Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ___.

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)

          State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the close of business on June 30, 2004: $1,375,100.

          The number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: 5,522,490 shares of Common Stock as of the close of business on February 28, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

None.

          The Company was incorporated on April 17, 1936. The Company is engaged in the importation, sale and distribution of men's accessories under the names "Kenneth Cole", "Geoffrey Beene", "Pierre Cardin", "Claiborne", "Tommy Hilfiger", "Guess", "Swank", "Colours by Alexander Julian", and "City of London" among others. Prior to July 23, 2001, the Company was also engaged in the sale and distribution of women's costume jewelry.

          On July 23, 2001, the Company sold certain assets associated with its women's costume jewelry division pursuant to an Agreement dated July 10, 2001 (the "Agreement") between the Company and K&M Associates, LP ("K&M"), a subsidiary of American Biltrite, Inc. Pursuant to the Agreement, the Company sold to K&M, inventory, accounts receivable and miscellaneous other assets relating to the Company's Anne Klein, Anne Klein II, Guess?, and certain private label women's costume jewelry businesses. The purchase price paid by K&M to the Company at the closing of the transactions contemplated by the Agreement was approximately $4,600,000, subject to adjustment. K&M also assumed the Company's interest in its respective license agreements with Anne Klein, a division of Kasper A.S.L., Ltd., and Guess? Licensing Inc. and certain specified liabilities. In connection with the sale to K&M, the Company and K&M entered in to an agreement whereby the Company provided certain operational and administrative services to and on behalf of K&M for a period of time extending from the closing date through December 31, 2001 (the "Transition Agreement"). As provided by the Transition Agreement, the Company was reimbursed by K&M in 2001 for its direct costs associated with performing the transition services.

          Men's leather accessories, principally belts, wallets and other small leather goods including billfolds, key cases, card holders and other items, and men's jewelry, principally cuff links, tie klips, chains and tacs, bracelets, neck chains, vest chains, collar pins, key rings and money clips, as well as suspenders, are distributed under the names "Geoffrey Beene", "Claiborne", "Kenneth Cole", "Tommy Hilfiger", "Guess?", "Swank", "Field & Stream" and "Colours by Alexander Julian". The Company also distributes men's leather accessories under the name "Pierre Cardin" and for customers' private labels. In February 2005, the Company entered into an exclusive license for the distribution and sale by it of men's jewelry and leather accessories under the name "City of London."

          As is customary in the fashion accessories industry, substantial percentages of the Company's sales and earnings occur in the months of September, October and November, during which the Company makes significant shipments of its products to retailers for sale during the holiday season. The Company's bank borrowings typically are at a peak during these months corresponding with the Company's peak working capital requirements.

          In addition to product, pricing and terms of payment, the Company's customers generally consider one or more factors, such as the availability of electronic order processing and the timeliness and completeness of shipments, as important in maintaining ongoing relationships. In addition, the Company from time to time will allow customers to return merchandise in order to achieve proper stock balances. These factors, among others, result in the Company increasing its inventory levels during the Fall selling season (July through December) in order to meet customer imposed delivery requirements. The Company believes that these practices are substantially consistent throughout the fashion accessories industry.

          The Company's customers are primarily major retailers within the United States. Net sales in both fiscal 2004 and fiscal 2003 to the Company's three largest customers, Federated Department Stores, Inc. ("Federated"), TJX Companies, Inc. ("TJX"), and May Department Stores Company, Inc. ("May") accounted for approximately 13%, 11%, and 10%, respectively, of consolidated net sales. In addition, net sales to Target Corporation ("Target") during fiscal 2003 were approximately 10% of consolidated net sales. Net sales to Federated, Target and May were approximately 15%, 14%, and 11% respectively, of consolidated net sales in fiscal 2002. No other customer accounted for more than 10% of consolidated net sales during fiscal years 2004, 2003 or 2002. Exports to foreign countries accounted for approximately 7%, of consolidated net sales in fiscal 2004, and less then 4% of consolidated net sales in each of fiscal 2003 and 2002, respectively .

          At March 24, 2005, the Company had unfilled orders of approximately $6,439,000 compared with approximately $9,016,000 at March 24, 2004. The decrease in backlog of unfilled orders is primarily due to orders being received and shipped somewhat earlier in the 2005 spring season compared to the corresponding period in 2004 and to a decrease in unfilled orders for the Company's products compared to the same date in 2004. The Company has substantially improved its shipping and delivery performance in 2005 which has reduced order cancellations and has contributed to the decrease in the backlog of unfilled orders. In the ordinary course of business, the dollar amount of unfilled orders at a particular point in time is affected by a number of factors, including manufacturing schedules, timely shipment of goods, which, in turn, may be dependent on the requirements of customers, and the timing of placement by our customers of orders from year-to-year. Accordingly, a comparison of backlog from period to period is not necessarily meaningful and may not be indicative of future sales patterns or shipments.

          Approximately 45 salespeople and district managers are engaged in the sale of products of the Company working out of sales offices located in New York, NY and Atlanta, GA. In addition, at December 31, 2004 the Company sold certain of its products through 8 company-owned factory outlet stores in 6 states.

          The Company no longer manufactures the products it sells, which are, instead, sourced from third-party vendors. The Company historically manufactured and/or assembled its men's and women's costume jewelry products at the Company's plant in Attleboro, Massachusetts and at the facility of the Company's former 65% owned subsidiary, Joyas y Cueros de Costa Rica, S.A. ("Joyas y Cueros") located in Cartago, Costa Rica. The Company discontinued its manufacturing operations at Joyas y Cueros and Massachusetts in 2001 and 2000, respectively. In addition, during the fourth quarter of fiscal 2003, the Company ceased manufacturing operations at its belt and suspender manufacturing facility, located in Norwalk, Connecticut. Reference is made to Footnote I of the Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information concerning the cessation of the Norwalk manufacturing operations.

          The Company purchases substantially all of its small leather goods, principally wallets, from a single supplier in India. Unexpected disruption of this source of supply could have an adverse effect on the Company's small leather goods business in the short-term depending upon the Company's inventory position and on the seasonal shipping requirements at that time. However, the Company has identified alternative sources for small leather goods which could be utilized by the Company within several months. The Company also purchases its finished belts and other accessories from a number of suppliers in the United States and abroad. The Company believes that alternative suppliers are readily available for substantially all such purchased items.

          Substantial expenditures on advertising and promotion are an integral part of the Company's business. Approximately 3.3% of net sales was expended on advertising and promotion in 2004, of which approximately 2.6% was for advertising media, principally in national consumer magazines, trade publications, newspapers, radio and television. The remaining expenditures were for cooperative advertising, fixtures, displays and point-of-sale materials.

