of the Company for the year ended December 31, 2007.

 

**Item 8. Financial Statements and Supplementary        Data**

 

The Company’s Consolidated Financial Statements as of and for the year        ended December 31, 2007 commencing on page F-1 are incorporated herein by        reference.

 

The following table sets forth certain unaudited consolidated quarterly        statement of income data for the eight quarters ended December 31, 2007. This information        is unaudited, but in the opinion of management, it has been prepared substantially on the        same basis as the audited consolidated financial statements appearing elsewhere in this        Annual Report on Form 10-K and all necessary adjustments, consisting only of normal        recurring adjustments, have been included in the amounts stated below to present fairly the        unaudited consolidated quarterly results of operations. The consolidated quarterly data        should be read in conjunction with the Company’s audited consolidated financial        statements and the notes to such statements appearing elsewhere in this Annual Report. The        results of operations for any quarter are not necessarily indicative of the results of        operations for any future period:

         

 

|                                   |   | **Year ended December 31, 2007**     |    |
|----------------------------------------|--------|--------------------------------------|---------|
|                                   |   | **First****quarter**                 |    | **Second****quarter** |   | **Third****quarter** |   | **Fourth****quarter** |   |
|                                   |   | (in thousands-except per share data) |    |
| Net sales                              |   | $                                    | 103,787 |   | $ | 91,371 |   | $ | 143,470 |   | $ | 155,097 |   |
| Gross profit                           |   |                                 | 42,690  |   |   | 39,465 |   |   | 58,936 |   |   | 63,637 |   |
| Income (loss) from operations          |   |                                 | (552    | ) |   | (1,750 | ) |   | 13,752 |   |   | 9,334 |   |
| Net income (loss)                      |   |                                 | (1,283  | ) |   | (2,026 | ) |   | 6,795 |   |   | 5,406 |   |
| Basic income (loss) per common share   |   | $                                    | (0.10   | ) | $ | (0.15 | ) | $ | 0.52 |   | $ | 0.44 |   |
| Diluted income (loss) per common share |   | $                                    | (0.10   | ) | $ | (0.15 | ) | $ | 0.47 |   | $ | 0.40 |   |

|                                   |   | **Year ended December 31, 2006**     |   |
|----------------------------------------|--------|--------------------------------------|--------|
|                                   |   | **First****quarter**                 |   | **Second****quarter** |   | **Third****quarter** |   | **Fourth****quarter** |   |
|                                   |   | (in thousands-except per share data) |   |
| Net sales                              |   | $                                    | 74,421 |   | $ | 84,051 |   | $ | 141,654 |   | $ | 157,274 |   |
| Gross profit                           |   |                                 | 32,551 |   |   | 35,850 |   |   | 57,393 |   |   | 65,857 |   |
| Income (loss) from operations          |   |                                 | 1,752  |   |   | (1,591 | ) |   | 12,392 |   |   | 17,247 |   |
| Net income (loss)                      |   |                                 | 896    |   |   | (1,507 | ) |   | 6,684 |   |   | 9,459 |   |
| Basic income (loss) per common share   |   | $                                    | 0.07   |   | $ | (0.11 | ) | $ | 0.50 |   | $ | 0.71 |   |
| Diluted income (loss) per common share |   | $                                    | 0.07   |   | $ | (0.11 | ) | $ | 0.45 |   | $ | 0.63 |   |

 

**Item 9. Changes In and Disagreements With Accountants On        Accounting and Financial Disclosure**

 

None

 

33

 

 

 

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**Item 9A. Controls and Procedures**

 

| (a) | **Evaluation of Disclosure Controls and                        Procedures** |
|-----|-----------------------------------------------------------------------------|

         

The Chief Executive Officer and the Chief Financial Officer of the Company        (its principal executive officer and principal financial and accounting officer,        respectively) have concluded, based on their evaluation as of December 31, 2007, that the        Company’s controls and procedures are effective to ensure that information required        to be disclosed by the Company in the reports filed by it under the Securities and Exchange        Act of 1934, as amended (the “Exchange Act”), is recorded, processed,        summarized and reported within the time periods specified in the Securities and Exchange        Commission’s rules and forms, and include controls and procedures designed to ensure        that information required to be disclosed by the Company in such reports is accumulated and        communicated to the Company’s management, including the Chief Executive Officer and        Chief Financial Officer of the Company, as appropriate to allow timely decisions regarding        required disclosure.

         

| (b) | **Changes in Internal Controls** |
|-----|----------------------------------|

         

In April 2007, the Company implemented a new SAP business enterprise system        which involved changes in internal controls inherent in the Company’s systems and        other data processing controls. There were no other changes in the Company’s internal        control over financial reporting that occurred during the Company’s most recent        fiscal quarter that has materially affected, or is reasonably likely to materially affect,        the Company’s internal control over financial reporting.

         

**Management’s Report on Internal Control over Financial        Reporting**

 

Management of the Company is responsible for establishing and maintaining        effective internal control over financial reporting, and for performing an assessment of        the effectiveness of internal control over financial reporting as of December 31, 2007.        Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f)        promulgated under the Exchange Act as a process designed by, or under the supervision of,        the Company’s principle executive and principal financial officers and effected by        the Company’s Board of Directors, management and other personnel, to provide        reasonable assurance regarding the reliability of financial reporting and the preparation        of financial statements for external purposes in accordance with U.S. generally accepted        accounting principles.

 

Internal control over financial reporting includes those policies and        procedures that (1) pertain to the maintenance of records that, in reasonable detail,        accurately and fairly reflect the transactions and dispositions of the assets of the        Company; (2) provide reasonable assurance that transactions are recorded as necessary to        permit the preparation of financial statements in accordance with U.S. generally accepted        accounting principles, and that receipts and expenditures of the Company are being made        only in accordance with authorizations of management and directors of the Company; and (3)        provide reasonable assurance regarding prevention or timely detection of unauthorized        acquisition, use or disposition of the Company’s assets that could have a material        effect on the financial statements.

 

All internal control systems, no matter how well designed, have inherent        limitations. Because of the inherent limitations, internal control over financial reporting        may not prevent or detect misstatements. Projections of any evaluation of effectiveness to        future periods are subject to the risk that controls may become inadequate because of        changes in conditions, or the degree of compliance with the policies or procedures may        deteriorate. Accordingly, even those systems determined to be effective can provide only        reasonable assurance with respect to financial statement preparation and        presentation.

 

Management performed an assessment of the effectiveness of the        Company’s internal control over financial reporting as of December 31, 2007 using the        criteria set forth in the Internal Control Integrated Framework issued by the Committee of        Sponsoring Organizations of the Treadway Commission. Based on this assessment, management        has determined that the Company’s internal control over financial reporting as of        December 31, 2007 is effective.

 

The effectiveness of the Company’s internal control over financial        reporting as of December 31, 2007 has been audited by Ernst & Young LLP, an independent        registered public accounting firm, as stated in their report.

 

34

 

 

 

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**Report of Independent Registered Public Accounting Firm on Internal        Control over Financial Reporting**

 

To the Board of Directors and Stockholders of              Lifetime Brands, Inc.

         

We have audited Lifetime Brands, Inc.’s internal control over        financial reporting as of December 31, 2007, based on criteria established in Internal        Control—Integrated Framework issued by the Committee of Sponsoring Organizations of        the Treadway Commission (the COSO criteria)**.**Lifetime Brands, Inc.’s management is responsible for maintaining        effective internal control over financial reporting and for its assessment of the        effectiveness of internal control over financial reporting included in the accompanying        Management Report on Internal Control Over Financial Reporting. Our responsibility is to        express an opinion on the company’s internal control over financial reporting based        on our audit.

 

We conducted our audit in accordance with the standards of the Public        Company Accounting Oversight Board (United States). Those standards require that we plan        and perform the audit to obtain reasonable assurance about whether effective internal        control over financial reporting was maintained in all material respects. Our audit        included obtaining an understanding of internal control over financial reporting, assessing        the risk that a material weakness exists, testing and evaluating the design and operating        effectiveness of internal control based on the assessed risk, and performing such other        procedures as we considered necessary in the circumstances. We believe that our audit        provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process        designed to provide reasonable assurance regarding the reliability of financial reporting        and the preparation of financial statements for external purposes in accordance with        generally accepted accounting principles. A company’s internal control over financial        reporting includes those policies and procedures that (1) pertain to the maintenance of        records that, in reasonable detail, accurately and fairly reflect the transactions and        dispositions of the assets of the company; (2) provide reasonable assurance that        transactions are recorded as necessary to permit preparation of financial statements in        accordance with generally accepted accounting principles, and that receipts and        expenditures of the company are being made only in accordance with authorizations of        management and directors of the company; and (3) provide reasonable assurance regarding        prevention or timely detection of unauthorized acquisition, use, or disposition of the        company’s assets that could have a material effect on the financial        statements.

 

Because of its inherent limitations, internal control over financial        reporting may not prevent or detect misstatements. Also, projections of any evaluation of        effectiveness to future periods are subject to the risk that controls may become inadequate        because of changes in conditions, or that the degree of compliance with the policies or        procedures may deteriorate.

 

In our opinion, Lifetime Brands, Inc. maintained, in all material respects,        effective internal control over financial reporting as of December 31, 2007, based on the        COSO criteria**.**

 

We also have audited, in accordance with the standards of the Public Company        Accounting Oversight Board (United States), Lifetime Brands, Inc. as of December 31, 2007        and 2006, and the related consolidated statements of income, stockholders’ equity,        and cash flows for each of the three years in the period ended December 31, 2007 and our        report dated March 14, 2008 expressed an unqualified opinion thereon.

 

/s/ ERNST & YOUNG LLP

         

Melville, New York        March 14, 2008

 

35

 

 

 

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**Item 9B. Other Information**

 

Not        applicable

 

**PART        III**

 

**Items 10,11,12,13 and 14**

 

The        information required under these items is contained in the Company’s 2008 Proxy        Statement, which will be filed with the Securities and Exchange Commission within 120 days        after the close of the Company’s fiscal year covered by this Annual Report on Form        10-K and is herein incorporated by reference.

 

36

 

 

 

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**PART IV**

 

**Item 15. Exhibits, Financial Statement        Schedules**

 

| (a) | See list of Financial Statements and Financial Statement                        Schedule on page F-1. |
|-----|-------------------------------------------------------------------------------------------------------|

         

| (b) | Exhibits*: |
|-----|------------|

         

**Exhibit**

| **No.** | **Description** |
|---------|-----------------|

 

| 3.1 | Second Restated Certificate of Incorporation of the Company                        (incorporated by reference to the Registrant’s Annual Report on Form                        10-K for the year ended December 31, 2005)** |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 3.2 | Amended and Restated By-Laws of the Company ( incorporated                        by reference to the Registrant’s Form 8-K dated November 1,                        2007)** |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 4.1 | Indenture dated as of June 27, 2006, Lifetime Brands, Inc.                        as issuer, and HSBC Bank USA, National Association as trustee, $75,000,000                        4.75% convertible senior notes due 2011 (incorporated by reference to the                        Registrant’s registration statement No. 333-137575 on Form                        S-3)** |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 10.1 | License agreement dated December 14, 1989 between the                        Company and Farberware, Inc. (incorporated by reference to the                        Registrant’s registration statement No. 33-40154 on Form                        S-1)** |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 10.2 | Evan Miller employment agreement dated July 1, 2003                        (incorporated by reference to the Registrant’s Form 10-Q dated                        September 30, 2003)** |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 10.3 | Employment agreement dated October 17, 2005 between Lifetime                        Brands, Inc. and Ronald Shiftan (incorporated by reference to the                        Registrant’s Form 8-K dated October 17, 2005)** |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 10.4 | Asset Purchase Agreement dated as of March 8, 2006 among                        Syratech Corporation, Wallace International de P.R., Inc., Chi                        International, Inc. and Syratech (H.K.) Limited, as the sellers, and                        Syratech Acquisition Corporation, as the purchaser, and Lifetime Brands,                        Inc. (incorporated by reference to the Registrant’s Form 8-K dated                        March 8, 2006)** |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 10.5 | Employment agreement dated May 2, 2006 between Lifetime                        Brands, Inc. and Jeffrey Siegel (incorporated by reference to the                        Registrant’s Form 8-K dated May 2, 2006)** |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 10.6 | Employment agreement dated April 18, 2006 between Lifetime                        Brands, Inc. and Alan Kanter (incorporated by reference to the                        Registrant’s Form 8-K dated May 2, 2006)** |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 10.7 | Lease agreement dated as of May 10, 2006 between AG                        Metropolitan Endo, L.L.C and Lifetime Brands, Inc. for the property located                        at 1000 Stewart Avenue in Garden City, New York (incorporated by reference                        to the Registrant’s Form 8-K dated May 10, 2006)** |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 10.8 | Amended 2000 Long-Term Incentive Plan (incorporated by                        reference to the Registrant’s Form 8-K dated June 8,                        2006)** |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 10.9 | Amended 2000 Incentive Bonus Compensation Plan (incorporated                        by reference to the Registrant’s Form 8-K dated June 8,                        2006)** |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 10.10 | Second Amended and Restated Credit Agreement among Lifetime                        Brands, Inc., Lenders party thereto, Citibank, N.A. and Wachovia Bank,                        National Association, as Co-Documentation Agents, JP Morgan Chase Bank,                        N.A., as Syndication Agent, and HSBC Bank USA, National Association, as                        Administrative Agent. (incorporated by reference to the Registrant’s                        Form 8-K dated October 31, 2006)** |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 10.11 | First Amendment to the Lease Agreement dated as of May 10,                        2006 between AG Metropolitan Endo, L.L.C and Lifetime Brands, Inc. for the                        property located at 1000 Stewart Avenue in Garden City, New York                        (incorporated by reference to the Registrant’s Form 10-Q dated                        September 30, 2006)** |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

