Back to GetFilings.com

NOTE A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 28, 2003 are not necessarily indicative of the results that may be expected for the twelve months ending January 3, 2004. The Company has historically recorded its highest sales in the fourth quarter. Certain prior year amounts have been reclassified in order to conform to the current year presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 28, 2002.

NOTE B - Acquisition of Costa Del Mar Sunglasses, Inc. ("Costa Del Mar")
On April 22, 2003, the Company completed the acquisition of all of the outstanding shares of Costa Del Mar, a designer, manufacturer and wholesaler of high quality, high-performance polarized sunglasses. The acquisition of Costa Del Mar is part of the Company's strategy of becoming a leading designer and marketer of branded personal and business accessories. Costa Del Mar was a privately held company founded in Florida in 1983. The excess of the purchase price over the fair value of the net assets acquired approximated $3.4 million, which will not be deductible for income tax purposes. The acquired intangible, the Costa Del Mar trade name, is deemed to have an indefinite life and will not be amortized. The results of operations of Costa Del Mar since April 21, 2003 are included in the consolidated statements of operations of the Company. Costa Del Mar will be reported in the optical segment of the Company.

The following is the allocation of the purchase price of Costa Del Mar:

The following unaudited pro forma summary financial information summarizes the estimated combined results of operations of the Company and Costa Del Mar assuming that the acquisition had taken place on December 30, 2001. The unaudited pro forma combined results of operations were prepared on the basis of information provided to the Company by the former management of Costa Del Mar.

NOTE C - Restructuring Charges
In 2000, the Company's Board of Directors approved a plan to restructure the Company's domestic and international writing instrument operations. As part of this restructuring plan, the Company consolidated all writing instrument manufacturing and distribution at its headquarters in Lincoln, Rhode Island, closed its Irish facility and reorganized its European operations. There was no change to the estimated expenses related to the restructuring plan in 2003.

The following is a tabular presentation of the restructuring liabilities:

With the acquisition of Costa Del Mar in the second quarter of 2003, the Company now has two reportable segments; Writing Instruments and Accessories ("WI&A") and Optical. The Company evaluates segment performance based upon profit or loss from operations before income taxes. Following is the segment information for the Company for the three and six month periods ended June 28, 2003 and June 29, 2002:

NOTE E - Comprehensive Income
Comprehensive income for the three and six month periods ended June 28, 2003 and June 29, 2002 follows:

NOTE F - Stock Option Accounting
The Company has elected to account for stock options in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," which uses the intrinsic value method of accounting. Accordingly, the Company has not recognized compensation expense for the fair value of its stock-based awards in its condensed consolidated statements of operations. The following table reflects pro forma net income (loss) and earnings (loss) per share had the Company elected to record expense for employee stock options under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation."

NOTE G - Line of Credit
The Company maintains a $25 million unsecured line of credit with a bank. During the second quarter of 2003 the Company renegotiated the loan agreement with the bank. The renegotiated agreement requires the Company to meet certain covenants. The most restrictive covenant is that over the next three fiscal years the Company can not incur extraordinary charges, as defined by the bank, in excess of approximately $6.5 million. There is also a restriction on the Company's ability to grant a security interest in its assets. Any amounts borrowed under this agreement are payable on demand. Under this agreement, the Company has the option to borrow either at the bank's prime lending rate or at one percent per annum in excess of the London Interbank Offering Rate. This agreement is cancelable at any time by the Company or the bank. During the second quarter of 2003, the Company borrowed approximately $10 million on this line of credit, primarily to finance the acquisition of Costa Del Mar. On May 23, 2003, $9 million of this amount was converted into a five-year term note incurring interest at a rate of London Interbank Offering Rate plus 75 basis points.

On June 28, 2003, approximately $8.9 million of the $9 million converted debt was outstanding, of which $7.5 million was classified as long-term debt, less current maturities and $1.4 million was classified as current maturities of long-term debt.

The outstanding balance of notes payable to banks at June 28, 2003 was approximately $1.3 million.

NOTE H - Derivative Financial Instruments
During the second quarter of 2003, the Company entered into an interest rate swap agreement with an initial notional amount of $9 million and a term of five years. This swap effectively fixes the interest rate on the Company's five-year term note at 4.15%. The terms of the swap and the term note being hedged match, and the Company qualifies for the "shortcut" treatment. Amounts receivable or payable under this swap agreement are recorded as adjustments to interest expense. This swap has been designated as a cash flow hedge and the effect of the mark-to-market valuation that relates to the effective amount of the derivative financial instrument is recorded as an adjustment, net of tax, to accumulated other comprehensive loss. From inception to June 28, 2003, the effect of the mark-to-market valuation, net of tax, was an unrealized loss of approximately $191,000.