          The businesses in which the Company is engaged are highly competitive. The Company competes with, among others, Cipriani, Salant, Randa/Humphrey's, Fossil, Tandy Brands Accessories, Inc., and retail private label programs in men's belts; Tandy Brands Accessories, Inc., Cipriani, Fossil, Mundi-Westport, Randa/Humphrey's and retail private label programs in small leather goods; and David Donahue in men's jewelry. The ability of the Company to continue to compete will depend largely upon its ability to create new designs and products, to meet the increasing service and technology requirements of its customers and to offer consumers high quality merchandise at popular prices.

Patents, Trademarks and Licenses

          The Company owns the rights to various patents, trademarks, trade names and copyrights and has exclusive licenses in the United States and, in some instances, in certain other jurisdictions, for the distribution and sale of men's leather accessories and costume jewelry under the names "Geoffrey Beene", "Claiborne", "Kenneth Cole", "Tommy Hilfiger", "Guess?", "Field & Stream", "City of London", and "Colours by Alexander Julian." The Company also holds exclusive licenses to distribute men's leather accessories under the name "Pierre Cardin." The Company's "Geoffrey Beene", "Pierre Cardin", "Claiborne", "Kenneth Cole", "Tommy Hilfiger", "Field & Stream" and "Guess?" licenses collectively may be considered material to the Company's business. The "Pierre Cardin", "Geoffrey Beene", "Claiborne" and "Tommy Hilfiger" agreements also license the Company to distribute and sell suspenders. The Company does not believe that its busin ess is materially dependent on any one license agreement. The Company's "City of London" license provides for percentage royalty payments not exceeding 5% of net sales. The Company's "Pierre Cardin", "Field & Stream" and "Claiborne" licenses provide for percentage royalty payments not exceeding 6% of net sales. The "Geoffrey Beene" and "Tommy Hilfiger" licenses provide for percentage royalty payments not exceeding 7% of net sales. The "Kenneth Cole" and "Guess" licenses provide for percentage royalty payments not exceeding 8% of net sales. The license agreements to which the Company is a party generally specify minimum royalties and minimum advertising and promotion expenditures. The Company's "Kenneth Cole", "Claiborne", and "Guess?" licenses expire December 31, 2005. The Company's "Pierre Cardin" and "Field & Stream" licenses expire December 31, 2006. The Company's "Tommy Hilfiger" license expires December 31, 2007. The Company's "Geoffrey Beene" and "City of London" licenses expire June 30, 2008. The Company regularly assesses the status of its license agreements and anticipates renewing those contracts scheduled to expire in 2005, subject to the negotiation of terms and conditions satisfactory to the Company and its licensors.

          The Company has approximately 283 employees, of whom approximately 137 are warehouse and distribution employees. None of the Company's employees are represented by labor unions and management believes its relationship with its employees to be satisfactory.

          The Company's main administrative offices and distribution center are presently located in a leased warehouse building containing approximately 242,000 square feet in Taunton, Massachusetts. This facility is used in the distribution of substantially all of the Company's products. In addition, one of the Company's factory stores is located within the Taunton location. The lease for these premises expires in 2006. The warehouse facility in Taunton is equipped with modern machinery and equipment, substantially all of which is owned by the Company, with the remainder leased.

          The Company's executive offices and its national, international, and regional sales offices are located in leased premises at 90 Park Avenue, New York City, New York. On July 23, 2001 the Company entered into a sublease agreement with K&M Associates, L.P. for approximately 43% of its space under lease at 90 Park Avenue. The lease and sublease of such premises both expire in 2010. A regional sales office is also located in leased premises in Scottsdale, Arizona. The lease for the Scottsdale office expires in 2006. Collectively, these two offices contain approximately 22,000 square feet.

          The Company also owns a three-story building containing approximately 193,000 square feet on a seven-acre site in Attleboro, Massachusetts. Until 2000, this facility had been used to manufacture and/or assemble men's and women's costume jewelry products and, until December 2004, housed the Company's main administrative offices. During December 2004, the Company's administrative staff relocated to its Taunton location. The Company is presently assessing its options with regard to alternative uses or the disposition of its Attleboro property.

          Through fiscal 2003, men's belts and suspenders were manufactured in leased premises located in Norwalk, Connecticut consisting of a manufacturing plant and office space in a 126,500 square foot building, located on approximately seven and one-half acres. In 2003, the Company ceased manufacturing operations in Norwalk and the lease for these premises was terminated during the first quarter of fiscal 2004.

          The Company presently operates seven factory outlet store locations in addition to the outlet store in Taunton, Massachusetts as described above. These stores have leases with terms not in excess of three years and contain approximately 13,000 square feet in the aggregate.

          In management's opinion, the Company's properties and machinery and equipment are adequate for the conduct of the Company's businesses.

Item 3.          Legal Proceedings.

          (a)  On June 7, 1990, the Company received notice from the United States Environmental Protection Agency ("EPA") that it, along with fifteen others, had been identified as a Potentially Responsible Party ("PRP") in connection with the release of hazardous substances at a Superfund site located in Massachusetts. This notice does not constitute the commencement of a proceeding against the Company nor necessarily indicate that a proceeding against the Company is contemplated. The Company, along with six other PRP's, has entered into an Administrative Order by Consent pursuant to which, inter alia, they have undertaken to conduct a remedial investigation/feasibility study (the "RI/FS") with respect to the alleged contamination at the site.

          The remedial investigation of the site has been completed and the EPA has prepared its Record of Decision.  The Massachusetts Superfund site is adjacent to a municipal landfill that is in the process of being closed under Massachusetts law. Once the EPA and the PRPs resolve an outstanding dispute regarding certain oversight costs, the Company expects to receive confirmation from the EPA that the Company has fulfilled its obligations under the Administrative Order. It is unlikely that this matter will have a material adverse effect on the Company's operating results, financial condition or cash flows. The PRP Group's accountant's records reflect group expenses since December 31, 1990, independent of legal fees, in the amount of $4,455,291 as of December 31, 2004. The Company's share of the costs for the RI/FS historically was allocated on an interim basis at 12.52%. Due to the withdrawal of two PRP's, however, the respec tive shares of these costs were reallocated among the remaining members of the group in 2004, increasing the Company's allocation to 19.5% for any remaining costs. The Company believes that it has adequately reserved for the potential costs associated with this site.

          In September 1991, the Company signed a judicial consent decree relating to the Western Sand and Gravel site located in Burrillville and North Smithfield, Rhode Island. The consent decree was entered on August 28, 1992 by the United States District Court for the District of Rhode Island. The most likely scenario for remediation of the ground water at this site is through natural attenuation, which will be monitored for a period of up to 24 years. Estimates of the costs of remediation range from approximately $2.8 million for natural attenuation to approximately $7.8 million for other remediation. Based on current participation, the Company's share is 8.66% of approximately 75% of the costs. Management believes that this site will not result in any material adverse effect on the Company's operating results, financial condition or cash flows based on the results of periodic tests conducted at the site. The Company b elieves that it has adequately reserved for the potential costs associated with this site.