37

 

 

 

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| 10.12 | Amendment of Employment Agreement dated June 7, 2007 by and                        between Lifetime Brands, Inc. and Ronald Shiftan (incorporated by reference                        to the Registrant’s Form 8-K dated June 7, 2007)** |
|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 10.13 | Robert McNally Employment Agreement, dated June 7, 2007                        (incorporated by reference to the Registrant’s Form 8-K dated June 7,                        2007)** |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 10.14 | Employment agreement dated June 28, 2007 between Lifetime                        Brands, Inc. and Laurence Winoker (incorporated by reference to the                        Registrant’s Form 8-K dated July 3, 2007)** |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 10.15 | Shares Subscription Agreement by and among Lifetime Brands,                        Inc., Ekco, S.A.B. and Mr. José Ramón Elizondo Anaya and                        Mr. Miguel Ángel Huerta Pando, dated as of June 8, 2007                        (incorporated by reference to the Registrant’s Form 8-K dated June                        11, 2007)** |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 10.16 | Lease Agreement between Granite Sierra Park LP and Lifetime                        Brands, Inc. dated June 29, 2007 (incorporated by reference to the                        Registrant’s Form 8-K dated June 29, 2007) ** |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 10.17 | Evan Miller Amendment of Employment Agreement dated June 29,                        2007 (incorporated by reference to the Registrant’s Form 8-K dated                        June 29, 2007)** |
|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 10.18 | Robert McNally Amendment of Employment Agreement dated July                        2, 2007 (incorporated by reference to the Registrant’s Form 8-K dated                        June 29, 2007)** |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 10.19 | Amendment to the Lifetime Brands, Inc. 2000 Long-Term                        Incentive Plan dated November 1, 2007 (incorporated by reference to the                        Registrant’s Form 8-K dated November 1, 2007)** |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 14.1 | Code of Conduct dated March 25, 2004, as amended on June 7,                        2007 (incorporated by reference to the Registrant’s Form 8-K dated                        June 7, 2007)** |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 21.1 | Subsidiaries of the registrant *** |
|------|------------------------------------|

         

| 23.1 | Consent of Ernst & Young LLP*** |
|------|-------------------------------------|

         

| 31.1 | Certification by Jeffrey Siegel, Chief Executive Officer and                        President, pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities                        and Exchange Act of 1934, as adopted pursuant to Section 302 of the                        Sarbanes-Oxley Act of 2002.*** |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 31.2 | Certification by Laurence Winoker, Senior Vice President                        – Finance, Treasurer and Chief Financial Officer, pursuant to Rule                        13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of 1934, as                        adopted pursuant to Section 302 of the Sarbanes-Oxley Act of                        2002*** |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 32.1 | Certification by Jeffrey Siegel, Chief Executive Officer and                        President, and Laurence Winoker, Senior Vice President – Finance,                        Treasurer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350,                        as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of                        2002**** |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

Notes:

         

|   | * | The Company will furnish a copy of any of the exhibits                        listed above upon payment of $5.00 per exhibit to cover the cost of the                        Company furnishing the exhibit. |
|--------|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ** | Incorporated by reference. |
|--------|----|----------------------------|

|   | *** | Filed herewith. |
|--------|-----|-----------------|

|   | **** | This exhibit is being “furnished” pursuant to                        Item 601(b)(32) of SEC Regulation S-K and is not deemed “filed”                        with the Securities and Exchange Commission and is not incorporated by                        reference in any filing of the Company under the Securities Act of 1933 or                        the Securities Exchange Act of 1934. |
|--------|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

(c)        Financial Statement        Schedules — the response to this portion of Item 15 is submitted as a separate        section of this report.

 

38

 

 

 

----

**SIGNATURES**

 

Pursuant to        the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the        registrant has duly caused this report to be signed on its behalf by the undersigned,        thereunto duly authorized.

 

Lifetime Brands, Inc.

         

/s/ Jeffrey Siegel

Jeffrey Siegel

Chairman of the Board of Directors,

Chief Executive Officer, President and Director

         

Pursuant        to the requirements of the Securities Exchange Act of 1934, this report has been signed        below by the following persons on behalf of the registrant and in the capacities and on the        dates indicated.

 

 

| Signature                                                                                                                          | Title                                                                                                                                                                          | Date           |
|------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|
| /s/ Jeffrey Siegel

Jeffrey Siegel                                                                                                 | Chairman of the Board of Directors, Chief Executive Officer,                        President and Director

                                                              | March 14, 2008 |
|                                                                                                                                    |
| /s/ Ronald                        Shiftan  

Ronald Shiftan

                                                       | Vice Chairman of the Board of Directors,Chief Operating Officer and Director                                                                                                   | March 14, 2008 |
| /s/ Laurence Winoker

Laurence Winoker                                                                                             | Senior Vice President – Finance, Treasurer and Chief                        Financial Officer(Principal Financial andAccounting Officer)

                          | March 14, 2008 |
| /s/ Craig Phillips

Craig Phillips

                                                                                          | Senior Vice-President – Distribution, Secretary, and a                        Director                                                                                   | March 14, 2008 |
| /s/ David Dangoor

David Dangoor

                                                                                            | Director                                                                                                                                                                       | March 14, 2008 |
| /s/ Michael Jeary                               

Michael Jeary

                          | Director                                                                                                                                                                       | March 14, 2008 |
| /s/ Sheldon Misher

Sheldon Misher

                                                                                          | Director                                                                                                                                                                       | March 14, 2008 |
| /s/ Cherrie Nanninga

Cherrie Nanninga

                                                                                      | Director                                                                                                                                                                       | March 14, 2008 |
| /s/ William Westerfield

William Westerfield                                                                                       | Director                                                                                                                                                                       | March 14, 2008 |

 

 

39

 

 

 

----

 

**Item        15**

 

LIFETIME        BRANDS, INC.

 

**LIST        OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE**

 

The        following consolidated financial statements of Lifetime Brands, Inc. are filed as part of        this report under Item 8 – Financial Statements and Supplementary Data

 

| Report of Independent Registered Public Accounting                        Firm | F-2 |
|--------------------------------------------------------------------------------|-----|

 

| Consolidated Balance Sheets as of December 31, 2007 and                        2006 | F-3 |
|-------------------------------------------------------------------------------------|-----|

 

Consolidated Statements of Income for the Years ended

|   | December 31, 2007, 2006 and 2005 | F-4 |
|--------|----------------------------------|-----|

         

Consolidated Statements of Stockholders’ Equity for the Years        ended

|   | December 31, 2007, 2006 and 2005 | F-5 |
|--------|----------------------------------|-----|

         

Consolidated Statements of Cash Flows for the Years ended

|   | December 31, 2007, 2006 and 2005 | F-6 |
|--------|----------------------------------|-----|

         

| Notes to Consolidated Financial Statements | F-7 |
|--------------------------------------------|-----|

 

The        following consolidated financial statement schedule of Lifetime Brands, Inc. required        pursuant to Item 15(a) is submitted herewith:

 

| Schedule II – Valuation and Qualifying                        Accounts | S-1 |
|------------------------------------------------------------------------------|-----|

 

All        other financial schedules are not required under the related instructions or are        inapplicable, and therefore have been omitted.

 

The        unaudited supplementary data regarding quarterly results of operations are incorporated by        reference to the information set forth in Item 8,*Financial        Statements and Supplementary Data*.

 

 

F-1

 

----

 

 

 

**Report of Independent Registered Public Accounting Firm**

 

To the        Board of Directors and Stockholders of

     Lifetime Brands, Inc.

         

We have        audited the accompanying consolidated balance sheets of Lifetime Brands, Inc. (the        “Company”) as of December 31, 2007 and 2006 and the related consolidated        statements of income, stockholders’ equity, and cash flows for each of the three        years in the period ended December 31, 2007. Our audits also included the financial        statement schedule listed in the Index at Item 15(a). These financial statements and        schedule are the responsibility of the Company’s management. Our responsibility is to        express an opinion on these financial statements and schedule based on our        audits.

 

We        conducted our audits in accordance with the standards of the Public Company Accounting        Oversight Board (United States). Those standards require that we plan and perform the audit        to obtain reasonable assurance about whether the financial statements are free of material        misstatement. An audit includes examining, on a test basis, evidence supporting the amounts        and disclosures in the financial statements. An audit also includes assessing the        accounting principles used and significant estimates made by management, as well as        evaluating the overall financial statement presentation. We believe that our audits provide        a reasonable basis for our opinion.

 

In our        opinion, the financial statements referred to above present fairly, in all material        respects, the consolidated financial position of Lifetime Brands, Inc. at December 31, 2007        and 2006, and the consolidated results of its operations and its cash flows for each of the        three years in the period ended December 31, 2007, in conformity with U. S. generally        accepted accounting principles. Also, in our opinion, the related financial statement        schedule, when considered in relation to the basic financial statements taken as a whole,        presents fairly in all material respects the information set forth therein.

 

As        discussed in Note A to the consolidated financial statements, the Company adopted the        provisions of Statement of Financial Accounting Standards No. 123(R),*Share-Based Payment*, effective January 1,        2006.

 

We have        also audited, in accordance with the standards of the Public Company Accounting Oversight        Board (United States), Lifetime Brands, Inc.’s internal control over financial        reporting as of December 31, 2007, based on the criteria established in Internal        Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the        Treadway Commission and our report dated March 14, 2008, expressed an unqualified opinion        thereon.

 

/s/ ERNST & YOUNG LLP

         

Melville, New York        March 14, 2008

 

F-2

 

 

 

 

----

**LIFETIME BRANDS, INC.**

**CONSOLIDATED BALANCE SHEETS**

(in        thousands-except share data)

 

|                                                                                                                                                                                |   | **December 31,** |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|---------|
| **ASSETS**                                                                                                                                                                          |   | **2007**         |    | **2006** |   |
| CURRENT ASSETS                                                                                                                                                                      |   |             |    |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                           |   | $                | 4,172   |   | $ | 150 |   |
| Accounts receivable, less allowances of $16,400 at                        2007and $12,097 at 2006                                                                                   |   |             | 65,030  |   |   | 60,516 |   |
| Inventory                                                                                                                                                                           |   |             | 143,684 |   |   | 155,350 |   |
| Deferred income taxes                                                                                                                                                               |   |             | 7,925   |   |   | 8,519 |   |
| Prepaid expenses and other current assets                                                                                                                                           |   |             | 7,267   |   |   | 7,098 |   |
| TOTAL CURRENT ASSETS                                                                                                                                                                |   |             | 228,078 |   |   | 231,633 |   |
|                                                                                                                                                                                |   |             |    |   |   |   |   |
| PROPERTY AND EQUIPMENT, net                                                                                                                                                         |   |             | 54,332  |   |   | 42,722 |   |
| GOODWILL                                                                                                                                                                            |   |             | 27,432  |   |   | 20,951 |   |
| OTHER INTANGIBLES, net                                                                                                                                                              |   |             | 35,383  |   |   | 42,391 |   |
| INVESTMENT IN EKCO                                                                                                                                                                  |   |             | 22,950  |   |   | ― |   |
| OTHER ASSETS                                                                                                                                                                        |   |             | 3,240   |   |   | 5,367 |   |
| **TOTAL ASSETS**                                                                                                                                                                    |   | $                | 371,415 |   | $ | 343,064 |   |
|  

**LIABILITIES AND STOCKHOLDERS’ EQUITY**CURRENT LIABILITIES                                                                                                           |   |             |    |   |   |   |   |
| Short-term borrowings                                                                                                                                                               |   | $                | 13,500  |   | $ | 21,500 |   |
| Accounts payable                                                                                                                                                                    |   |             | 21,759  |   |   | 15,585 |   |
| Accrued expenses                                                                                                                                                                    |   |             | 31,504  |   |   | 45,743 |   |
| Income taxes payable                                                                                                                                                                |   |             | 4,520   |   |   | 6,899 |   |
| TOTAL CURRENT LIABILITIES                                                                                                                                                           |   |             | 71,283  |   |   | 89,727 |   |
|                                                                                                                                                                                |   |             |    |   |   |   |   |
| DEFERRED RENT & OTHER LONG-TERM LIABILITIES                                                                                                                                     |   |             | 14,481  |   |   | 5,522 |   |
| DEFERRED INCOME TAXES                                                                                                                                                               |   |             | 8,211   |   |   | 6,204 |   |
| LONG-TERM DEBT                                                                                                                                                                      |   |             | 55,200  |   |   | 5,000 |   |
| CONVERTIBLE NOTES                                                                                                                                                                   |   |             | 75,000  |   |   | 75,000 |   |
|                                                                                                                                                                                |   |             |    |   |   |   |   |
| STOCKHOLDERS’ EQUITY                                                                                                                                                          |   |             |    |   |   |   |   |
| Common stock, $.01 par value, shares authorized: 25,000,000;                        shares issued and                        outstanding: 11,964,388 in 2007 and 13,283,313 in 2006 |   |             | 120     |   |   | 133 |   |
| Paid-in capital                                                                                                                                                                     |   |             | 113,995 |   |   | 111,165 |   |
| Retained earnings                                                                                                                                                                   |   |             | 33,250  |   |   | 50,235 |   |
| Accumulated other comprehensive income                                                                                                                                              |   |             | (125    | ) |   | 78 |   |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                                                                                    |   |             | 147,240 |   |   | 161,611 |   |
|                                                                                                                                                                                |   |             |    |   |   |   |   |
| **TOTAL LIABILITIES AND STOCKHOLDERS’                        EQUITY**                                                                                                         |   | $                | 371,415 |   | $ | 343,064 |   |
|                                                                                                                                                                                |   |             |    |   |   |   |   |

 

See notes        to consolidated financial statements.