NOTE I - Goodwill and Other Intangible Assets
The Company accounts for intangible assets, including goodwill, under SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill is tested for impairment annually or when an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, and write downs may be necessary. In the second quarter of 2003, approximately $3.4 million of goodwill was capitalized as a result of the Costa Del Mar acquisition. At June 28, 2003, the carrying value of all goodwill was approximately $7.3 million.

Other intangibles consisted of the following:

NOTE J - New Accounting Pronouncements
In July 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," and nullified Emerging Issues Task Force ("EITF") Issue No. 94-3. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, whereas EITF No 94-3 had recognized the liability at the commitment date to an exit plan. The Company adopted this statement effective January 1, 2003. The adoption of this statement will only have an impact on the accounting for exit or disposal activities initiated after December 31, 2002.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure." SFAS No. 148 is an amendment of SFAS No. 123, "Accounting for Stock Based Compensation," and APB Opinion No. 28, "Interim Financial Reporting." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends the disclosure requirements. The Company is reviewing SFAS No. 148 and has not yet made a decision on the adoption of the fair value method of recording stock options. The Company has adopted the disclosure requirements of SFAS No. 148.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" established accounting and reporting standards for derivative instruments including derivatives embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivatives and for hedging activities under SFAS No. 133. This statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this statement is not expected to have a material impact on the Company's consolidated financial statements.

NOTE K - Stock Repurchase Plan
In fiscal 2001, the Company's Board of Directors authorized the repurchase of up to 10% of the Company's outstanding Class A common stock. This plan was completed in October 2002. A total of 1,499,967 shares were purchased under this plan for approximately $10.2 million at an average price per share of $6.78.

On October 23, 2002, the Company's Board of Directors authorized a new plan to repurchase up to an additional 10% of the outstanding Class A common stock. Under this new plan, the Company plans to purchase approximately 1.4 million shares of stock on the open market, subject to regulatory considerations, from time to time, depending on market conditions. At December 28, 2002, the Company had repurchased 180,000 shares under this new plan for approximately $1.1 million at an average price per share of $6.09. In the first quarter of 2003, the Company repurchased 260,000 shares for approximately $1.4 million at an average price per share of $5.25. In the second quarter of 2003, the Company repurchased 135,000 shares for approximately $693,000 at an average price per share of $5.13

Repurchased shares will be held as treasury stock and will be available for general corporate purposes including but not limited to employee benefit plans, strategic acquisitions and alliances.

NOTE L - Contingencies
On or about April 21, 2000, the Company, certain officers and directors of the Company and others were named as defendants in an action filed in the United States District Court for the District of Rhode Island. The suit, which is brought by a purchaser of the Company's Class A common stock, alleges that the defendants violated Federal securities laws by making material misstatements and omissions in the Company's public filings and statements relating to the Company's former Pen Computing Group business. The suit seeks class action status including all purchasers of the Company's Class A common stock between September 17, 1997 and April 22, 1999. The damages sought are unspecified.

On June 30, 2000, the Company filed a Motion to Dismiss the action in the United States District Court in Rhode Island. The United States District Court for the District of Rhode Island granted the Company's Motion to Dismiss in June 2001. In July 2001, the Plaintiff filed an appeal with the First Circuit Court of Appeals. The appeal was before the First Circuit Court of Appeals. Oral argument was held February 8, 2002.

On March 20, 2002, the Court of Appeals for the First Circuit issued a judgment affirming the dismissal of all claims asserted against the W. Russell Boss Jr. Trust A, W. Russell Boss Jr. Trust B and W. Russell Boss Jr. Trust C and reversing the District Court's dismissal of the Section 10(b) and 20(a) claims asserted against the Company and the named individual defendants. The Court of Appeals' ruling was limited to a finding that the plaintiff's complaint had satisfied the pleading requirements of the Private Securities Litigation Reform Act of 1995; the Court did not opine on the merits of plaintiff's claims. The Company maintains that the claims are without merit and continues to vigorously defend the litigation.

In 1998, the Company received a Letter of Responsibility ("LOR") from the Rhode Island Department of Environmental Management ("DEM"). The LOR stated that analytical results indicated elevated levels of volatile organic compounds at several sites on the Company's property and requested that the Company conduct a site investigation to identify the source. The Company retained an environmental consulting firm to perform the site investigation