          (b)  No material pending legal proceedings were terminated during the three month period ended December 31, 2004.

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

Not applicable.

The executive officers of the Company are as follows:

          There are no family relationships among any of the persons listed above or among such persons and the directors of the Company except that John A. Tulin and James E. Tulin are the sons of Marshall Tulin.

          Marshall Tulin has served as Chairman of the Board since October 1995. He joined the Company in 1940, was elected a Vice President in 1954 and President in 1957. Mr. Tulin has served as a director of the Company since 1956.

          John A. Tulin has served as President and Chief Executive Officer of the Company since October 1995. Mr. Tulin joined the Company in 1971, was elected a Vice President in 1974, Senior Vice President in 1979 and Executive Vice President in 1982. He has served as a director since 1975.

          Paul Duckett has been Senior Vice President-Distribution and Retail Store Operations since October 1995. For more than five years prior to October 1995, Mr. Duckett served as a Senior Vice President of the Company.

          Melvin Goldfeder has been Senior Vice President-Special Markets Division since October 1995. For more than five years prior to October 1995, Mr. Goldfeder served as a Senior Vice President of the Company.

          Jerold R. Kassner has been Senior Vice President, Chief Financial Officer, Treasurer and Secretary of the Company since July 1999. Mr. Kassner joined the Company in November 1988 and was elected Vice President and Controller in September 1997.

          Eric P. Luft has been Senior Vice President-Men's Division since October 1995. Mr. Luft served as a Divisional Vice President of the Men's Products Division from June 1989 until January 1993, when he was elected a Senior Vice President of the Company. Mr. Luft became a director of the Company in December 2000.

          Each officer of the Company serves, at the pleasure of the Board of Directors, for a term of one year and until his successor is elected and qualified.

          The Company's common stock, $.10 par value per share (the "Common Stock") is traded in the over-the-counter market under the symbol SNKI. The following table sets forth for each quarterly period during the last two fiscal years the high and low bid prices for the Common Stock, as reported by bigcharts.com (which prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions).

            Number of Record Holders at February 28, 2005  -  1,218

           The 2004 Loan Agreement prohibits the payment of cash dividends on the Common Stock (see "Management's Discussion and Analysis of Financial Condition and Results of Operations"). The Company has not paid any cash dividends on its Common Stock during the last two fiscal years and has no current expectation that cash dividends will be paid in the foreseeable future.

          The Company did not issue any unregistered securities during the past year.

          During the three-months ended December 31, 2004, the Company did not repurchase any shares of its Common Stock.

          The following table provides selected consolidated financial data of the Company as of and for each of the years in the five-year period ended December 31, 2004 and should be read in conjunction with the Company's consolidated financial statements and notes thereto included elsewhere in this annual report on Form 10-K.

          The selected consolidated financial data as of December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004 have been derived from the Company's consolidated financial statements which are included elsewhere in this annual report on Form 10-K and were audited by BDO Seidman, LLP, independent registered public accounting firm. The selected consolidated financial data as of December 31, 2002 have been derived from the Company's consolidated financial statements not included herein, which were audited by BDO Seidman, LLP. The selected consolidated financial data as of December 31, 2001 and 2000 and for each of the two years in the period ended December 31, 2001 have been derived from the Company's consolidated financial statements not included herein, which were audited by PricewaterhouseCoopers LLP, independent registered public accounting firm.

       The Company is currently engaged in the importation, sale and distribution of men's belts, leather accessories, suspenders, and men's jewelry. These products are sold both domestically and internationally, principally through department stores, and also through a wide variety of specialty stores and mass merchandisers. The Company also operates a number of factory outlet stores primarily to distribute excess and out of line merchandise.

       Net sales in 2004 decreased 1.6% to $93,287,000 compared to $94,845,000 in 2003. The decrease in net sales was mainly due to lower shipments of the Company's men's belt and personal leather goods merchandise associated with certain branded and private-label collections sold primarily to department stores. Gross profit, however, increased 16.5% to $30,720,000 from $26,362,000 in 2003 and, as a percentage of net sales, increased to 32.9% from 27.8% last year. The increase in gross profit was due principally to the closure of the Company's domestic belt manufacturing facility in Norwalk, Connecticut during the fourth quarter of 2003 and subsequent re-sourcing of all merchandise requirements to third-party vendors and an increase in higher-margin men's jewelry net sales compared to the prior year. Selling and administrative expenses increased 2.6% or $716,000 mainly due to an increase in certain merchandising and advertising and prom otion costs.

       Earnings for the 12 months ended December 31, 2004 included net non-recurring income of $139,000. During the Company's quarter ended March 31, 2004, the Company recorded a net gain of $1,090,000 from the termination of a real estate lease that was offset, in part by a $362,000 asset impairment charge in connection with the Company's former jewelry manufacturing facility and administrative offices in Attleboro, Massachusetts recorded during the quarter ended December 31, 2004. The Company relocated its administrative staff to its Taunton distribution facility during December 2004 and is presently assessing its options with regard to alternative uses or the disposition of the Attleboro property. The net gain on the lease termination and the Attleboro fixed asset impairment charges were recorded separately in the Company's consolidated statement of operations as non-recurring items. In addition, during the quarter ended June 30, 2004, the Company rec orded a non-recurring expense of $589,000, which was included in interest expense, in connection with the write-off of certain deferred financing costs, early termination fees and other charges related to the termination of the Company's revolving credit agreement with its prior lender (see "Restructuring Charges" below).

       Results for both the quarter and 12-month period ended December 31, 2003 include restructuring charges of $1,640,000 related to the closure of the Company's belt manufacturing facility in Norwalk, Connecticut. These expenses included a $1,360,000 inventory-related charge that was included in cost of sales in the Company's consolidated statement of operations and a $280,000 charge for severance and asset-impairment expenses that was stated separately in the consolidated statement of operations as a restructuring charge. The Company ceased manufacturing activities at its Norwalk facility and began outsourcing the balance of its belt production requirements to third-party manufacturers during the quarter ended December 31, 2003.

       Management believes that the accounting policies discussed below are important to an understanding of the Company's financial statements because they require management to exercise judgment and estimate the effects of uncertain matters in the preparation and reporting of financial results. Accordingly, management cautions that these policies and the judgments and estimates they involve are subject to revision and adjustment in the future. While they involve judgment, management believes the other accounting policies discussed in Note B to the consolidated financial statements are also important in understanding the statements.