 

F-3

 

----

 

**LIFETIME BRANDS, INC.**

**CONSOLIDATED STATEMENTS OF INCOME**

(in        thousands – except per share data)

 

 

|                                         |   | **Year ended December 31,** |
|----------------------------------------------|--------|-----------------------------|
|                                         |   | **2007**                    |   | **2006** |   | **2005** |   |
|                                         |   |                        |   |   |   |   |   |
| Net sales                                    |   | $                           | 493,725 |   | $ | 457,400 |   | $ | 307,897 |   |
|                                         |   |                        |   |   |   |   |   |   |   |   |
| Cost of sales                                |   |                        | 288,997 |   |   | 265,749 |   |   | 178,295 |   |
| Distribution expenses                        |   |                        | 53,493 |   |   | 49,729 |   |   | 34,539 |   |
| Selling, general and administrative expenses |   |                        | 128,527 |   |   | 112,122 |   |   | 69,891 |   |
| Asset impairment and restructuring expenses  |   |                        | 1,924 |   |   | ― |   |   | ― |   |
|                                         |   |                        |   |   |   |   |   |   |   |   |
| Income from operations                       |   |                        | 20,784 |   |   | 29,800 |   |   | 25,172 |   |
|                                         |   |                        |   |   |   |   |   |   |   |   |
| Interest expense                             |   |                        | 8,397 |   |   | 4,576 |   |   | 2,489 |   |
| Other income, net                            |   |                        | (3,935 | ) |   | (31 | ) |   | (73 | ) |
|                                         |   |                        |   |   |   |   |   |   |   |   |
| Income before income taxes                   |   |                        | 16,322 |   |   | 25,255 |   |   | 22,756 |   |
|                                         |   |                        |   |   |   |   |   |   |   |   |
| Income tax provision                         |   |                        | 7,430 |   |   | 9,723 |   |   | 8,647 |   |
|                                         |   |                        |   |   |   |   |   |   |   |   |
| **NET INCOME**                               |   | $                           | 8,892 |   | $ | 15,532 |   | $ | 14,109 |   |
|                                         |   |                        |   |   |   |   |   |   |   |   |
| **BASIC INCOME PER COMMON SHARE**            |   | $                           | 0.69 |   | $ | 1.18 |   | $ | 1.25 |   |
|                                         |   |                        |   |   |   |   |   |   |   |   |
| **DILUTED INCOME PER COMMON SHARE**          |   | $                           | 0.68 |   | $ | 1.14 |   | $ | 1.23 |   |
|                                         |   |                        |   |   |   |   |   |   |   |   |

 

See notes        to consolidated financial statements.

 

F-4

 

----

**LIFETIME BRANDS, INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

(in thousands)

         

         

|                                                                              |   | **Common stock** |   | **Paid-in** |   |        | **Retained** |    |         | **Accumulated other comprehensive** |   |       | **Notes receivable from** |   |             |    |
|-----------------------------------------------------------------------------------|--------|------------------|--------|-------------|--------|-------------|--------------|---------|--------------|-------------------------------------|--------|------------|---------------------------|--------|------------------|---------|
|                                                                              |   | **Shares**       |   | **Amount**  |   | **capital** |         |    | **earnings** |                                |   | **income** |                      |   | **stockholders** |    | **Total** |   |
| **BALANCE AT DECEMBER 31, 2004**                                                  |   | 11,050           |   | $           | 111    |        | $            | 65,229  |         |                                | $      | 28,077     |                      |   | $                | ― |   |   | $ | (479 | ) | $ | 92,938 |   |
| Net income for 2005                                                               |   |             |   |        |   |        |         |    |         |                                |   | 14,109     |                      |   |             |    |   |   |   |   |   |   | 14,109 |   |
| Net proceeds from public offering                                                 |   | 1,733            |   |        | 17     |        |         | 34,402  |         |                                |   |       |                      |   |             |    |   |   |   |   |   |   | 34,419 |   |
| Tax benefit on exercise of stock options                                          |   |             |   |        |   |        |         | 735     |         |                                |   |       |                      |   |             |    |   |   |   |   |   |   | 735 |   |
| Exercise of stock options                                                         |   | 139              |   |        | 1      |        |         | 1,052   |         |                                |   | (409       | )                         |   |             |    |   |   |   |   |   |   | 644 |   |
| Shares issued to directors                                                        |   |             |   |        |   |        |         | 50      |         |                                |   |       |                      |   |             |    |   |   |   |   |   |   | 50 |   |
| Repayment of notes receivable from stockholders                                   |   |             |   |        |   |        |         |    |         |                                |   |       |                      |   |             |    |   |   |   | 479 |   |   | 479 |   |
| Dividends                                                                         |   |             |   |        |   |        |         |    |         |                                |   | (2,887     | )                         |   |             |    |   |   |   |   |   |   | (2,887 | ) |
| **BALANCE AT DECEMBER 31, 2005**                                                  |   | 12,922           |   |        | 129    |        |         | 101,468 |         |                                |   | 38,890     |                      |   |             | ― |   |   |   | ― |   |   | 140,487 |   |
| Comprehensive income:                                                             |   |             |   |        |   |        |         |    |         |                                |   |       |                      |   |             |    |   |   |   |   |   |   |   |   |
| Net income for 2006                                                               |   |             |   |        |   |        |         |    |         |                                |   | 15,532     |                      |   |             |    |   |   |   |   |   |   | 15,532 |   |
| Foreign currency translation adjustment                                           |   |             |   |        |   |        |         |    |         |                                |   |       |                      |   |             | 78      |   |   |   |   |   |   | 78 |   |
| Total comprehensive income                                                        |   |             |   |        |   |        |         |    |         |                                |   |       |                      |   |             |    |   |   |   |   |   |   | 15,610 |   |
| Tax benefit on exercise of stock options                                          |   |             |   |        |   |        |         | 725     |         |                                |   |       |                      |   |             |    |   |   |   |   |   |   | 725 |   |
| Stock option expense                                                              |   |             |   |        |   |        |         | 1,155   |         |                                |   |       |                      |   |             |    |   |   |   |   |   |   | 1,155 |   |
| Costs of public offering                                                          |   |             |   |        |   |        |         | (131    | )            |                                |   |       |                      |   |             |    |   |   |   |   |   |   | (131 | ) |
| Exercise of stock options                                                         |   | 116              |   |        | 2      |        |         | 1,014   |         |                                |   | (820       | )                         |   |             |    |   |   |   |   |   |   | 196 |   |
| Stock issued for acquisition                                                      |   | 240              |   |        | 2      |        |         | 6,819   |         |                                |   |       |                      |   |             |    |   |   |   |   |   |   | 6,821 |   |
| Shares issued to directors                                                        |   | 5                |   |        |   |        |         | 115     |         |                                |   |       |                      |   |             |    |   |   |   |   |   |   | 115 |   |
| Dividends                                                                         |   |             |   |        |   |        |         |    |         |                                |   | (3,367     | )                         |   |             |    |   |   |   |   |   |   | (3,367 | ) |
| **BALANCE AT DECEMBER 31, 2006**                                                  |   | 13,283           |   |        | 133    |        |         | 111,165 |         |                                |   | 50,235     |                      |   |             | 78      |   |   |   | ― |   |   | 161,611 |   |
| Comprehensive income:                                                             |   |             |   |        |   |        |         |    |         |                                |   |       |                      |   |             |    |   |   |   |   |   |   |   |   |
| Net income for 2007                                                               |   |             |   |        |   |        |         |    |         |                                |   | 8,892      |                      |   |             |    |   |   |   |   |   |   | 8,892 |   |
| Derivative fair value adjustment,                        net of taxes of $170,000 |   |             |   |        |   |        |         |    |         |                                |   |       |                      |   |             | (203    | ) |   |   |   |   |   | (203 | ) |
| Total comprehensive income                                                        |   |             |   |        |   |        |         |    |         |                                |   |       |                      |   |             |    |   |   |   |   |   |   | 8,689 |   |
| Tax benefit on exercise of stock options                                          |   |             |   |        |   |        |         | 161     |         |                                |   |       |                      |   |             |    |   |   |   |   |   |   | 161 |   |
| Stock option expense                                                              |   |             |   |        |   |        |         | 2,197   |         |                                |   |       |                      |   |             |    |   |   |   |   |   |   | 2,197 |   |
| Purchase and retirement of common stock                                           |   | (1,363           | )      |        | (14    | )           |         |    |         |                                |   | (22,658    | )                         |   |             |    |   |   |   |   |   |   | (22,672 | ) |
| Exercise of stock options                                                         |   | 32               |   |        | 1      |        |         | 244     |         |                                |   |       |                      |   |             |    |   |   |   |   |   |   | 245 |   |
| Stock issued for acquisition                                                      |   | 5                |   |        |   |        |         | 133     |         |                                |   |       |                      |   |             |    |   |   |   |   |   |   | 133 |   |
| Shares issued to directors                                                        |   | 7                |   |        |   |        |         | 95      |         |                                |   |       |                      |   |             |    |   |   |   |   |   |   | 95 |   |
| Dividends                                                                         |   |             |   |        |   |        |         |    |         |                                |   | (3,219     | )                         |   |             |    |   |   |   |   |   |   | (3,219 | ) |
| **BALANCE AT DECEMBER 31, 2007**                                                  |   | 11,964           |   | $           | 120    |        | $            | 113,995 |         |                                | $      | 33,250     |                      |   | $                | (125    | ) |   | $ | ― |   | $ | 147,240 |   |

 

 

 

See notes        to consolidated financial statements.

 

F-5

 

----

**LIFETIME BRANDS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(in        thousands)

|                                                                                                                 |        | **Year ended December                    31,** |         |
|-----------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|---------|
|                                                                                                            |   | **2007**                                       |    | **2006** |   | **2005** |   |
| **OPERATING ACTIVITIES**                                                                                        |   |                                           |    |   |   |   |   |   |   |   |
| Net income                                                                                                      |   | $                                              | 8,892   |   | $ | 15,532 |   | $ | 14,109 |   |
| Adjustments to reconcile net income to net cash provided by(used in) operating activities:                      |   |                                           |    |   |   |   |   |   |   |   |
| Provision for doubtful accounts                                                                                 |   |                                           | 79      |   |   | 81 |   |   | 132 |   |
| Depreciation and amortization                                                                                   |   |                                           | 9,659   |   |   | 8,380 |   |   | 5,641 |   |
| Deferred income taxes                                                                                           |   |                                           | 2,771   |   |   | 421 |   |   | (2,726 | ) |
| Provision for losses on accounts receivable                                                                     |   |                                           | ― |   |   | (81 | ) |   | 132 |   |
| Stock option expense                                                                                            |   |                                           | 2,197   |   |   | 1,155 |   |   | ― |   |
| Director stock compensation                                                                                     |   |                                           | 95      |   |   | 115 |   |   | 50 |   |
| Unrealized loss on derivatives                                                                                  |   |                                           | 358     |   |   | ― |   |   | ― |   |
| Gain on sale of property                                                                                        |   |                                           | (3,760  | ) |   | ― |   |   | ― |   |
| Asset impairment                                                                                                |   |                                           | 1,635   |   |   | ― |   |   | ― |   |
| Changes in operating assets and liabilities (excluding the                    effects of business acquisitions) |   |                                           |    |   |   |   |   |   |   |   |
| Accounts receivable                                                                                             |   |                                           | (4,593  | ) |   | 5,417 |   |   | (12,715 | ) |
| Inventory                                                                                                       |   |                                           | 19,925  |   |   | (36,410 | ) |   | 4,942 |   |
| Prepaid expenses, other current assets and other                    assets                                      |   |                                           | 1,220   |   |   | 251 |   |   | (86 | ) |
| Accounts payable, accrued expenses and other                    liabilities                                     |   |                                           | (4,568  | ) |   | (3,982 | ) |   | 14,610 |   |
| Income taxes payable                                                                                            |   |                                           | (2,343  | ) |   | (2,330 | ) |   | 4,574 |   |
| **NET CASH PROVIDED BY (USED IN) OPERATING                    ACTIVITIES**                                      |   |                                           | 31,567  |   |   | (11,451 | ) |   | 28,663 |   |
|                                                                                                            |   |                                           |    |   |   |   |   |   |   |   |
| **INVESTING ACTIVITIES**                                                                                        |   |                                           |    |   |   |   |   |   |   |   |
| Purchases of property and equipment, net                                                                        |   |                                           | (19,023 | ) |   | (21,144 | ) |   | (4,781 | ) |
| Business acquisitions                                                                                           |   |                                           | (10,543 | ) |   | (43,763 | ) |   | (52,154 | ) |
| Investment in Ekco                                                                                              |   |                                           | (22,950 | ) |   | ― |   |   | ― |   |
| Net proceeds from sale of property                                                                              |   |                                           | 8,832   |   |   | ― |   |   | ― |   |
| **NET CASH USED IN INVESTING ACTIVITIES**                                                                       |   |                                           | (43,684 | ) |   | (64,907 | ) |   | (56,935 | ) |
|                                                                                                            |   |                                           |    |   |   |   |   |   |   |   |
| **FINANCING ACTIVITIES**                                                                                        |   |                                           |    |   |   |   |   |   |   |   |
| Proceeds (repayments) of short-term borrowings, net                                                             |   |                                           | 42,200  |   |   | 7,000 |   |   | (4,900 | ) |
| Bank financing costs                                                                                            |   |                                           | ― |   |   | (200 | ) |   | (235 | ) |
| Net proceeds from public offering                                                                               |   |                                           | ― |   |   | (131 | ) |   | 34,419 |   |
| Proceeds from issuance of convertible notes                                                                     |   |                                           | ― |   |   | 75,000 |   |   | ― |   |
| Convertible notes issuance costs                                                                                |   |                                           | ― |   |   | (3,062 | ) |   | ― |   |
| Proceeds from the exercise of stock options                                                                     |   |                                           | 245     |   |   | 196 |   |   | 644 |   |
| Repayment of note receivable                                                                                    |   |                                           | ― |   |   | ― |   |   | 479 |   |
| Payment of capital lease obligations                                                                            |   |                                           | (456    | ) |   | (387 | ) |   | (320 | ) |
| Excess tax benefits from stock option expense                                                                   |   |                                           | 125     |   |   | 638 |   |   | ― |   |
| Purchases of common stock                                                                                       |   |                                           | (22,672 | ) |   | ― |   |   | ― |   |
| Cash dividends paid                                                                                             |   |                                           | (3,303  | ) |   | (3,332 | ) |   | (2,770 | ) |
| **NET CASH PROVIDED BY FINANCING ACTIVITIES**                                                                   |   |                                           | 16,139  |   |   | 75,722 |   |   | 27,317 |   |
|                                                                                                            |   |                                           |    |   |   |   |   |   |   |   |
| **INCREASE (DECREASE) IN CASH AND CASH                    EQUIVALENTS**                                         |   |                                           | 4,022   |   |   | (636 | ) |   | (955 | ) |
| Cash and cash equivalents at beginning of year                                                                  |   |                                           | 150     |   |   | 786 |   |   | 1,741 |   |
| **CASH AND CASH EQUIVALENTS AT END OF YEAR**                                                                    |   | $                                              | 4,172   |   | $ | 150 |   | $ | 786 |   |

