ITEM 1. BUSINESS
General
Forward Looking Statements: This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, including statements concerning the Company's future products, results of operations and prospects. These forward-looking statements involve risks and uncertainties, including risks relating to general economic and business conditions, including changes which could affect customer payment practices or consumer spending; industry trends; the loss of major customers; changes in demand for the Company's products; the timing of orders received from customers; cost and availability of raw materials; increases in costs relating to manufacturing and transportation of products; dependence on foreign sources of supply and foreign manufacturing; and the seasonal nature of the business as detailed elsewhere in this Annual Report on Form 10-K and from time to time in the Company's filings with the Securities and Exchange Commission. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties which could cause actual results to differ materially from those described in the forward-looking statements.
Lifetime Hoan Corporation designs, markets and distributes household cutlery, kitchenware, cutting boards and other houseware products. Items are sold under both owned and licensed tradenames. Owned tradenames include Hoffritzr, Tristarr, Old Homesteadr and Hoanr. Licensed tradenames include Farberwarer and various names under licenses from The Pillsbury Company and The Walt Disney Company, Inc. The Farberwarer tradename is used pursuant to a 200 year royalty-free license. The Company, incorporated in Delaware in 1983, is the successor to Lifetime Cutlery Corporation, which was founded in 1945. As used herein, unless the context requires otherwise, the terms "Company" and "Lifetime" means Lifetime Hoan Corporation and its subsidiaries.
Sales growth is stimulated by expanding product offerings and penetrating various channels of distribution. Lifetime has developed a strong consumer franchise by promoting and marketing innovative products under Company trade names and through licensing agreements. In addition, the following acquisitions have been made which have had a material impact on the Company's business:
Hoffritzr
In September 1995, the Company acquired the Hoffritzr trademarks and brand name. The Company uses the name on various products including cutlery, scissors, personal care and kitchen implements. The Company believes that Hoffritzr is a respected name with a history of quality. The acquisition has enabled the Company to sell products at higher price points than the rest of the Company's products. The Company shipped over 150 new items under the Hoffritz brandname during 1996, with the total line expected to exceed 300 items. In addition, the new products are marketed through a newly developed "shop within a store" concept in department and specialty stores. Shipments of Hoffritzr products began in the first quarter of 1996.
Farberwarer
In April 1996, the Company entered into an agreement to acquire certain assets of Farberware, Inc. ("Farberware"). Under the terms of the acquisition agreement, and a joint venture agreed to by the Company and Syratech Corporation in connection therewith, the Company acquired a 200 year, royalty-free, exclusive right to use the Farberwarer name in connection with the product lines covered by its then existing license agreement, which included kitchen cutlery products (excluding flatware) and kitchen tools such as spatulas, barbecue forks and "gadgets" (but excluding appliances), plus certain limited additional products. This agreement enables the Company to market products under the Farberwarer name without paying additional royalties. The Company also acquired 50 Farberware outlet stores. In addition, rights to license the Farberwarer name for use by third parties in certain categories are held by a joint venture, owned equally by the Company and a wholly owned subsidiary of Syratech Corporation. The purchase price consisted of cash of $12.7 million.
Cutlery
The Company designs, markets and distributes a broad range of household cutlery under a variety of Company tradenames and the Farberwarer royalty-free license. Company tradenames in 1996 included Hoffritzr and Tristarr. Cutlery is sold individually in blister packages, boxed sets and in sets fitted into wooden counter blocks, resin carousels and, new in 1997, stainless carousels in assortments of 4 to 20 knives with certain sets including steak knives, household shears and other kitchen tools.
Cutlery is generally shipped as individual pieces from overseas manufacturers to the Company's warehouse facilities in central New Jersey. This permits the Company to configure the quantity, style and contents of cutlery sets to meet customer requirements as to product mix and pricing. The sets are then assembled and packaged for shipment to customers.