Revenue Recognition

       The Company records revenues net of sales allowances, including cash discounts, in-store customer allowances, cooperative advertising, and customer returns, which are all accounted for in accordance with Emerging Issues Task Force Issue No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor's Products". Sales allowances are estimated using a number of factors including historical experience, current trends in the retail industry and individual customer and product experience. The Company reduces net sales and cost of sales by the estimated effect of future returns of current period shipments. Each spring upon the completion of processing returns from the preceding fall season, the Company records adjustments to net sales in the second quarter to reflect the difference between customer returns of prior year shipments actually received in the current year and the estimate used to establish the allowance for customer returns at the end of the preceding fiscal year.

Allowance for Doubtful Accounts

       The Company determines allowances for doubtful accounts using a number of factors including historical collection experience, general economic conditions and the amount of time an account receivable is past its payment due date. In certain circumstances where it is believed a customer is unable to meet its financial obligations, a specific allowance for doubtful accounts is recorded to reduce the account receivable to the amount believed to be collectable.

Income Taxes

       The Company determines the valuation allowance for deferred tax assets based upon projections of taxable income or loss for future tax years in which the temporary differences that created the deferred tax asset are anticipated to reverse, and the likelihood that the Company's deferred tax assets will be recovered.

        Net sales for the year ended December 31, 2004 decreased by $1,558,000 or 1.6% compared to 2003. Net sales of the Company's men's jewelry merchandise increased 11.5% while net sales of personal leather goods and belts decreased 3.7% and 2.5%, respectively, all as compared to the prior year. The increase in jewelry net sales is due to higher shipments of certain private-label merchandise and increased sales of branded programs to department and chain stores. Jewelry net sales have also increased due to improved trends generally at retail for this classification resulting in an increased emphasis by retailers on "giftable" merchandise. The decrease in personal leather goods net sales was primarily due to a reduction in shipments of certain branded goods sold mainly to department store customers, offset in part by a significant increase in shipments of the Company's "Guess?" merchandise. The decrease in men's belt net sales in 2004 was primarily due to lower sales of the Company's "Geoffrey Beene" and "Pierre Cardin" merchandise offset in part by higher sales associated with the Company's "Axcess by Claiborne" and "Kenneth Cole" goods. During 2004, one of the Company's larger customers for "Pierre Cardin" merchandise began placing more emphasis on alternative private-label brands. During 2004, the Company also decreased its exposure to certain lower-margin private-label businesses in favor of faster-growing, more profitable lines, including its export business. The Company's international business overall increased 84% during 2004 mainly due to higher shipments of "Guess?" branded personal leather goods merchandise to existing customers and generally higher shipments of all product categories, especially belts, to certain new export accounts. Net sales to international customers accounted for approximately 7% of the Company's total net sales during 2004 compared to less than 4% in 2003.

       The decrease in belt and small leather goods shipments during 2004 was offset in part by a reduction in sales dilution associated with reduced customer returns. The Company's provision for customer returns decreased 38% in 2004 mainly due to a more stable product line and an increased emphasis on promotional expenditures to promote retail sales. Cooperative advertising and markdown expenditures increased approximately 9% during the year. The Company regularly participates in promotional events designed to stimulate sales of its merchandise or expand its market share within certain retail channels.

   Net sales in 2004 and 2003 were also favorably affected by the annual returns adjustment made in the second quarter. The Company reduces net sales and cost of sales by the estimated effect of future returns of current period shipments. Each spring upon the completion of processing returns from the preceding fall season, the Company records adjustments to net sales in the second quarter to reflect the difference between customer returns of prior year shipments actually received in the current year and the estimate used to establish the allowance for customer returns at the end of the preceding fiscal year. These adjustments increased net sales by $1,703,000 and $2,069,000 for the twelve month periods ended December 31, 2004 and 2003, respectively. The Company's actual return experience during both the spring 2004 and spring 2003 seasons was better than anticipated compared to the reserves established at December 31, 2003 and December 31, 2002, respectively, principally due to lower than expected returns for men's personal leather goods and belts. Returns generally declined during 2004 compared to the prior year as the Company maintained a more stable merchandise assortment and increased its emphasis on in-store promotions to promote the sale of slower-moving goods. The Company established its reserve for returns as of December 31, 2003 based on its estimate of merchandise to be received during the spring 2004 season which was generally shipped to retailers for the 2003 fall and holiday selling seasons. Although the Company anticipated a reduction in returns in establishing its reserve at December 31, 2003, actual experience was more favorable than planned.

        Gross profit for the year ended December 31, 2004 increased by $4,358,000 or 16.5% to $30,720,000 compared to the prior year's gross profit of $26,362,000. Gross profit expressed as a percentage of net sales for 2004 was 32.9% compared to 27.8% for 2003.

        The increase in gross profit both in dollars and as a percentage of net sales during 2004 was primarily due to higher margins for men's belts resulting from the closure of the Company's Norwalk, Connecticut manufacturing facility in 2003 and subsequent re-sourcing of all merchandise requirements to third-party vendors. The Company was able to significantly decrease its merchandise cost for men's belts in 2004 through the elimination of certain manufacturing inefficiencies and other fixed overhead expenses associated with the operation of its Norwalk plant. During 2003, the Company recorded substantial labor and overhead manufacturing variances at Norwalk in an attempt to adjust production levels with anticipated demand. The Company began significantly decreasing its production levels at Norwalk during the third quarter of 2003 and ceased manufacturing operations during the fourth quarter.

       The improvement in 2004's gross profit was also due to lower inventory control costs, primarily belt raw material obsolescence, and a more favorable sales mix, principally an increase in net sales of men's jewelry which commands a higher gross margin than the Company's other products, compared to the prior year. Gross profit for the year ended December 31, 2003 included a non-recurring charge of $1,360,000 recorded during the fourth quarter in connection with the write-off of the Company's remaining belt raw material inventory. Net sales of the Company's men's jewelry merchandise increased 11.5% in 2004 compared to the prior year and accounted for approximately 13.0% of consolidated net sales compared to 11.5% in 2003. The Company's initial markup in 2004 on its men's personal leather goods merchandise also increased during the year mainly due to a reduction in net sales to lower-margin customers which was offset in part by an increase in export n et sales.

       Provisions for customer returns, in-store markdown and cooperative advertising allowances, and other sales dilution decreased to 10.2% of gross shipments in 2004 from 11.3% last year. The reduction was mainly due to lower customer returns offset in part by an increase in the provision for in-store markdowns and cooperative advertising allowances. Royalty charges associated with the Company's license agreements increased 6.8% in 2004 due to an increase in net sales of certain branded merchandise and in some cases, increases in contractual minimum royalty obligations.

       Selling and administrative expenses for the year ended December 31, 2004 increased $716,000 or 2.6% compared to the prior year. Selling and administrative expense expressed as a percentage of net sales increased to 30.3% from 29.0% in 2003. Selling expenses increased by $544,000 or 2.8% while administrative expenses increased by $172,000 or 2.1%, both as compared to the prior year. Expressed as a percentage of net sales, selling expenses totaled 21.5% and 20.5% for 2004 and 2003, respectively, and administrative expenses totaled 8.8% and 8.5% for 2004 and 2003, respectively.