 

See notes        to consolidated financial statements.

 

 

F-6

 

----

 

**LIFETIME BRANDS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

 

**NOTE A — SIGNIFICANT ACCOUNTING POLICIES**

 

**Organization and business**

 

Lifetime Brands, Inc. (the “Company”) designs, markets and        distributes a broad range of consumer products used in the home, including food        preparation, tabletop and home décor products and markets its products under a        number of brand names and trademarks, that are either owned or licensed. The Company sells        its products wholesale to retailers throughout North America and directly to the consumer        through 78 Company-operated factory and outlet stores, mail order catalogs, and the        Internet.

 

**Principles of consolidation**

 

The accompanying consolidated financial statements include the accounts of        Lifetime Brands, Inc. and its wholly-owned subsidiaries (collectively, the        “Company”). All intercompany accounts and transactions have been eliminated in        consolidation.

 

The Company operates in two reportable business segments —        wholesale and direct-to-consumer. The wholesale segment is the Company’s primary        business that designs, markets and distributes household products to retailers and        distributors. The direct-to-consumer segment is comprised of the Company’s business        that sells household products directly to the consumer through Company-operated factory and        outlet stores, and catalog and Internet operations.

 

**Revenue recognition**

 

Wholesale sales are recognized when title passes and the risks and rewards        of ownership have transferred to the customer. Factory and outlet store sales are        recognized at the time of sale, while catalog and Internet sales are recognized upon        receipt by the customer. Shipping and handling fees that are billed to customers in sales        transactions are included in net sales and amounted to $4.8 million, $4.8 million and $3.2        million for the years ended December 31, 2007, 2006 and 2005, respectively. Net sales        exclude taxes that are collected from customers and remitted to the taxing        authorities.

 

**Distribution expenses**

 

Distribution expenses consist primarily of warehousing expenses, handling        costs of products sold and freight-out expenses. Freight-out costs included in distribution        expenses amounted to $8.4 million, $8.9 million and $6.6 million for the years ended        December 31, 2007, 2006 and 2005, respectively.

 

**Advertising expenses**

 

Advertising expenses are expensed as incurred and are included in selling,        general and administrative expenses. Advertising expenses were $1.6 million, $2.0 million        and $1.0 million for the years ended December 31, 2007, 2006 and 2005,        respectively.

 

**Accounts receivable**

 

The Company periodically reviews the collectibility of its accounts        receivable and establishes allowances for estimated losses that could result from the        inability of its customers to make required payments. A considerable amount of judgment is        required to assess the ultimate realization of these receivables including assessing the        credit-worthiness of each wholesale customer. The Company also establishes allowances for        sales returns and customer chargebacks. To evaluate the adequacy of the sales returns and        customer chargeback allowances the Company analyzes currently available information and        historical trends. If the financial conditions of the customers were to deteriorate,        resulting in an impairment of their ability to make payments, or the Company’s        estimate of returns is determined to be inadequate, additional allowances may be        required.

 

F-7

 

----

**LIFETIME BRANDS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

 

**NOTE        A — SIGNIFICANT ACCOUNTING POLICIES (continued)**

 

**Inventory**

 

Inventory consists principally of finished goods sourced from third-party        suppliers. Inventory also includes finished goods, work in process and raw materials        related to the Company’s manufacture of sterling silver products. Inventory is priced        by the lower of cost (first-in, first-out basis) or market method. Consistent with the        seasonality of the Company’s business, inventory generally increases, beginning late        in the first quarter of the year, and reaches a peak at the end of the third quarter or        early in the fourth quarter, and declines thereafter. The Company periodically reviews and        analyzes inventory based on a number of factors including, but not limited to, future        product demand for items and estimated profitability of merchandise. When appropriate, the        Company writes down inventory to net realizable value.

 

**Property and equipment**

 

Property        and equipment is stated at cost. Property and equipment, other than leasehold improvements,        is depreciated using the straight-line method over the estimated useful lives of the        assets. Building and improvements are being depreciated over 30 years and machinery,        furniture, and equipment over periods ranging from 3 to 10 years. Leasehold improvements        are amortized over the term of the lease or the estimated useful lives of the improvements,        whichever is shorter. Advances paid towards the acquisition of property and equipment and        the cost of property and equipment not ready for use before the end of the period are        classified as construction in progress.

 

**Cash        equivalents**

 

The        Company considers all highly liquid instruments with a maturity of three months or less        when purchased to be cash equivalents.

 

**Use        of estimates**

 

The        preparation of financial statements in conformity with U.S. generally accepted accounting        principles requires management to make estimates and assumptions that affect the amounts        reported in the financial statements and accompanying notes. Actual results could differ        from those estimates.

 

**Concentration of credit risk**

 

The        Company maintains cash with various financial institutions.

 

Concentrations of credit risk with respect to trade accounts receivable are        limited due to the large number of entities comprising the Company’s customer base        and their dispersion across North America.

 

During        the years ended December 31, 2007, 2006 and 2005, Wal-Mart Stores, Inc. (including        Sam’s Clubs) accounted for 21%, 17% and 20% of net sales, respectively. No other        customer accounted for 10% or more of the Company’s net sales during the years ended        December 31, 2007, 2006 or 2005. For the years ended December 31, 2007, 2006 and 2005, the        Company’s ten largest customers accounted for 62%, 49% and 51% of net sales,        respectively.

 

F-8

 

----

**LIFETIME BRANDS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

 

**NOTE        A — SIGNIFICANT ACCOUNTING POLICIES (continued)**

 

**Fair        value of financial instruments**

 

The        Company estimated that the carrying amounts of cash and cash equivalents, accounts        receivable and accounts payable are a reasonable estimate of their fair value because of        their short-term nature. The Company estimated that the carrying amounts of borrowings        outstanding under its revolving Credit Facility approximate fair value since such        borrowings bear interest at variable market rates. At December 31, 2007, the fair value of        the Company’s $75 million 4.75% Convertible Senior Notes was $66.1 million based on        the quoted price of the notes on December 31, 2007.

 

**Derivatives**

 

The        Company accounts for derivative instruments in accordance with Statement of Financial        Accounting Standards (“SFAS”) No. 133, *Accounting for Derivative        Instruments and Hedging Activities*, and subsequent amendments (“SFAS 133”).        SFAS No. 133 requires that all derivative instruments be recognized on the balance        sheet at fair value as either an asset or a liability. Accounting for changes in the fair        value of a derivative depends on whether it qualifies and has been designated as part of a        hedging relationship. For derivatives that qualify and have been designated as hedges for        accounting purposes, changes in fair value have no net impact on earnings to the extent the        derivative is considered perfectly effective in achieving offsetting changes in fair value        or cash flows attributable to the risk being hedged until the hedged item is recognized in        earnings. For derivatives that do not qualify or are not designated as hedging instruments        for accounting purposes, changes in fair value are recorded in current period        earnings.

 

**Goodwill, other intangible assets and long-lived assets**

 

Goodwill, and intangible assets deemed to have indefinite lives, are not        amortized but instead are subject to annual impairment tests in accordance with the        provisions of SFAS No.142,*Goodwill and Other Intangible        Assets*.

 

Long-lived assets are reviewed for impairment in accordance with SFAS No.        144, *Accounting for the Impairment or Disposal of Long-lived Assets.* Other        intangible assets are amortized over their respective useful lives and reviewed for        impairment whenever events or changes in circumstances indicate that such amounts may have        been impaired. Impairment indicators include among other conditions, cash flow deficits,        historic or anticipated declines in revenue or operating profit or material adverse changes        in the business climate that indicate that the carrying amount of an asset may be impaired.        When impairment indicators are present, the Company compares the carrying value of the        asset to the estimated undiscounted future cash flows expected to be generated by the        assets. If the assets are considered to be impaired, the impairment to be recognized is        measured by the amount by which the carrying amount of the assets exceeds the fair value of        the assets. Other than described in Note M, as of December 31, 2007, no impairment has        occurred.

 

F-9

 

----

**LIFETIME BRANDS, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

 

**NOTE        A — SIGNIFICANT ACCOUNTING POLICIES (continued)**

 

**Income taxes**

 

The        Company accounts for income taxes using the asset and liability method. Under this method,        deferred tax assets and liabilities are determined based on differences between financial        reporting and tax bases of assets and liabilities, and are measured using the enacted tax        rates and laws that are expected to be in effect when the differences are expected to        reverse.

 

In July        2006, the Financial Accounting Standards Board (“FASB”) issued FASB        Interpretation (“FIN”) No. 48, *Accounting for Uncertainty in Income        Taxes*. FIN No. 48 provides guidance for the financial statement recognition,        measurement and disclosure of uncertain tax positions recognized in an enterprise’s        financial statements in accordance with FASB Statement No. 109, *Accounting for Income        Taxes.* Tax positions must meet a more-likely-than-not recognition threshold and        measurement attribute for the financial statement recognition and measurement of a tax        position taken upon the adoption of FIN No. 48 or in subsequent periods. The Company        adopted FIN No. 48 on January 1, 2007.

 

**Stock        options**

 

Effective January 1, 2006, the Company adopted SFAS        No. 123(R)*Share-Based Payment*, as        amended. SFAS No.123(R) requires the measurement of compensation expense for all        share-based compensation granted to employees and non-employee directors at fair value on        the date of grant and recognition of compensation expense over the related service period        for awards expected to vest. SFAS No. 123(R) also requires that excess tax benefits        associated with share-based payments be classified as a financing activity in the statement        of cash flows, rather than as operating cash flows as required by previous accounting        pronouncements. The Company adopted SFAS No. 123(R) using the modified-prospective        transition method. Accordingly, the Company has not restated prior period amounts. The fair        value of stock options granted under SFAS No. 123(R) is determined by the Company using the        Black-Scholes valuation model.

 

Prior to        January 1, 2006, the Company accounted for stock-based compensation using the intrinsic        value based method in accordance with the provisions of Accounting Principles Board        (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*, and        related interpretations, and the Company complied with the disclosure requirements of SFAS        No. 123, *Accounting of Stock-Based Compensation*, as amended by SFAS No. 148,        *Accounting for Stock-Based Compensation, Transition and Disclosure*. Accordingly, the        Company was only required to record compensation expense if stock options were granted with        an exercise price that was less than the fair market value of the underlying stock at the        date of grant. In 2005, the Company accelerated the vesting of all unvested outstanding        stock options in order to reduce the non-cash compensation expense that otherwise would        have been required to be recorded under SFAS No. 123(R).