Kitchenware
The Company sells over 2,750 kitchenware items for use around the home under various Company tradenames including Hoffritzr, Hoanr, Smart Choice and HealthWorks and under licensed Farberwarer, Pillsbury and cDisney tradenames. The kitchenware items are manufactured to the Company's specifications outside the U.S. and are generally shipped fully assembled. These items are typically packaged on a card which can be mounted for sale on racks at the retailers' premises for maximum display visibility. Products include the following:
Kitchen Tools and Gadgets
Food preparation and serving tools such as metal, plastic and wooden spoons, spatulas, serving forks, graters, strainers, ladles, shears, vegetable and fruit knives, juicers, pizza cutters, pie servers, and slicers;
Baking, measuring, and rangetop products such as cookie sheets, muffin, cake and pie pans, drip pans, bake, roast and loaf pans, scraper sets, whisks, cutters, spatulas, rolling pins, baking shells, baking cups, measuring devices, thermometers, timers and burner covers;
Barbecue accessories, in sets and individual pieces, featuring such items as spatulas, tongs, forks, skewers, hamburger and fish grills, brushes, corn holders, food umbrellas, nut and lobster crackers and clam knives;
Mickey Unlimited and Mickey Stuff for Kids, child- oriented products featuring Mickey and Minnie Mouse on such items as bag clips, magnetic note holders, party goods, magnetic picture frames, can covers, bottle stoppers and flatware;
Pillsbury, one of America's best known brands of baking accessories featuring the Poppin-Fresh logo on such items as pastry brushes, spatulas, whisks, spoon and cup sets, cookie cutters, mixing spoons and magnets;
Green Giantr, vegetable-related kitchen accessories capitalizing on the recognition factor of the Green Giantr character, including items such as peelers, can openers, kitchen hooks, magnets, spoons, steamers and strainers.
Smart Choice
J-Hook and Clip Strip merchandising systems which enable the Company to expand its product offering and create additional selling space in the stores. The line consists of a variety of quality, novelty items designed to trigger impulse buying. This line is targeted towards supermarkets and mass merchants.
HealthWorks
Unique household products which emphasize healthy cooking and eating. Products include nonstick roasters, roast racks, broiling pans, steamers, and clay roasters and steamers.
Cutting Boards
The Company designs, markets and distributes a full range of cutting boards made of polyethylene, wood, glass and acrylic. All cutting boards except for glass are imported. Glass cutting board blanks are purchased domestically and are finished and packaged in the Company's warehouse facilities in central New Jersey. Boards are also cross-merchandised with cutlery and gadgets.
New Products
The Company has a design department consisting of 12 designers who create new products, packaging and merchandising concepts. In excess of 300 items were developed or remodeled in 1996. New product lines for sale in 1997 include:
Hoffritz: The Company plans to introduce approximately 100 Hoffritzr branded items in 1997 including barbecue accessories, colanders and bowls, various caddies and expansion of the pepper mills, cutting boards and personal care lines.
Cutlery: Introduction of stainless steel knife caddies with Ultrapro knives.
Gadgets: Introduction of various softgrip kitchen tools.
Cutting Boards: Continued expansion of the value added approach, packaging boards with Farberwarer cutlery and kitchen gadgets.
Source of Supply
The Company sources its products from approximately 40 manufacturers located primarily in the Far East, including Japan, Indonesia, Taiwan, People's Republic of China, Hong Kong, Thailand, Malaysia and to a small extent in the United States and Italy. In 1996, cutlery was purchased from four suppliers, whom individually accounted for 40%, 34%, 15% and 11% of the total purchased. An interruption of supply from any of these manufacturers could have an adverse impact on the Company's ability to fill orders on a timely basis. However, the Company believes other manufacturers with whom the Company does business would be able to increase production to fulfill the Company's requirements.
The Company's policy is to maintain a large inventory base and, accordingly, it orders products substantially in advance of anticipated time of sale to its customers. While the Company does not have any long-term formal arrangements with any of its suppliers, in certain instances, particularly in the manufacture of cutlery, the Company places firm commitments for products up to twelve months in advance of receipt of firm orders from customers. Lifetime's arrangements with most manufacturers allow for flexibility in modifying the quantity, composition and delivery dates of each order. All purchase orders are in U.S. dollars.
Marketing
The Company markets its product lines directly through its own sales force and through a network of independent sales representatives. The Company's products are primarily sold in the United States to approximately 1,900 customers including national retailers, department store chains, mass merchant retail and discount stores, supermarket chains, warehouse clubs, direct marketing companies, specialty chains and through other channels of distribution. No customer accounted for 10% or more of the Company's net sales during fiscal 1996.
Competition
The markets for household cutlery, kitchenware and cutting boards 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, packaging, breadth of product line, distribution capability, prompt delivery and price to the consumer.
Patents and Trademarks
The Company uses a number of owned trademarks, primarily Hoffritzr, Tristarr and Hoanr as well as Farberwarer which is licensed under a 200 year royalty-free agreement, which it considers significant to its competitive position. Some of these trademarks are registered in the United States and others have become distinctive marks as to which the Company has acquired common law rights. The Company also has licensed several other trademarks from The Walt Disney Company and The Pillsbury Company which it uses in its business. The Company also owns several design and utility patents expiring from 2000 to 2013 on the overall design of some of its knives (the handle and blade). The Company also acquired patents, trademarks and copyrights as part of the Hoffritzr purchase, expiring from 1999 to 2022. The Company believes that the expiration of any of its patents would not have a material adverse effect on its business.