       The increase in selling expenses was primarily due to higher advertising and promotional expenditures and increased product development costs including purchased samples and other supplies, trade shows, and international travel. These increases were offset in part by lower compensation and related expenses, occupancy costs, and freight expense. The Company routinely makes advertising and promotional expenditures to enhance its business and to support the advertising and promotion activity of its licensors. The license agreements to which the Company is a party also generally include minimum advertising and promotional spending requirements. Advertising and promotional expenses in support of the Company's men's accessories business, exclusive of cooperative advertising and display expenditures, totaled 2.6% of net sales for the year ended December 31, 2004 compared to 2.1% in 2003.

       The increase in administrative expenses in 2004 was mainly due to higher professional fees and bad debt expense offset in part by a reduction in administrative compensation and related expense and occupancy costs. The increase in professional fees was primarily due to activities associated with the Company's revolving credit refinancing during the first half of 2004.

       During 2002, the Company recorded an adjustment to an accrual that originally had been established in connection with certain variable expenses associated with net sales made prior to 2001. The Company determined its actual liability for this expense in 2002 and accordingly, recorded other income of $640,000 for the period ending December 31, 2002 to adjust the accrual to its expected amount.

        During the first quarter of 2004, the Company and the landlord of its former Norwalk, Connecticut belt manufacturing facility entered into an agreement under which the lease for that facility was terminated effective April 1, 2004. The Company paid $250,000 to the landlord upon the signing of the termination agreement and $250,000 on April 30, 2004. The agreement also provided for payments to the landlord of an additional $1,000,000, in installments, during the period from January 2005 through March 2006. The Company estimates its aggregate remaining liabilities under the lease, had it not been terminated, would have been approximately $2,586,000. During the first quarter, the Company recorded a net gain of $1,090,000 consisting of a $3,348,000 gain associated with the recognition of the remaining balance of a deferred gain on real estate offset in part by $2,084,000 in costs related to the lease termination (including $1,500,000 in lease termi nation costs, $455,000 in asset impairment charges, and $129,000 for other plant closing expenses), and $174,000 in severance and related expenses recorded in connection with employee terminations. The net gain was stated separately as a non-recurring item in the Company's consolidated statement of operations. On January 3, 2005, the Company paid the landlord $925,000 to settle all of its remaining obligations under the termination agreement. The Company will record a gain of $75,000 during the first quarter of 2005 to recognize the difference between the amount of the liability outstanding at December 31, 2004 under the termination agreement and the final amount paid.

       During the quarter ended June 30, 2004, the Company recorded an expense of $589,000 in connection with the write-off of deferred financing costs, early termination fees and other charges related to the termination of its previous loan and security agreement. These expenses are included in interest expense in the Company's consolidated statement of operations for 2004.

       During the quarter ended December 31, 2004, the Company recorded a non-cash impairment charge of $362,000 in connection with certain fixed assets associated with its former jewelry manufacturing facility and administrative offices in Attleboro, Massachusetts. Although the Company ceased jewelry manufacturing operations in 2000, the Attleboro building continued to house the Company's main administrative offices. In December 2004, the Company consolidated its administrative staff into its Taunton, Massachusetts distribution center and is currently assessing alternative uses or the disposition of its Attleboro property. The impairment charge was included as a non-recurring expense in the Company's consolidated statement of operations for the quarter and year ended December 31, 2004.

       During the fourth quarter of 2003, the Company ceased manufacturing operations at its belt and suspender manufacturing facility in Norwalk, Connecticut and began sourcing the balance of its belt and suspender merchandise requirements from third-party vendors. As part of this transition, beginning early in the third quarter the Company gradually began to reduce production levels at Norwalk and subsequently reorganized its sourcing and production organizations to better reflect the Company's new supply chain model. In connection with the plant closure, the Company recorded and included in cost of goods sold during the fourth quarter $1,360,000 in non-recurring charges associated with obsolete raw materials and supplies. In addition, the Company also recorded during the fourth quarter a $280,000 restructuring charge associated with severances and other expenses incurred in connection with the plant closure. The restructuring charge is stated separatel y in the accompanying Consolidated Statements of Operations for the year ending December 31, 2003. At December 31, 2003, $181,000 had been paid representing all of the severance liability payable to the affected employees. An additional $99,000 was recorded as a reduction in the cost basis of the machinery and equipment formerly used in the Company's belt and suspender manufacturing operations, to reflect their estimated fair market values. No restructuring expenses were recorded in 2002. 

       Net interest expense for the year ended December 31, 2004 increased $459,000 or 40% compared to 2003. The increase was primarily due to a non-recurring expense of $589,000 recorded during the quarter ended June 30, 2004 in connection with the write-off of deferred financing costs, early termination fees and other charges related to the termination of the Company's previous loan and security agreement. Exclusive of this charge, net interest expense declined $130,000 or 11.2% compared to 2003. This decrease was due mainly to a reduction in average outstanding revolving credit balances during 2004 compared to 2003 offset in part by an increase of approximately 89 basis points in the Company's average borrowing costs compared to the prior year (see "Liquidity and Capital Resources").

       Net sales for the year ended December 31, 2003 decreased by $5,166,000 or 5.2% compared to 2002. Shipments of the Company's personal leather goods and belt merchandise decreased 8.8% and 5.7%, respectively both as compared to the prior year. The decrease in personal leather goods shipments was primarily due to rollouts of new small leather goods merchandise shipped during the first and second quarters of 2002 and certain holiday gift programs that were not shipped to the same extent in 2003. During 2002's spring season, the Company made unusually heavy shipments in connection with new product and packaging concepts associated with the Company's "Geoffrey Beene" and "Tommy Hilfiger" branded collections as well as in connection with certain private label programs. The decrease in men's belt shipments in 2003 was primarily due to lower sales of non-branded merchandise offset in part by higher sales associated with the launch of certain new branded be lt programs including "Axcess by Claiborne" and "Kenneth Cole Reaction".

       Net sales in 2003 were further affected by decisions made by the Company's retail customers during the year to reduce their on-hand inventories to accelerate inventory turn. Retailers generally reduced their purchases from the Company during 2003 to achieve the targeted reductions. In addition, shipments of private label merchandise for all categories fell 12.1% in 2003, due in part to the Company's decision to reduce its exposure to low-margin businesses. Retailers have generally been revising their pricing strategies with regard to private label product requiring vendors to become more aggressive in providing lower cost merchandise. The Company determined in 2003 that it would reduce its participation in certain of these programs if the Company could not achieve appropriate margin goals, and instead concentrate its working capital and product development resources on potentially more profitable businesses.