 

F-10

 

----

**LIFETIME BRANDS, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

 

**NOTE        A — SIGNIFICANT ACCOUNTING POLICIES (continued)**

 

**New        accounting pronouncements**

 

In        September 2006, the FASB issued SFAS No. 157,*Fair Value        Measurements*, which provides enhanced guidance for using fair        value to measure assets and liabilities. SFAS No. 157 establishes a common definition        of fair value, provides a framework for measuring fair value under U.S. generally accepted        accounting principles and expands disclosure requirements about fair value measurements.        SFAS No. 157 is effective for financial statements issued in fiscal years beginning        after November 15, 2007, and interim periods within those fiscal years. In February        2008, the FASB issued FASB Staff Position (“FSP”) 157-1,*Application of FASB Statement No.* *157 to FASB Statement No.* *13 and Other Accounting Pronouncements That Address Fair Value        Measurements for Purposes of Lease Classification or Measurement under Statement        13*and FSP 157-2,*Effective Date of FASB        Statement No.* *157*. FSP 157-1 amends SFAS No. 157 to        remove certain leasing transactions from its scope. FSP 157-2,*Effective Date of FASB Statement        No.* *157*delays the effective date of SFAS No. 157 for all nonfinancial assets        and liabilities except those that are recognized or disclosed at fair value in the        financial statements on at least an annual basis until January 1, 2009. The Company        will adopt SFAS No. 157 except as it applies to nonfinancial assets and liabilities as        noted in FSP 157-2 effective January 1, 2008. The Company does not expect the partial        adoption of SFAS No. 157 to have a significant impact on its consolidated financial        statements. The Company has not determined the effect that the adoption of SFAS        No. 157, as it relates to nonfinancial assets and liabilities, will have on its        consolidated financial statements.

 

In        December 2007, the FASB issued SFAS No. 141 (R),*Business Combinations*, which establishes the        principles and requirements for how an acquirer: (1) recognizes and measures in its        financial statements the identifiable assets acquired, the liabilities assumed, and any        noncontrolling interest in the acquiree; (2) recognizes and measures the goodwill        acquired in the business combination or a gain from a bargain purchase; and        (3) determines what information to disclose to enable users of the financial        statements to evaluate the nature and financial effects of the business combination. SFAS        No. 141(R) replaces SFAS No. 141,*Business        Combinations*. SFAS No. 141(R) applies prospectively to        business combinations for which the acquisition date is on or after the beginning of the        first annual reporting period beginning on or after December 15, 2008, and will only        have an impact on transactions recorded by the Company beginning January 1,        2009.

 

**Reclassifications**

 

Certain        amounts in 2006 were reclassified to conform to the presentation in 2007. These        reclassifications had no effect on the Company’s previously reported consolidated        financial position or results of operations.

 

F-11

 

----

**LIFETIME BRANDS, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

 

**NOTE        B — INVESTMENT IN EKCO AND BUSINESS ACQUISITIONS**

 

The        following acquisitions were accounted for by the Company under the purchase method of        accounting in accordance with SFAS No. 141,*Business        Combinations*. Accordingly, the results of operations of the        acquisitions have been included in the Company’s consolidated statements of income        from the respective dates of the acquisitions. The fair value of identifiable intangible        assets has been determined based on standard valuation techniques. The cash purchase prices        were funded by borrowings under the Company’s Credit Facility. The acquisitions in        2007 were not deemed material; accordingly, summary*pro        forma*financial information has not been presented.

 

**Ekco**

 

On        December 19, 2007 the Company acquired a 29.99% interest in Ekco S.A.B.        (“Ekco”) for $23.0 million, consisting of cash paid at closing of $22.3 million        and acquisition related costs of $619,000. Ekco is one of Mexico’s leading housewares        companies and manufactures and sells cookware and distributes bakeware, kitchenware,        cutlery, dinnerware, flatware and related items. Ekco markets its products in Mexico under        the Ekco®, Vasconia®, Regal®, H. Steele®, Presto® and Thermos®        brands. Shares of Ekco’s capital stock are traded on the Bolsa Mexicana de Valores,        S.A. de C.V., (the Mexican Stock Exchange), under the symbol BMV: EKCO. The agreement        provides the Company the right, for a period of 30 days beginning on the first anniversary        of the closing date, to require Ekco to acquire its 29.99% interest for an amount equal to        the original purchase price. The agreement also provides the Company with the option, after        the second year following the closing date, for a period of three years, to (i) require        Ekco to purchase the Company’s 29.99% interest for an amount equal to the fair market        value at the time as determined by an independent appraisal, or (ii) require the primary        shareholders who control a majority of the outstanding shares of Ekco, to tender their        shares in the event the Company makes a public tender offer for 100% of the outstanding        shares of Ekco not owned by the Company. The Company has accounted for its investment in        Ekco using the equity method of accounting. The allocation of the purchase price of Ekco        has not been finalized at December 31, 2007 and is pending the completion of a third party        valuation. The effect, if any, of the step-up in value of the Company’s proportionate        share of Ekco’s tangible and identifiable intangible assets that may result from the        third party valuation is not likely to be material to the Company’s consolidated        financial statements for the year ended December 31, 2007. Due to the timing of the        acquisition, the Company’s proportionate share of Ekco’s results of operations        for the year ended December 31, 2007 was not material to the Company’s 2007        consolidated financial statements.

 

**Gorham®**

 

On July        20, 2007 the Company acquired certain assets from Lenox Group Inc. (“Lenox) for $8.3        million, consisting of cash paid at closing of $8.2 million and acquisition related costs        of $119,000. As part of the transaction the Company also entered into a long-term licensing        agreement with Lenox under which it exclusively licensed the Gorham®, Kirk Stieff®,        WhitingTM and DurginTM trademarks in connection with the manufacture, sale,        distribution and marketing of sterling silver products.

 

The        following summarizes the estimated fair values of the assets acquired at the date of        acquisition (in thousands):

 

 

 

| Inventory              | $      | 7,289 |
|------------------------|--------|-------|
| Property and equipment |   | 965   |
| Total assets acquired  | $      | 8,254 |

 

 

 

F-12

 

----

****LIFETIME BRANDS, INC.****

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

         

         

**NOTE B — INVESTMENT IN EKCO AND BUSINESS ACQUISITIONS        (continued)**

 

**Pomerantz® and Design for Living®**

 

On April 25, 2007, in two separate, but related transactions, the Company        acquired the Pomerantz® brand and certain related assets from JP Products, LLC and the        Design for Living® brand and certain related assets from Design for Living, LLC;        designers, importers and distributors of pantryware products. The combined purchase was        $1.9 million, consisting of cash paid at closing of $1.7 million and acquisition related        costs of $199,000.

 

The following summarizes the estimated fair values of the assets acquired at        the date of acquisition (in thousands):

         

 

| Inventory             | $      |  975 |
|-----------------------|--------|-----------|
| Other intangibles     |   | 584       |
| Goodwill              |   | 318       |
| Total assets acquired | $      | 1,877     |

 

Other intangibles consist of patents that have an estimated life of 17        years.

 

**Syratech**

 

In April 2006, the Company acquired the business and certain assets of        Syratech Corporation (“Syratech”), a designer, importer, manufacturer and        distributor of a diverse portfolio of tabletop, home décor and picture frame        products. The assets acquired included Syratech’s registered trademarks, including        Wallace Silversmiths®, Towle Silversmiths®, International® Silver Company,        Melannco® and Elements® and a license to market Cuisinart® branded tabletop        products. The total purchase price was $52.1 million, of which $7.0 million was paid in the        Company’s common stock.

 

During the quarter ended March 31, 2007, the Company finalized the valuation        of the identifiable intangible assets and goodwill related to Syratech and recorded an        increase in goodwill of $6.2 million and a corresponding decrease of $6.2 million in        intangible assets. See Note C.

 

**NOTE C — GOODWILL AND INTANGIBLE ASSETS**

 

**Goodwill**

 

Goodwill, all of which is included as an asset in the wholesale segment,        consists of the following (in thousands):

 

| **Balance December 31, 2006**             | $      | 20,951 |
|-------------------------------------------|--------|--------|
| Syratech                                  |   | 6,163  |
| Pomerantz® and Design for Living® |   | 318    |
| **Balance December 31, 2007**             | $      | 27,432 |

 

The Company completed its annual goodwill impairment test as of December 31,        2007. The test primarily involved the assessment of the fair market value of the Company as        a single reporting unit. No impairment of goodwill was indicated. All existing and future        goodwill is subject to a goodwill impairment test on at least an annual basis or more        frequently if indicators of impairment exist. There can be no assurance that future        goodwill impairment tests will not result in a charge to income.

 

All goodwill is expected to be deductible for tax purposes since the        acquisitions were asset purchases.

 

F-13

 

----

**LIFETIME BRANDS, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

 

**NOTE        C — GOODWILL AND INTANGIBLE ASSETS (continued)**

 

**Intangibles assets**

 

Intangible assets consist of the following (in thousands):

 

 

 

|                                |   | **Year Ended December 31,** |
|-------------------------------------|--------|-----------------------------|
|                                |   | **2007**                    |   | **2006** |
|                                |   | **Gross**                   |   | **Accumulated Amortization** |   | **Net** |   | **Gross** |   | **Accumulated Amortization** |   | **Net** |
| Indefinite-lived intangible assets: |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade names                         |   | $                           | 21,443 |   | $ | ― |   | $ | 21,443 |   | $ | 27,979 |   | $ | ― |   | $ | 27,979 |
|                                |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Finite-lived intangible assets:     |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Licenses                            |   |                        | 15,847 |   |   | 4,490 |   |   | 11,357 |   |   | 15,885 |   |   | 3,872 |   |   | 12,013 |
| Trade names                         |   |                        | 2,477 |   |   | 1,020 |   |   | 1,457 |   |   | 2,477 |   |   | 937 |   |   | 1,540 |
| Customer relationships              |   |                        | 886 |   |   | 451 |   |   | 435 |   |   | 460 |   |   | 261 |   |   | 199 |
| Designs                             |   |                        | 460 |   |   | 330 |   |   | 130 |   |   | 949 |   |   | 289 |   |   | 660 |
| Patents                             |   |                        | 584 |   |   | 23 |   |   | 561 |   |   | ― |   |   | ― |   |   | ― |
|                                |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                               |   | $                           | 41,697 |   | $ | 6,314 |   | $ | 35,383 |   | $ | 47,750 |   | $ | 5,359 |   | $ | 42,391 |
|                                |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

The        weighted-average amortization periods for the Company’s finite-lived intangible        assets as of December 31, 2007 are as follows:

 

|                   | **Years** |
|------------------------|-----------|
| Trade names            | 30        |
| Licenses               | 33        |
| Designs                | 7         |
| Customer relationships | 4         |
| Patents                | 17        |

 

Estimated amortization expense for each of the five succeeding fiscal years        is as follows (in thousands):

 

| **Year ending December 31** |   |   |
|-----------------------------|---|--------|
| 2008                        | $ | 982    |
| 2009                        |   | 965    |
| 2010                        |   | 840    |
| 2011                        |   | 752    |
| 2012                        |   | 674    |

 

 

Amortization expense for the years ended December 31, 2007, 2006 and 2005        was $915,000, $855,000, and $814,000 respectively.

 

F-14

 

----

**LIFETIME BRANDS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

 

**NOTE D —CREDIT FACILITY**

 

The Company has a $150 million secured credit facility, with an accordion        feature for an additional $50 million, that expires in April 2011 (the “Credit        Facility”). Borrowings under the Credit Facility are secured by all assets of the        Company. Under the terms of the Credit Facility, the Company is required to satisfy certain        financial covenants, including covenants providing limitations on indebtedness, sale of        assets and capital expenditures, a maximum leverage ratio and a minimum interest coverage        ratio. At December 31, 2007, the Company was in compliance with these covenants. Borrowings        under the Credit Facility have different interest rate options that are based either on,        (i) an alternate base rate, (ii) the Libor rate, or (iii) the lender’s cost of funds        rate, plus in each case a margin based on a leverage ratio. At December 31, 2007, the        Company had $2.7 million of open letters of credit and $68.7 million of borrowings        outstanding under its Credit Facility. The availability under the Credit Facility at        December 31, 2007 was $73.6 million. Interest rates on outstanding borrowings at December        31, 2007 ranged from 5.50% to 6.12%. The Company has entered into interest rate swap and        collar agreements (see Note F) with aggregate notional amounts of $55.2 million and $5.0        million, at December 31, 2007 and 2006, respectively. The Company entered into these        agreements to effectively fix the interest rate on a portion of its borrowings under the        Credit Facility. The agreements have maturity dates that exceed one year as the Company        does not intend to repay an equivalent amount of debt within one year. Accordingly, $55.2        million and $5.0 million of debt outstanding under the Credit Facility at December 31, 2007        and 2006, respectively, has been classified as long-term debt in the accompanying        consolidated balance sheets.

 

**NOTE E — CONVERTIBLE NOTES**

 

The Company has outstanding $75 million aggregate principal amount of 4.75%        Convertible Senior Notes due 2011 (the “Notes”). The Notes are convertible into        shares of the Company’s common stock at a conversion price of $28.00 per share,        subject to adjustment in certain events. The Notes bear interest at 4.75%*per annum*, payable semiannually in arrears on        January 15th and July 15th of each year and are unsubordinated except with respect to the        Company’s debt to the extent secured by the Company’s assets. The Notes mature        on July 15, 2011. The Company may not redeem the Notes at any time prior to        maturity.