Seasonality
Although the Company sells its products throughout the year, the Company has traditionally had higher net sales during its third and fourth quarters. The following table sets forth the quarterly net sales for the three years ended December 31, 1996, 1995 and 1994:
Net Sales (in thousands) 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter 1996 $19,300 $21,000 $25,100 $33,000
1995 $18,700 $15,600 $22,100 $24,200
1994 $14,600 $15,500 $20,300 $27,000
Backlog
Lifetime receives projections on a seasonal basis from its principal customers; however, firm purchase orders are most frequently placed on an as needed basis. The Company's experience has been that while there may be some modifications of customers' projections, the Company is able, with some degree of certainty, to predict its product needs.
Lifetime's backlog at December 31, 1996 and 1995 was approximately $3,714,000. The Company expects to fill the 1996 backlog during 1997. The Company does not believe that backlog is indicative of its future results of operations or prospects. Although the Company seeks commitments from customers well in advance of shipment dates, actual confirmed orders are typically not received until close to the required shipment dates.
Employees
As of December 31, 1996, the Company had 612 full-time employees, of whom 4 were employed in an executive capacity, 40 in sales, marketing and product development, 58 in financial, administrative or clerical capacities, 327 in warehouse or distribution capacities and 183 are outlet store personnel. None of the Company's employees are represented by a labor union. The Company considers its employee relations to be good.
ITEM 2.
ITEM 2. PROPERTIES
The Company conducts its operations from four facilities, exclusive of the Outlet Store subsidiary. The Company's corporate headquarters located in Westbury, New York, occupy approximately 42,000 square feet and was acquired in October 1994 at an approximate cost of $6,850,000, inclusive of building, furniture, fixtures and equipment.
The Company's primary warehouse and distribution facility located in central New Jersey occupies approximately 305,000 square feet. The facility is leased pursuant to a net lease subject to annual automatic renewals through January 31, 1998. The annual rent is approximately $1,084,000. The Company leased approximately 136,000 square feet of additional warehouse and distribution space in 1995. The facility is leased through January 31, 1998 with an option to renew for an additional three years. The annual rent is approximately $429,000.
The Company also leases an approximately 2,000 square foot showroom in New York City. The annual rental is approximately $43,000 and the lease expires on June 30, 1999.
The Company is designing a new state of the art distribution center, which it expects to begin leasing in the beginning of 1998.
The Company's Outlet Store subsidiary leases approximately 50 stores in retail outlet centers located in 25 states throughout the country. The square footage of the stores range from approximately 2,000 square feet to 4,500 square feet. The terms of these leases range from three to five years with expiration dates beginning in January 1997 and extending through April 2002.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than non-material ordinary routine litigation incidental to its business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded under the symbol "LCUT" on the over-the-counter market and has been quoted on The Nasdaq National Market ("Nasdaq") since its initial public offering, in June 1991. The Company declared and paid stock dividends in 1992 and 1993 and declared and paid a 3 for 2 stock split in 1993. On December 14, 1994, the Board of Directors of the Company declared a 10% stock dividend payable to shareholders of record on December 27, 1994. On December 1, 1995, the Board of Directors of the Company declared a 10% stock dividend payable to shareholders of record on December 15, 1995. On February 5, 1997, the Board of Directors of the Company declared a 10% stock dividend payable to shareholders of record on February 18, 1997. All share and per share data included in this report have been retroactively adjusted to reflect the declaration and payment of stock dividends. See Note A to the financial statements.
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 The Nasdaq Stock Market, Inc.
1996 1995 High Low High Low
First Quarter $9.32 $7.27 $11.15 $9.30
Second Quarter $10.23 $7.27 $10.95 $8.68
Third Quarter $10.00 $8.30 $10.33 $7.70
Fourth Quarter $10.68 $7.84 $10.12 $7.84
On December 31, 1996, there were approximately 790 beneficial holders of the Common Stock of the Company.
The Company has not paid cash dividends on its Common Stock. The Board of Directors currently intends to follow a policy of retaining all earnings to finance the continued growth and development of the Company's business and does not anticipate paying cash dividends in the foreseeable future. The payments of stock dividends in December 1994, December 1995 and February 1997 are not indicative of the payment of future stock dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the five years in the period ended December 31, 1996 have been derived from the audited financial statements of the Company. The data for 1994 through 1996 should be read in conjunction with "Item 7