       The decrease in belt and small leather goods shipments was offset in part by a reduction in sales dilution associated with reduced customer returns, markdowns and allowances. The decrease in sales dilution during 2003 was mainly due to higher returns received during the spring 2002 season associated with the launches of the new packaging concepts, and increased markdown activity during the fourth quarter of 2002 in connection with certain holiday boxed merchandise shipped to retailers during the fall 2002 season. During 2002, a disappointing holiday season and generally sluggish retail climate also contributed to a more promotional retail environment compared to 2003. The Company regularly participates in promotional events designed to stimulate sales of its merchandise or expand its market share within certain retail channels.

       Net sales in 2003 and 2002 were also favorably affected by the annual returns adjustment made in the second quarter. The Company reduces net sales and cost of sales by the estimated effect of future returns of current period shipments. Each spring upon the completion of processing returns from the preceding fall season, the Company records adjustments to net sales in the second quarter to reflect the difference between customer returns of prior year shipments actually received in the current year and the estimate used to establish the allowance for customer returns at the end of the preceding fiscal year. These adjustments increased net sales by $2,069,000 and $505,000 for the twelve month periods ended December 31, 2003 and 2002, respectively. The increase in this adjustment in 2003 compared to 2002 was primarily due to a significant reduction in customer returns during the spring 2003 season beyond that which had been projected. As described abov e, during the spring 2002 season the Company made unusually heavy shipments in connection with certain new "Geoffrey Beene" and "Tommy Hilfiger" branded merchandise but also experienced an increase in returns as retailers adjusted their inventories accordingly. In establishing its reserve at December 31, 2002, the company anticipated a reduction in returns during the spring 2003 season but its actual experience was more favorable than planned.

       Gross profit for the year ended December 31, 2003 decreased by $1,792,000 or 6.4% compared to the prior year's gross profit of $28,154,000. Gross profit expressed as a percentage of net sales for 2003 was 27.8% compared to 28.1% for 2002.

       The decrease in gross profit both in dollars and as a percentage of net sales during 2003 was primarily due to increases in certain inventory-related costs, non-recurring expenses associated with the Norwalk closure and lower net sales, all offset in part by reduced sales dilution and royalty charges and improved manufacturing efficiencies. The increase in inventory-related charges in 2003 was primarily due to costs incurred by the Company associated with sales of discontinued and excess belt inventories. As a consequence of transitioning its belt requirements to third-party vendors, the Company discontinued a variety of manufactured styles and purchased additional merchandise to ensure adequate supplies for the fall season. As discussed above, the Company's retail customers also adjusted their purchases during 2003 to reduce their on-hand inventories. These factors contributed to a higher than usual inventory of excess product primarily during the fall season and resulted in additional markdown expense associated with the subsequent sale of these goods. The closure of the Norwalk facility resulted in non-recurring inventory-related charges of $1,360,000 recorded in cost of sales during the fourth quarter associated with excess and obsolete raw materials and supplies formerly used in belt and suspender manufacturing. Sales dilution decreased in 2003 compared to 2002 due to customer returns received during last year's spring season associated with the launches of the new packaging concepts shipped during the first quarter of 2002 and increased markdown accruals recorded during the fourth quarter of 2002 in connection with certain holiday boxed merchandise shipped to retailers during the fall 2002 season. The Company made fewer shipments of boxed merchandise during the 2003 holiday season.

       The Company's initial markup in 2003 on its men's personal leather goods and belt merchandise decreased slightly compared to the prior year principally due to a higher proportion of sales to off-price and labels-for-less retailers. During the past year, the Company has also introduced several new styling and packaging concepts for certain of its leather goods programs to address the needs of more value-conscious consumers that contributed to an increase in merchandise cost. The Company has developed several initiatives designed to reduce these costs by more effectively sourcing its leather goods merchandise and developing new sources for its packaging requirements.

       The improvement in manufacturing efficiencies is mainly attributable to the increase in belt merchandise sourced from third-party vendors and the consequent decrease in production activity at Norwalk. During 2002, the Company recorded substantial labor and overhead manufacturing variances at Norwalk in an attempt to adjust production levels with anticipated demand. The Company began significantly decreasing its production levels at Norwalk during the third quarter of 2003 and ceased manufacturing operations during the fourth quarter. Royalty charges decreased in 2003 due to lower net sales of certain branded merchandise, reductions in contractual minimum royalty obligations and the expiration of the Company's John Henry license.

       Selling and administrative expenses for the year ended December 31, 2003 decreased $3,078,000 or 10.1% compared to the prior year. Selling and administrative expense expressed as a percentage of net sales decreased to 29.0% from 30.7% in 2002. Selling expenses decreased by $2,185,000 or 10.1% while administrative expenses decreased by $893,000 or 10.0%, both as compared to the prior year. Expressed as a percentage of net sales, selling expenses totaled 20.5% and 21.7% for 2003 and 2002, respectively, and administrative expenses totaled 8.5% and 9.0% for 2003 and 2002, respectively.

       The decrease in selling expenses was primarily due to lower variable selling costs, including sales commissions, travel and entertainment and distribution-related costs, and reduced management and administrative compensation and benefits expense. During 2003, the Company determined that it would reduce its overall cost structure and streamline its operations by reorganizing its sales and merchandising functions to reflect its new sourcing strategy.

       The Company routinely makes advertising and promotional expenditures to enhance its business and to support the advertising and promotion activity of its licensors. The license agreements to which the Company is a party also generally include minimum advertising and promotional spending requirements. Advertising and promotional expenses in support of the Company's men's accessories business, exclusive of cooperative advertising and display expenditures, totaled 2.1% of net sales for the year ended December 31, 2003 compared to 2.2% in 2002.

       The reduction in administrative expenses in 2003 was mainly due to a decrease in management compensation and related expenses, professional fees, and bad debt expense. The reduction in bad debt expense was due mainly to a reserve established during the fourth quarter of 2002 associated with a specific event concerning one of the Company's customers.

       During 2002, the Company recorded an adjustment to an accrual that originally had been established in connection with certain variable expenses associated with net sales made prior to 2001. The Company determined its actual liability for this expense in 2002 and accordingly, recorded other income of $640,000 for the period ending December 31, 2002 to adjust the accrual to its expected amount.

       During the fourth quarter of 2003, the Company ceased manufacturing operations at its belt and suspender manufacturing facility in Norwalk and began sourcing its entire belt and suspender merchandise requirements from third-party vendors. As part of this transition, beginning early in the third quarter the Company gradually began to reduce production levels at Norwalk and subsequently reorganized its sourcing and production organizations to better reflect the Company's new supply chain model. In connection with the plant closure, the Company recorded and included in cost of goods sold during the fourth quarter $1,360,000 in non-recurring charges associated with obsolete raw materials and supplies. In addition, the Company also recorded during the fourth quarter a $280,000 restructuring charge associated with severances and other expenses incurred in connection with the plant closure. The restructuring charge is stated separately in the accompanying Consolidated Statements of Operations for the year ending December 31, 2003. At December 31, 2003, $181,000 had been paid representing all of the severance liability payable to the affected employees. An additional $99,000 was recorded as a reduction in the cost basis of the machinery and equipment formerly used in the Company's belt and suspender manufacturing operations, to reflect their estimated fair market values. No restructuring expenses were recorded in 2002.