 

The Notes are convertible at the option of the holder anytime prior to the        close of business on the business day prior to the maturity date. Upon conversion, the        Company may elect to deliver either shares of the Company’s common stock, cash or a        combination of cash and shares of the Company’s common stock in satisfaction of the        Company’s obligations upon conversion of the Notes. At any time prior to the 26th        trading day preceding the maturity date, the Company may irrevocably elect to satisfy in        cash the Company’s conversion obligation with respect to the principal amount of the        Notes to be converted after the date of such election, with any remaining amount to be        satisfied in shares of the Company’s common stock. The election would be in the        Company’s sole discretion without the consent of the holders of the Notes. The        conversion rate of the Notes may be adjusted upon the occurrence of certain events that        would dilute the Company’s common stock. In addition, holders that convert their        Notes in connection with certain fundamental changes, such as a change in control, may be        entitled to a make whole premium in the form of an increase in the conversion        rate.

 

The Company has reserved 2,678,571 shares of common stock for issuance upon        conversion of the Notes. Such shares have been registered and the Notes include a        registration rights agreement that would require the Company to pay liquidating damages to        the holders of the Notes if the Company fails to keep the registration statement        effective.

 

As part of the issuance of the Notes, the Company incurred $3.1 million in        underwriter’s discounts and other offering expenses. The offering costs are being        amortized to interest expense over the term of the Notes. At December 31, 2007 the        unamortized balance of these costs is $2.1 million and is included in other assets in the        consolidated balance sheet.

 

F-15

 

----

**LIFETIME BRANDS, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

 

**NOTE        F – DERIVATIVES**

 

The        Company has entered into interest rate swap agreements with an aggregate notional amount of        $50 million and interest rate collar agreements with an aggregate notional amount of $40.2        million to manage interest rate exposure in connection with its variable interest rate        borrowings. All agreements expire in 2010. Certain interest rate swap agreements with an        aggregate notional amount of $35 million were not designated as hedges under SFAS 133 and        the fair value gains or losses from these swap agreements are recognized currently in        earnings. The effect of recording these interest rate swap agreements at fair value        resulted in an unrealized loss of $358,000 for the year ended December 31, 2007, which is        included in interest expense. An interest rate swap agreement with a notional amount of $15        million and the interest rate collar agreements were designated as cash flow hedges under        SFAS 133. The effective portion of the fair value gains or losses on these agreements is        recorded in other comprehensive income. The effect of recording these agreements at fair        value resulted in an unrealized loss of $373,000 for the year ended December 31, 2007. No        amount of this loss is expected to be reclassified to interest expense in the next twelve        months. The aggregate fair value of the Company’s derivative instruments at December        31, 2007 was a liability of $731,000, which is included in deferred rent and other        long-term liabilities.

 

| **NOTE G — CAPITAL STOCK** |
|----------------------------------|

 

**Public offering**

 

In 2005,        the Company completed a public offering pursuant to which it sold 1,733,000 shares of the        Company’s stock at an offering price of $21.50. The net proceeds of the sale were        $34.4 million.

 

**Cash        dividends**

 

The        Company paid regular quarterly cash dividends of $0.0625 per share on its common stock, or        a total annual cash dividend of $0.25 per share, in 2007, 2006 and 2005. The        Company’s Board of Directors currently intends to maintain a quarterly cash dividend        of $0.0625 per share of common stock for the foreseeable future, however, the Board of        Directors may in its discretion determine to modify or eliminate such dividend at any        time.

 

**Share        repurchase program**

 

The        Board of Directors of the Company has authorized a program to repurchase up to $40.0        million of the Company’s common stock through open market purchases or        privately-negotiated transactions. As of December 31, 2007 the Company had purchased in the        open market and retired a total of 1,362,505 shares of its common stock for a total cost of        $22.7 million under the program.

 

**Preferred stock**

 

The        Company is authorized to issue 100 shares of Series A Preferred Stock and 2,000,000 shares        of Series B Preferred Stock, none of which is outstanding at December 31, 2007.

 

F-16

 

----

**LIFETIME BRANDS, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

 

| **NOTE G — CAPITAL STOCK (continued)** |
|----------------------------------------------|

 

**Long-term incentive plan**

 

The        Company maintains the 2000 Long-Term Incentive Plan (the “Plan”), whereby up to        2,500,000 shares of the Company’s common stock may be subject to outstanding awards        granted to directors, officers, employees, consultants and service providers and affiliates        in the form of stock options or other equity-based awards. The Plan authorizes the Board of        Directors of the Company, or a duly appointed committee thereof, to issue incentive stock        options, non-qualified options, and other stock-based awards. Options that have been        granted under the Plan expire over a range of five to ten years from the date of the grant        and vest over a range of up to five years from the date of grant. As of December 31, 2007,        the shares available for grant under the Plan were 241,231. All stock options granted        through December 31, 2007 under the Plan have exercise prices equal to the market values of        the Company’s stock on the dates of grant.

 

**Stock        options**

 

A        summary of the Company’s stock option activity and related information for the three        years ended December 31, 2007 is as follows:

 

 

|                                       |   | **Options** |   |   | **Weighted-****average                        exercise price** |   | **Weighted-average remaining contractual                        life (years)** |   |   | **Aggregate intrinsic value** |
|--------------------------------------------|--------|-------------|--------|--------|----------------------------------------------------------------|--------|--------------------------------------------------------------------------------|--------|--------|-------------------------------|
| **Options outstanding, December 31, 2004** |   | 694,807     |   | $      | 7.59                                                           |   |                                                                           |   |   |                          |
| Grants                                     |   | 362,000     |   |   | 24.12                                                          |   |                                                                           |   |   |                          |
| Exercises                                  |   | (150,650)   |   |   | 7.00                                                           |   |                                                                           |   |   |                          |
| Cancellations                              |   | (31,000)    |   |   | 8.25                                                           |   |                                                                           |   |   |                          |
| **Options outstanding, December 31, 2005** |   | 875,157     |   |   | 14.51                                                          |   |                                                                           |   |   |                          |
| Grants                                     |   | 695,500     |   |   | 29.96                                                          |   |                                                                           |   |   |                          |
| Exercises                                  |   | (146,157)   |   |   | 6.95                                                           |   |                                                                           |   |   |                          |
| Cancellations                              |   | (13,600)    |   |   | 28.12                                                          |   |                                                                           |   |   |                          |
| **Options outstanding December 31, 2006**  |   | 1,410,900   |   |   | 22.78                                                          |   |                                                                           |   |   |                          |
| Grants                                     |   | 516,500     |   |   | 21.65                                                          |   |                                                                           |   |   |                          |
| Exercises                                  |   | (32,000)    |   |   | 7.64                                                           |   |                                                                           |   |   |                          |
| Cancellations                              |   | (86,500)    |   |   | 23.48                                                          |   |                                                                           |   |   |                          |
| **Options outstanding December 31, 2007**  |   | 1,808,900   |   |   | 22.69                                                          |   | 5.95                                                                           |   | $      | 1,818,000                     |
| **Options exercisable December 31, 2007**  |   | 927,316     |   |   | 20.28                                                          |   | 5.11                                                                           |   | $      | 1,810,000                     |

 

 

 

 

The        aggregate intrinsic value in the table above represents the total pre-tax intrinsic value        that would have been received by the option holders had all option holders exercised their        stock options on December 31, 2007. The intrinsic value is calculated for each in-the-money        stock option as the difference between the closing price of the Company’s common        stock on December 31, 2007 and the exercise price.

 

F-17

 

----

**LIFETIME BRANDS, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

 

**NOTE        G — CAPITAL STOCK (continued)**

 

**Stock        options (continued)**

 

The        total intrinsic value of stock options exercised for the years ended December 31, 2007,        2006 and 2005 was $417,000, $2.7 million and $2.3 million, respectively. The intrinsic        value of a stock option that is exercised is calculated as the difference between the        quoted market price of the Company’s common stock at the date of exercise and the        exercise price of the stock option multiplied by the number of shares exercised.

 

The        Company recognized stock option expense of $2.2 million and $1.2 million for the years        ended December 31, 2007 and 2006, respectively. Total unrecognized compensation cost        related to unvested stock options at December 31, 2007, before the effect of income taxes,        was $7.2 million and is expected to be recognized over a weighted-average period of 3.3        years.

 

The        Company values stock options using the Black-Scholes option valuation model. However, the        Black-Scholes option valuation model, as well as other available models, were developed for        use in estimating the fair value of traded options, which have no vesting restrictions and        are fully transferable. In addition, option valuation models require the input of highly        subjective assumptions including the expected stock price volatility. Because the        Company’s stock options have characteristics significantly different from those of        traded options, and because changes in the subjective input assumptions can materially        affect the fair value estimate, in management’s opinion, the existing models do not        provide a reliable measure of the fair value of its stock options.

 

The        weighted-average per share grant date fair value of stock options granted during the years        ended December 31, 2007, 2006 and 2005 was $8.26, $12.11 and $7.45,        respectively.

 

The fair        value for these stock options was estimated at the date of grant using the following        weighted-average assumptions:

 

|                    |   |  | **2007** |        | **2006** |       | **2005** |
|-------------------------|--------|--|----------|--------|----------|-------|----------|
| Volatility              |   |  | 40       | %      |          | 41    | %        |  | 42 | % |
| Expected term (years)   |   |  | 5.2      |   |          | 5.2   |     |  | 3.1 |   |
| Risk-free interest rate |   |  | 4.56     | %      |          | 5.02  | %        |  | 4.26 | % |
| Expected dividend yield |   |  | 1.18     | %      |          | 0.834 | %        |  | 1.04 | % |

 

 

F-18

 

----

**LIFETIME BRANDS, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

 

**NOTE        G— CAPITAL STOCK (continued)**

 

**Stock        options (continued)**

 

Prior to        the adoption of SFAS No. 123(R), *Share-Based Payment*, as amended, the Company        accounted for stock options under the recognition and measurement principles of APB Opinion        No. 25, *Accounting for Stock Issued to Employees*, and related interpretations.        Accordingly, for the periods prior to the adoption of SFAS No. 123(R), no stock-based        employee compensation cost was reflected in net income as all stock options granted under        the plan had exercise prices equal to the market values of the underlying common stock of        the Company on the dates of grant. *Pro forma* information regarding the impact of        stock-based compensation on net income and income per share for prior periods is required        by SFAS No. 123(R).

 

The        following table illustrates what would have been the effect on net income and net income        per common share if the Company had accounted for its stock options using the fair value        method during the year ended December 31, 2005 (in thousands-except per share        data):

 

| **Net income as reported**                                                                                                                                                         |   | $      | 14,109 |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Deduct: Total stock option employee compensation expense                    determined under fair value based method for all awards, net of related tax                    effects |   |   | (2,109 | )      |
| **Pro forma net income**                                                                                                                                                           |   | $      | 12,000 |   |
| **Income per common share:**                                                                                                                                                       |   |   |   |   |
| Basic income per common share – as reported                                                                                                                                  |   | $      | 1.25   |   |
| Basic income per common share – pro forma                                                                                                                                    |   | $      | 1.06   |   |
|                                                                                                                                                                               |   |   |   |   |
| Diluted income per common share – as reported                                                                                                                                |   | $      | 1.23   |   |
| Diluted income per common share – pro forma                                                                                                                                  |   | $      | 1.04   |   |

 

 

 

**Restricted stock**

 

In 2007,        2006 and 2005, the Company issued 7,280, 5,254 and 2,950 restricted shares, respectively,        of the Company’s common stock to its Board of Directors representing payment of a        portion of their annual retainer. The total fair value of the restricted shares, based on        the number of shares granted and the quoted market price of the Company’s common        stock on the date of grant, was $150,000, $115,000 and $50,000, respectively. The shares        granted in 2007 vest one year from the date of grant. The shares granted in 2006 and 2005,        vested in quarterly installments over a period of one year.

 

F-19

 

----

**LIFETIME BRANDS, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

 

**NOTE        H— INCOME PER COMMON SHARE**

 

Basic        income per common share has been computed by dividing net income by the weighted-average        number of shares of the Company’s common stock outstanding. Diluted income per common        share adjusts net income and basic income per common share for the effect of all        potentially dilutive shares of the Company’s common stock. The calculations of basic        and diluted income per common share for the years ended December 31, 2007, 2006 and 2005        are as follows:

 

 

|                                                                            | **2007**                                  |    | **2006** |   | **2005** |
|---------------------------------------------------------------------------------|-------------------------------------------|---------|----------|--------|----------|
|                                                                            | (in thousands - except per share amounts) |
| **Net income- Basic**                                                           | $                                         | 8,892   |     | $      | 15,532   |   | $ | 14,109 |
| Interest expense 4.75% Convertible Notes, net of                        tax     |                                      | ― |     |   | 1,312    |   |   | ― |
| **Net income- Diluted**                                                         | $                                         | 8,892   |     | $      | 16,844   |   | $ | 14,109 |
|                                                                            |                                      |    |     |   |     |   |   |   |
| **Weighted- average shares outstanding –                        Basic**   |                                      | 12,969  |     |   | 13,171   |   |   | 11,283 |
| Effect of dilutive securities:                                                  |                                      |    |     |   |     |   |   |   |
| Stock options                                                                   |                                      | 130     |     |   | 183      |   |   | 223 |
| 4.75% Convertible Notes                                                         |                                      | ― |     |   | 1,362    |   |   | ― |
| **Weighted- average shares outstanding –                        Diluted** |                                      | 13,099  |     |   | 14,716   |   |   | 11,506 |
|                                                                            |                                      |    |     |   |     |   |   |   |
| **Basic income per common share**                                               | $                                         | 0.69    |     | $      | 1.18     |   | $ | 1.25 |
| **Diluted income per common share**                                             | $                                         | 0.68    |     | $      | 1.14     |   | $ | 1.23 |

 

 

The        computation of diluted income per common share for the years ended December 31, 2007, 2006        and 2005 excludes options to purchase 1,544,000, 974,000 and 350,000 shares of the        Company’s common stock, respectively, due to their antidilutive effect. The        computation of diluted income per common share for the year ended December 31, 2007 also        excludes 2,678,571 shares of the Company’s common stock issuable upon the conversion        of the Company’s 4.75% Convertible Notes and related interest expense, due to its        antidilutive effect.