        During the first quarter of 2001, management determined that the Company should intensify its efforts to reduce costs throughout the organization to streamline operations and reduce net cash requirements. As a consequence of this strategy, the Company recorded a restructuring charge of $845,000 in the first quarter of 2001 for employee severance and related payroll costs associated with staff reductions primarily within certain sales and administrative departments affecting approximately 93 employees. Of the $845,000 charge recorded in 2001, $372,000 was included within discontinued operations and $473,000 was included in the results of continuing operations. The restructuring charges are stated separately in the accompanying Consolidated Statements of Operations for the year ending December 31, 2001. During 2002, the Company paid the remaining liability of $8,000, which was included in Other Liabilities on the Company's Consolidated Balance Sheet at December 31, 2001.

       Net interest expense for the year ended December 31, 2003 increased $18,000 or 1.2% compared to 2002. The increase was primarily due to higher average outstanding revolving credit balances during 2003 compared to 2002 offset in part by a reduction of approximately 26 basis points in the Company's average borrowing costs compared to the prior year (see "Liquidity and Capital Resources").

       The Company did not record a current income tax provision or benefit for fiscal years 2004 and 2003. In fiscal year 2000, the Company began recording a valuation reserve against all of its deferred tax assets. During 2004, the Company utilized various deferred tax assets which had been fully reserved to offset its tax provision. During 2003, the Company recorded a valuation reserve against the deferred tax assets generated from its losses. During 2002, the Company recorded an income tax benefit at a combined federal and state effective tax rate of 87.4%. The only benefit that the Company recorded in 2002 relates to the utilization of tax loss carrybacks for which the Company received cash refunds. The amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income or loss for future years are revised based on actual results.

        The Company routinely makes advertising and promotional expenditures to enhance its business and to support the advertising and promotion activity of its licensors. Promotional expenditures included in selling and administrative expenses increased by $385,000 in 2004 and decreased by $17,000 in 2003 both as compared to the prior year. The Company also makes expenditures in support of cooperative advertising arrangements with its retail customers. These expenses, which are included in net sales, decreased $398,000 in 2004 and decreased $235,000 in 2003, both as compared to the corresponding prior year periods. Expenditures for merchandise displays, which the Company includes in cost of sales, decreased $77,000 in 2004 and decreased $161,000 in 2003.

       The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During 2004, the Company was profitable, generated positive cash flow from operating activities, and successfully refinanced its revolving credit facility. The improvement in the Company's operating results was driven primarily by an increase in gross margin as well as a number of cost-saving and efficiency initiatives that the Company has undertaken over the past several years. Included among the various steps taken by the Company has been the closing of its Attleboro, Massachusetts, Cartago, Costa Rica, and Norwalk, Connecticut manufacturing facilities in 2000, 2001 and 2003, respectively. In 2001, the Company entered into a sale-leaseback transaction with respect to the Company's Norwalk facility and sold certain assets (and discontinued the remaining operations) associated with the Company's women's costume jewelry division, generating net proceeds of $6,100,000 and $4,600,000, respectively, which were used to reduce the Company's outstanding revolving credit balance. During 2003, the Company received federal income tax refunds of $1,648,000 offset by Internal Revenue Service audit adjustments of $632,000 in connection with fiscal years 1996 through 2001, and received $4,247,000 in federal income tax refunds during 2002.

       The Company believes that the improvement in gross margin and the steps it has taken to restructure its business and reduce operating costs have contributed to a reduction in the Company's breakeven point which led to a significant improvement in 2004's operating results. However, due to a variety of factors including high overhead costs relative to sales volume, inefficient manufacturing operations, disappointing retail sales and generally lackluster economic conditions, the Company experienced operating losses and negative cash flows from operating activities during each of the years ended December 31, 2003 and 2002 that the Company was able to fund from its revolving credit arrangements.

       The Company's 2004 Loan Agreement (see Note D to the consolidated financial statements) requires it to maintain various covenants, including a minimum earnings before interest, taxes, depreciation, and amortization ("EBITDA") requirement on a trailing 12 month basis. The Company's ability to remain profitable and continue to meet the various covenants contained in the 2004 Loan Agreement going forward will be dependent on, among other things, achieving its planned sales revenue for fiscal 2005; maintaining its cash requirements within the constraints of the 2004 Loan Agreement; and continuing to monitor and control its cost structure consistent with its anticipated revenues. If the Company's actual results deviate from plan such that it does not maintain the required EBITDA, there can be no assurance that the Company's current lender will waive such noncompliance or that the Company would be able to obtain alternative financing. These matters raise a substantial doubt about the ability of the Company to operate as a going concern.

       Although no assurances can be given, the Company believes that achieving its revenue plan for 2005, continuing the current program of cost control initiatives, and maintaining its cash requirements within the constraints of its 2004 Loan Agreement will enable the Company to continue as a going concern. Accordingly, the consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets or liabilities or any other adjustments that would be necessary should the Company be unable to operate as a going concern.

       On April 1, 2004, Marshall Tulin, Chairman of the Board of the Company, loaned $350,000 to the Company pursuant to the terms of a subordinated promissory note, as amended and restated as of June 30, 2004 (the "Note") issued by the Company to Mr Tulin. The Note is expressly subordinate in right of payment to the Company's senior debt, has an original maturity of two years and bears interest at an annual rate of 7.0%, payable quarterly. Under certain circumstances, as more fully set forth in the Note, the original maturity date of the Note will be extended to the earlier of December 31, 2009 or the date the 2004 Loan Agreement shall have been terminated and all obligations of the Company under the 2004 Loan Agreement shall have been paid in full in cash. Mr. Tulin has the option at any time to convert the principal amount of the Note into shares of the Company's common stock pursuant to a formula based on the greater of the aggregate market value of the Company or its going concern value as determined by an investment banking firm or nationally recognized accounting firm, on the conversion date. The number of shares of the Company's common stock that may be issued under the Note may not exceed 20% of the then issued and outstanding shares of the Company's common stock on the conversion date. The Company, at its option and subject to certain provisions of the Note, may prepay the Note at any time without premium or penalty.