 

F-20

 

----

**LIFETIME BRANDS, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

 

**NOTE        I— INCOME TAXES**

 

The        provision for income taxes consists of (in thousands):

 

 

|                 | **Year Ended December 31,** |          |
|----------------------|-----------------------------|----------|
|                 |                        | **2007** |   | **2006** |   | **2005** |   |
| Current:             |                        |     |   |   |   |   |   |   |   |
| Federal              | $                           | 3,891    |   | $ | 7,442 |   | $ | 9,755 |   |
| State and local      |                        | 768      |   |   | 1,860 |   |   | 1,618 |   |
| Deferred             |                        | 2,771    |   |   | 421 |   |   | (2,726 | ) |
| Income tax provision | $                           | 7,430    |   | $ | 9,723 |   | $ | 8,647 |   |

 

 

Deferred        income taxes reflect the net tax effects of temporary differences between the carrying        amount of assets and liabilities for financial reporting purposes and the amounts used for        income tax purposes. Significant components of the Company’s net deferred income tax        asset (liability) are as follows (in thousands):

 

|                            |   | **December 31,** |        |
|---------------------------------|--------|------------------|--------|
|                            |   | **2007**         |   | **2006** |  |
| Deferred income tax assets:     |   |             |   |   |   |   |  |
| Merchandise inventories         |   | $                | 4,347  |   | $ | 3,740 |  |
| Accounts receivable allowances  |   |             | 1,603  |   |   | 3,062 |  |
| Deferred rent expense           |   |             | 1,055  |   |   | 753 |  |
| Accrued bonuses                 |   |             | 469    |   |   | 732 |  |
| Stock options                   |   |             | 390    |   |   | 232 |  |
| Other                           |   |             | 61     |   |   | ― |  |
| Total deferred income tax asset |   | $                | 7,925  |   | $ | 8,519 |  |
|                            |   |             |   |   |   |   |  |
| Deferred income tax liability:  |   |             |   |   |   |   |  |
| Depreciation and amortization   |   | $                | (8,211 | ) | $ | (6,204 | ) |

 

The        provision for income taxes differs from the amounts computed by applying the applicable        federal statutory rates as follows:

 

|                                                           | **Year Ended December 31,** |   |
|----------------------------------------------------------------|-----------------------------|--------|
|                                                           | **2007**                    |   | **2006** |   | **2005** |   |
| Provision for Federal income taxes atthe statutory rate        | 35.0                        | %      | 35.0 | % | 35.0 | % |
| Increases (decreases):                                         |                        |   |   |   |   |   |
| State and local income taxes, net ofFederal income tax benefit | 5.6                         |   | 4.8 |   | 4.6 |   |
| Non-deductible stock options                                   | 2.9                         |   | ― |   | ― |   |
| Other                                                          | 2.0                         |   | (1.3 | ) | (1.6 | ) |
| Provision for income taxes                                     | 45.5                        | %      | 38.5 | % | 38.0 | % |

 

 

F-21

 

----

**LIFETIME BRANDS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

 

**NOTE I— INCOME TAXES (continued)**

 

The Company has analyzed filing positions in all of the federal and state        jurisdictions where it is required to file income tax returns, as well as all open tax        years in these jurisdictions. As a result of this review, the Company determined that        no adjustments to the estimated value of its tax positions were necessary upon adoption of        FIN No. 48. Accordingly, no charge to retained earnings was required. The estimated value        of the Company’s tax positions at December 31, 2007 is a liability of $1.4 million        (including interest of $308,000) and consisted of the following (in thousands):

 

| Balance as of January 1, 2007                   | $      | 1,704  |
|-------------------------------------------------|--------|-------------|
| Increases – tax positions in prior years  |   | 9      |
| Decreases – tax positions in prior years  |   | (312)       |
| Increases – tax positions in current year |   | 36     |
| Balance as of December 31, 2007                 | $      | 1,437  |

 

The liability for these tax positions is included in income taxes payable.        If the Company’s tax positions are sustained by the taxing authorities in favor of        the Company, the Company’s income tax provision would be reduced by $1.4 million. The        Company continues on a quarterly basis to evaluate FIN No. 48 tax positions and revises its        estimates accordingly. The Company recorded a net reduction to the estimates of        approximately $267,000 during the year ended December 31, 2007.

 

If certain settlements are effected in accordance with the Company’s        expectations, the estimated value of the Company’s tax positions could decrease by        approximately $1.3 million within the next twelve months.

 

The Company has identified federal, New York and New Jersey as        “major” tax jurisdictions. The periods subject to examination for the        Company’s federal return are years 2002 through 2006. The periods subject to        examination for the Company’s New York return are years 2003 through 2006. The        periods subject to examination for the Company’s New Jersey return are years 2001        through 2006.

 

The Company’s policy for recording interest and penalties is to record        such items as a component of income taxes. Interest and penalties were not material to the        Company’s financial position, results of operations or cash flows as of and for each        of the years ended December 31, 2007 and 2006.

 

**NOTE J – BUSINESS SEGMENTS**

 

**Segment information**

 

The Company operates in two reportable business segments —        wholesale and direct-to-consumer. The wholesale segment is the Company’s primary        business that designs, markets and distributes household products to retailers and        distributors. The direct-to-consumer segment is comprised of the Company’s business        that sells household products directly to the consumer through Company-operated factory and        outlet stores, and catalog and Internet operations. At December 31, 2007, the Company        operated 34 stores under the Farberware® brand name and 44 factory stores under the        Pfaltzgraff® brand name. As described in Note M, in December 2007, management of the        Company commenced a plan to close 27 underperforming Farberware® outlet stores and 3        underperforming Pfaltzgraff® factory stores. The Company has segmented its operations        in a manner that reflects how management reviews and evaluates the results of its        operations. While both segments distribute similar products, the segments are distinct due        to their different types of customers and the different methods used to sell, market and        distribute the products.

 

F-22

 

----

**LIFETIME BRANDS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

 

**NOTE J – BUSINESS SEGMENTS (continued)**

 

**Segment information (continued)**

 

Management evaluates the performance of the wholesale and direct-to-consumer        segments based on Net sales and Income (loss) from operations. Such measures give        recognition to specifically identifiable operating costs such as cost of sales,        distribution expenses and selling, general and administrative expenses. Certain general and        administrative expenses such as executive salaries and benefits, stock compensation,        director fees and accounting, legal and consulting fees are not allocated to the specific        segments and are reflected as unallocated corporate expenses. Assets in each segment        consist of assets used in its operations, acquired intangible assets and goodwill. Assets        in the unallocated corporate category consist of cash and tax related assets that are not        allocated to the segments.

 

|                                |   | **Year Ended December 31,** |    |
|-------------------------------------|--------|-----------------------------|---------|
|                                |   | **2007**                    |    |   |   | **2006** |   |   |   | **2005** |   |
|                                |   | **(in thousands)**          |    |
| **Net sales:**                      |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |
| Wholesale                           |   | $                           | 416,890 |   |   |   | $ | 374,081 |   |   |   | $ | 241,618 |   |
| Direct-to-consumer                  |   |                        | 76,835  |   |   |   |   | 83,319 |   |   |   |   | 66,279 |   |
| Total net sales                     |   | $                           | 493,725 |   |   |   | $ | 457,400 |   |   |   | $ | 307,897 |   |
|                                |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |
| **Income (loss) from operations:**  |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |
| Wholesale                           |   | $                           | 42,968  |   |   |   | $ | 46,824 |   |   |   | $ | 33,150 |   |
| Direct-to-consumer (1)              |   |                        | (10,010 | ) |   |   |   | (8,129 | ) |   |   |   | (444 | ) |
| Unallocated corporate expenses      |   |                        | (12,174 | ) |   |   |   | (8,895 | ) |   |   |   | (7,534 | ) |
| Total income from operations        |   | $                           | 20,784  |   |   |   | $ | 29,800 |   |   |   | $ | 25,172 |   |
|                                |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |
| **Depreciation and amortization:**  |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |
| Wholesale                           |   | $                           | 8,178   |   |   |   | $ | 7,078 |   |   |   | $ | 4,558 |   |
| Direct-to-consumer                  |   |                        | 1,481   |   |   |   |   | 1,302 |   |   |   |   | 1,083 |   |
| Total depreciation and amortization |   | $                           | 9,659   |   |   |   | $ | 8,380 |   |   |   | $ | 5,641 |   |
|                                |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |
| **Assets:**                         |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |
| Wholesale                           |   | $                           | 337,156 |   |   |   | $ | 310,260 |   |   |   | $ | 190,967 |   |
| Direct-to-consumer                  |   |                        | 22,163  |   |   |   |   | 24,136 |   |   |   |   | 23,191 |   |
| Unallocated/ corporate/other        |   |                        | 12,096  |   |   |   |   | 8,668 |   |   |   |   | 8,490 |   |
| Total assets                        |   | $                           | 371,415 |   |   |   | $ | 343,064 |   |   |   | $ | 222,648 |   |
|                                |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |
| **Capital expenditures:**           |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |
| Wholesale                           |   | $                           | 17,412  |   |   |   | $ | 17,719 |   |   |   | $ | 3,555 |   |
| Direct-to-consumer                  |   |                        | 1,611   |   |   |   |   | 3,425 |   |   |   |   | 1,226 |   |
| Total capital expenditures          |   | $                           | 19,023  |   |   |   | $ | 21,144 |   |   |   | $ | 4,781 |   |

 

 

Note:

 

| (1) | In 2007, loss from operations for the Direct-to-consumer                        segment includes $1.9 million of asset impairment and restructuring                        expenses. See Note M. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

F-23

 

----

**LIFETIME BRANDS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

 

**NOTE J – BUSINESS SEGMENTS (continued)**

 

**Product category information – net sales**

 

The following table sets forth the net sales by the major product categories        included within the Company’s wholesale operating segment:

         

|              |   | **Year ended December 31,** |
|-------------------|--------|-----------------------------|
|              |   | **2007**                    |   | **2006** |   | **2005** |
|              |   |                        | (in thousands) |
| Food Preparation  |   | $                           | 247,336 |   | $ | 239,200 |   | $ | 210,551 |
| Tabletop          |   |                        | 97,995 |   |   | 88,466 |   |   | 29,162 |
| Home Décor |   |                        | 68,856 |   |   | 44,040 |   |   | ― |
| Other             |   |                        | 2,703 |   |   | 2,375 |   |   | 1,905 |
| Total net sales   |   | $                           | 416,890 |   | $ | 374,081 |   | $ | 241,618 |

 

 

**NOTE K— COMMITMENTS AND CONTINGENCIES**

 

**Operating leases**

 

The Company has lease agreements for its corporate headquarters,        distribution centers, direct-to-consumer offices, showrooms, sales offices and factory and        outlet stores that expire through 2022. These leases generally provide for, among other        things, annual base rent escalations, and additional rent for real estate taxes and other        costs. Leases for certain factory and outlet stores require rent to be paid based upon a        percentage of monthly gross sales.

 

In January 2008, the Company entered into a 12-year lease agreement for        69,000 square feet of office, showroom and warehouse space located in Medford,        Massachusetts. The lease includes a renewal option for two additional five-year periods.        The location will serve as the headquarters for the Syratech business operations. Annual        rent is $991,000 and will increase over the initial term of the lease to $1.3 million. The        Company expects to take occupancy in October 2008. The new office space will replace        118,000 square feet of office space that the Company leases in the Boston, Massachusetts        area.

 

In June 2007, the Company entered into a lease agreement for 753,000 square        feet of warehouse and distribution space in Fontana, California. The Company began        occupying the space in December 2007, when fully operational in the third quarter of 2008,        the facility will serve as the Company’s main West Coast distribution center. The        term of the lease is 10-years and annual rent is $3.3 million and will increase over the        term of the lease to $4.5 million. The lease contains two renewal options for five years        each.

 

Future minimum payments under non-cancelable operating leases are as follows        (in thousands):

         

 

| **Year ending December 31** |   |    |
|-----------------------------|--------|---------|
|                        |   |    |
| 2008                        | $      | 20,955  |
| 2009                        |   | 17,015  |
| 2010                        |   | 14,144  |
| 2011                        |   | 12,248  |
| 2012                        |   | 12,182  |
| Thereafter                  |   | 73,096  |
|                        | $      | 149,640 |

 

 

F-24

 

----

**LIFETIME BRANDS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

 

**NOTE K— COMMITMENTS AND CONTINGENCIES (continued)**

 

**Operating leases (continued)**

 

During the years ended December 31, 2006 and 2005, the Company had an        agreement with Meyer Corporation whereby Meyer Corporation occupied 30% of the space in        each of the Company’s Farberware® outlet stores and was responsible for        merchandising and stocking Farberware® cookware products in these stores. Pursuant to        the agreement Meyer Corporation received all revenue from the sale of the Farberware®        cookware in the Company’s Farberware® outlet stores and in turn reimbursed the        Company for 30% of the operating expenses of the stores, including rent. The agreement was        terminated in June 2006. During the years ended December 31, 2006 and 2005, Meyer        Corporation reimbursed the Company $2.0 million and $4.2 million, respectively.

 

Rental and related expenses under operating leases were $18.3 million, $16.5        million and $13.0 million for the years ended December 31, 2007, 2006 and 2005,        respectively. The amounts for 2006 and 2005 are prior to the Meyer reimbursements described        above.

 

**Capital leases**

 

The Company has entered into various capital lease arrangements for the        leasing of equipment that is primarily utilized in its distribution centers. These leases        expire through 2011 and the future minimum lease payments due under the leases are as        follows (in thousands):

         

| **Year ending December 31**             |   |   |   |
|-----------------------------------------|--------|--------|--------|
| 2008                                    |   | $      | 413    |   |
| 2009                                    |   |   | 251    |   |
| 2010                                    |   |   | 161    |   |
| 2011                                    |   |   | 84     |   |
| Total minimum lease payments            |   |   | 909    |   |
| Less: amounts representing interest     |   |   | (82    | ) |
| Present value of minimum lease payments |   | $      | 827    |   |

 

 

**Royalties**

 

The Company has license agreements that require payments of royalties on        sales of licensed products, which expire through 2023. Future minimum royalties payable        under these agreements are as follows (in thousands):

 

 

| ****Year ending December                        31**** |   |        |
|--------------------------------------------------------|--------|-------------|
| 2008                                                   | $      |  9,591 |
| 2009                                                   |   | 10,758      |
| 2010                                                   |   | 1,125       |
| 2011                                                   |   | 1,030       |
| 2012                                                   |   | 210         |
| Thereafter                                             |   | 2,164       |
|                                                   | $      | 24,878      |

 

 

F-25

 

----

**LIFETIME BRANDS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

 

**NOTE K— COMMITMENTS AND CONTINGENCIES (continued)**

 

**Legal proceedings**

 

The Company is a defendant in various lawsuits arising in the ordinary        course of its business. Management does not expect the outcome of any of these matters,        individually or collectively, to have a material adverse effect on the Company’s        financial condition.

 

In addition to the matters referred to in the foregoing paragraph, in April        2007, a complaint was filed against the Company in the United States District Court for the        Eastern District of Pennsylvania, in which Plaintiff alleges that the Company violated the        Fair and Accurate Credit Transaction Act of 2003. The Company is in the process of        negotiating a settlement with the Plaintiff which will be subject to final court approval.        The proposed settlement is expected to be immaterial to the Company’s consolidated        financial statements.

 

**NOTE L— RETIREMENT PLANS**

 

**401(k) plan**

 

The Company maintains a defined contribution retirement plan for eligible        employees under Section 401(k) of the Internal Revenue Code. Participants can make        voluntary contributions up to a maximum of 15% of their respective salaries. The Company        matches 50% of employee contributions up to 4% of an employee’s eligible        compensation. The Company made matching contributions to the 401(k) plan of $778,000,        $809,000 and $372,000 in 2007, 2006 and 2005, respectively.

 

**Retirement benefit obligations**

 

As part of the acquisition of the business and certain assets of Syratech in        April 2006, the Company assumed certain obligations for retirement benefits to be payable        to certain former executives of Syratech. The obligations under these agreements are        unfunded. At December 31, 2007 and 2006, the total unfunded retirement benefit obligation        was $3.0 million and $2.9 million, respectively, and is included in accrued expenses, and        deferred rent and other long-term liabilities. During the years ended December 31, 2007 and        2006, the Company paid retirement benefits related to these obligations of $148,000. The        Company expects to pay a total of $148,000 in retirement benefits related to these        obligations during the year ending December 31, 2008.

 

**NOTE M— OTHER**

 

**Inventory**

 

The components of inventory are as follows:

 

|            |   | **December 31,** |    | **December 31,** |
|-----------------|--------|------------------|---------|------------------|
|            |   | **2007**         |    | **2006**         |
|            |   | (in thousands)   |
|            |   |             |    |             |   |   |
| Finished goods  |   | $                | 139,042 |             | $ | 151,480 |
| Work in process |   |             | 2,412   |             |   | 1,592 |
| Raw materials   |   |             | 2,230   |             |   | 2,278 |
| **Total**       |   | $                | 143,684 |             | $ | 155,350 |

 

 

F-26

 

----

**LIFETIME BRANDS, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

 

**NOTE        M— OTHER (continued)**

 

**Store        closings**

 

In        December 2007, management of the Company commenced a plan to close 27 underperforming        Farberware® outlet stores and 3 underperforming Pfaltzgraff® factory stores (the        “Plan”). The store closures began in December 2007 and are expected to be        completed by the end of the first quarter of 2008. In connection with the store closings,        the Company expects to incur certain restructuring related costs for stay bonuses,        severance, store lease obligations, and other incremental costs. During the year ended        December 31, 2007, the Company recognized $289,000 of such costs, consisting primarily of        fees paid to consultants who are assisting the Company with the Plan, which are included in        asset impairment and restructuring expenses.

 

Furthermore, due to the change in circumstances with respect to the stores        that will be closed, the Company reviewed the related fixed assets of these stores for        impairment and determined that the net book value of the fixed assets would not be        recoverable. Accordingly, the Company has recorded an impairment charge of $1.6 million at        December 31, 2007 for these fixed assets which is included in asset impairment and        restructuring expenses.

 

**Property and equipment**

 

Property        and equipment consist of (in thousands):

 

|                                            |   | **December 31,** |
|-------------------------------------------------|--------|------------------|
|                                            |   | **2007**         |   | **2006** |
|                                            |   |             |   |   |   |   |
| Machinery, furniture and equipment              |   | $                | 63,223 |   | $ | 53,667 |
| Leasehold improvements                          |   |             | 24,878 |   |   | 3,683 |
| Building and improvements                       |   |             | 1,708 |   |   | 7,300 |
| Construction in progress                        |   |             | 176 |   |   | 9,826 |
| Land                                            |   |             | 115 |   |   | 947 |
|                                            |   |             | 90,100 |   |   | 75,423 |
| Less: accumulated depreciation and amortization |   |             | 35,768 |   |   | 32,701 |
|                                            |   | $                | 54,332 |   | $ | 42,722 |

 

 

Depreciation and amortization expense on property and equipment for the        years ended December 31, 2007, 2006 and 2005 was $8.7 million, $7.5 million and $4.8        million, respectively.

 

Included        in machinery, furniture and equipment and accumulated depreciation at December 31, 2007 are        $2.1 million and $1.2 million, respectively, related to assets recorded under capital        leases. Included in machinery, furniture and equipment and accumulated depreciation at        December 31, 2006 are $2.1 million and $911,000, respectively, related to assets recorded        under capital leases.

 

In        November 2007, the Company sold its former corporate headquarters in Westbury, New York,        for net proceeds of $8.8 million. The Company recognized a gain of $3.7 million on the sale        which is included in other income, net.

 

F-27

 

----

**LIFETIME BRANDS, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007**

 

**NOTE        M— OTHER (continued)**

 

**Accrued Expenses**

 

Accrued        expenses consist of (in thousands):

 

|                                                                           | **December 31,** |
|--------------------------------------------------------------------------------|------------------|
|                                                                           | **2007**         |   | **2006** |
| Accrued vendor invoices                                                        | $                | 6,572 |   | $ | 10,815 |
| Accrued salaries, vacation and temporary labor                        billings |             | 3,517 |   |   | 3,360 |
| Officer and employee bonuses                                                   |             | 3,098 |   |   | 3,287 |
| Accrued customer allowances and rebates                                        |             | 3,339 |   |   | 4,835 |
| Accrued royalties                                                              |             | 2,387 |   |   | 4,743 |
| Accrued interest                                                               |             | 2,062 |   |   | 1,892 |
| Accrued contract settlement                                                    |             | 1,612 |   |   | ― |
| Accrued freight                                                                |             | 992 |   |   | 2,939 |
| Dividends payable                                                              |             | 748 |   |   | 843 |
| Commissions                                                                    |             | 686 |   |   | 1,600 |
| Other                                                                          |             | 6,491 |   |   | 11,429 |
|                                                                           | $                | 31,504 |   | $ | 45,743 |

 

 

**Supplemental cash flow information**

 

|                                                                           | **Year Ended December 31,** |
|--------------------------------------------------------------------------------|-----------------------------|
|                                                                           | **2007**                    |   | **2006** |   | **2005** |
|                                                                           | (in thousands)              |
| **Supplemental disclosure of cash flow                    information:**       |                        |   |   |   |   |   |   |   |
| Cash paid for interest                                                         | $                           | 6,167 |   | $ | 2,500 |   | $ | 2,400 |
| Cash paid for taxes                                                            |                        | 6,392 |   |   | 10,994 |   |   | 6,800 |
| **Non-cash investing activities:**                                             |                        |   |   |   |   |   |   |   |
| Common stock issued in connection with Syratech                    acquisition | $                           | 133 |   | $ | 6,821 |   | $ | ― |
| Capitalized tenant improvement allowances                                      |                        | 7,039 |   |   | ― |   |   | ― |
| Equipment acquired under capital lease obligations                             |                        | 34 |   |   | 521 |   |   | 317 |

 

 

F-28

 

----

 

 

 

**LIFETIME BRANDS, INC.**

**SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS**

**(in        thousands)**

 

 

| **COL. A**                       |   |        | **COL. B**                                                                                                        |   |   | **COL. C**                                  |   |   | **COL. D**                |   |   | **COL. E**                   |
|----------------------------------|--------|--------|-------------------------------------------------------------------------------------------------------------------|--------|---|---------------------------------------------|--------|---|---------------------------|--------|---|------------------------------|
| **Description**                  |   |        | **Balance at beginning of period**                                                                                |   |   | **Additions charged to costs and expenses** |   |   | **Deductions (describe)** |   |   | **Balance at end of period** |
|                             |   |        |                                                                                                              |   |   |                                        |   |   |                      |   |   |                         |
| **Year ended December 31, 2007** |   |        |                                                                                                              |   |   |                                        |   |   |                      |   |   |                         |
| Deducted from asset accounts:    |   |        |                                                                                                              |   |   |                                        |   |   |                      |   |   |                         |
| Allowance for doubtful           |   |        |                                                                                                              |   |   |                                        |   |   |                      |   |   |                         |
| accounts                         |   | $      | 395                                                                                                               |   | $ |  (79)                                  |   | $ |  (79)                | (a)    | $ | 395                          |
| Reserve for sales                |   |        |                                                                                                              |   |   |                                        |   |   |                      |   |   |                         |
| returns and allowances           |   |   | 11,702                                                                                                            |   |   | 19,970                                 | (c)    |   | 15,667               | (b)    |   | 16,005                       |
|                             |   | $      | 12,097                                                                                                            |   | $ | 19,891                                 |   | $ | 15,588               |   | $ | 16,400                       |
|                             |   |        |                                                                                                              |   |   |                                        |   |   |                      |   |   |                         |
| **Year ended December 31, 2006** |   |        |                                                                                                              |   |   |                                        |   |   |                      |   |   |                         |
| Deducted from asset accounts:    |   |        |                                                                                                              |   |   |                                        |   |   |                      |   |   |                         |
| Allowance for doubtful           |   |        |                                                                                                              |   |   |                                        |   |   |                      |   |   |                         |
| accounts                         |   | $      | 195                                                                                                               |   | $ | (81)                                        |   | $ |  (281)               | (a)    | $ |  395                    |
| Reserve for sales                |   |        |                                                                                                              |   |   |                                        |   |   |                      |   |   |                         |
| returns and allowances           |   |        |                                       7,718 |   |   | 18,996                                 | (c)    |   | 15,012               | (b)    |   | 11,702                       |
|                             |   | $      | 7,913                                                                                                             |   | $ | 18,915                                 |   | $ | 14,731               |   | $ | 12,097                       |
|                             |   |        |                                                                                                              |   |   |                                        |   |   |                      |   |   |                         |
| **Year ended December 31, 2005** |   |        |                                                                                                              |   |   |                                        |   |   |                      |   |   |                         |
| Deducted from asset accounts:    |   |        |                                                                                                              |   |   |                                        |   |   |                      |   |   |                         |
| Allowance for doubtful           |   |        |                                                                                                              |   |   |                                        |   |   |                      |   |   |                         |
| accounts                         |   | $      | 195                                                                                                               |   | $ | 132                                    |   | $ | 132                  | (a)    | $ | 195                          |
| Reserve for sales                |   |        |                                                                                                              |   |   |                                        |   |   |                      |   |   |                         |
| returns and allowances           |   |        | 3,282                                                                                                             |   |   | 13,662                                 | (c)    |   | 9,226                | (b)    |   | 7,718                        |
|                             |   | $      | 3,477                                                                                                             |   | $ | 13,794                                 |   | $ | 9,358                |   | $ | 7,913                        |
|                             |   |        |                                                                                                              |   |   |                                        |   |   |                      |   |   |                         |

         

         

(a) Uncollectible accounts written off, net of recoveries.

(b) Allowances granted.

(c) Charged to net sales.

 

S-1