       The Company, in the normal course of business, is theoretically exposed to interest rate change market risk with respect to borrowings under its 2004 Loan Agreement. The seasonal nature of the Company's business typically requires it to build inventories during the course of the year in anticipation of heavy shipments to retailers for the upcoming holiday season. The Company's revolving credit borrowings generally peak during the third and fourth quarters. Therefore, a sudden increase in interest rates (which under the Company's 2004 Loan Agreement is presently the prime rate plus a margin of 1.25% or LIBOR plus a margin of 3.75%) may, especially during peak borrowing periods, have a negative impact on short-term results. The Company is also theoretically exposed to market risk with respect to changes in the global price level of certain commodities used in the production of the Company's products.

       In the ordinary course of business, the Company is contingently liable for performance under letters of credit of approximately $381,000 at December 31, 2004. The Company is required to pay a fee quarterly equal to 2.0% per annum on outstanding letters of credit.

       The following chart summarizes the Company's contractual obligations as of December 31, 2004 (in thousands):

       As discussed above, during the first quarter of 2004, the Company and the landlord of its former South Norwalk, Connecticut belt manufacturing facility entered into an agreement under which the lease for that facility was terminated effective April 1, 2004. During 2004, the Company paid $500,000 to the landlord in connection with the termination agreement including $250,000 upon the signing of the agreement and $250,000 on April 30, 2004. The agreement also provided for payments to the landlord of an additional $1,000,000, in installments, during the period from January 2005 through March 2006. On January 3, 2005, the Company paid the landlord $925,000 to settle all of its remaining obligations under the termination agreement.

       The Company is also a party to employment agreements with certain of its executive officers that provide for the payment of compensation and other benefits during the term of each executives' employment and, under certain circumstances, for a period of time following their termination.

       Cash provided by operations totaled $4,107,000 in 2004 compared to cash used in operations of $2,704,000 in 2003. Cash was provided in 2004 principally by net income, depreciation and amortization, and decreases in accounts receivable, inventories, and other assets, all offset in part by the non-cash gain recorded during the quarter ended March 31, 2004 in connection with the termination of the Company's lease on its Norwalk facility. The decrease in accounts receivable is mainly due to lower net sales during the fourth quarter. Inventory balances generally declined throughout 2004 compared to the prior year due to the Company's ongoing efforts to reduce excess inventories and better match inventory investment with sales and other working capital requirements.

       In 2003, cash used in operations was due principally to the operating loss, increases in accounts receivable and certain prepaid and other current assets, and decreases in accounts payable, accrued and other long term obligations, and deferred credits. Cash was provided by decreases in inventory and recoverable income taxes. In 2002, cash used in operations was due primarily to the net loss and decreases in accounts receivable reserves and certain other accrued and other long-term liabilities. Working capital increased by $407,000 in 2004 mainly due to decreases in bank borrowings and accounts receivable reserves, offset partially by decreases in inventory, accounts receivable, and other current assets and increases in accounts payable and other current liabilities.

       Cash used in investing activities in 2004 of $266,000 was for capital expenditures and premiums on life insurance policies, offset in part by the proceeds received from the sale of certain manufacturing equipment. Cash used in investing activities in 2003 of $303,000 was for capital expenditures and premiums on life insurance policies. Cash was provided by investing activities in 2002 primarily by the proceeds from the surrender of certain life insurance policies owned by the Company in connection with its 1993 Deferred Compensation plan (the "1993 Plan"). During the third quarter of 2002, the Company completed the termination of its 1993 Plan, surrendered the underlying insurance policies, and used the proceeds to distribute all vested benefits to participants. Capital expenditures were $319,000, $62,000 and $187,000 in 2004, 2003 and 2002, respectively.

       Cash used in financing activities of $3,835,000 in 2004 was mainly due to net repayments of borrowings under the Company's revolving credit agreements and closing and other costs associated with the 2004 Loan Agreement, offset in part by an increase in notes payable due affiliates. Cash provided by financing activities in 2003 of $3,083,000 was from net borrowings under the Company's revolving credit agreements.

       The Company expects that cash from operations and availability under its 2004 Loan Agreement will be sufficient to fund its ongoing program of replacing aging machinery and equipment to maintain or enhance operating efficiencies.

       Certain of the preceding paragraphs contain "forward looking statements" which are based upon current expectations and involve certain risks and uncertainties. Under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, readers should note that these statements may be impacted by, and the Company's actual performance may vary as a result of, a number of factors including general economic and business conditions, continuing sales patterns, pricing, competition, consumer preferences, and other factors. Reference is also made to the information set forth under the caption "Forward Looking Statements" which appears before Part I of this Form 10-K, which is incorporated by reference herein.

Recent Accounting Pronouncements

       In November 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS No. 151, Inventory Costs, An Amendment of ARB No. 43, Chapter 4 ("SFAS 151"). SFAS 151 requires that abnormal amounts of idle facility expense, freight, handling costs and wasted materials should be recognized as current period charges in all circumstances. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe that the adoption of SFAS 151 will have a material impact on its financial position, results of operations or cash flows.

       In December 2004, FASB issued SFAS No. 123 (revised 2004, "SFAS No. 123R"), Share-Based Payment. SFAS 123R addresses the accounting for share-based payments to employees, including grants of employee stock options. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB Opinion No. 25, Accounting For Stock Issued To Employees. Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of operations. SFAS 123R will be effective for periods beginning after June 15, 2005 and allows, but does not require, companies to restate the full fiscal year of 2005 to reflect the impact of expensing share-based payments under SFAS 123R. The Company does not expect that the adoption of SFAS 123R will have a significant impact on its financial condition, res ults of operations, or cash flows.

       In December 2004, FASB issued SFAS No. 153, Exchange of Nonmonetary Assets, an Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions ("SFAS 153"). SFAS 153 is based on the principle that exchange of nonmonetary assets should be measured based on the fair market value of the assets exchanged. SFAS 153 eliminates the exception of nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS 153 is effective for nonmonetary asset exchanges in fiscal periods beginning after June 15, 2005. The Company is presently assessing the provisions of SFAS 153 and does not believe that the adoption of SFAS 153 will have a material impact on its financial condition, results of operations or cash flows.

       On February 28, 2005, Federated Department Stores, Inc. ("Federated") and The May Department Stores Company ("May") jointly announced that they entered into a merger agreement under which issued and outstanding shares of common stock of May would be converted into a combination of cash and shares of Federated common stock. The announcement indicated that the merger, which is subject to regulatory review and approval by the shareholders of both companies, is expected to close during the third quarter of 2005. The announcement further stated that the parties expected substantial cost savings resulting from consolidation of the parties' corporate headquarters, division integrations (including the likely conversion of May department stores into Macy's) and the adoption of other "best practices". During fiscal 2004, net sales to Federated were approximately 13% of consolidated net sales of the Company and Federated accounted for approximately 6% of con solidated trade receivables (gross of allowances) at December 31, 2004. During the same period, net sales to May were approximately 10% of consolidated net sales of the Company and May accounted for approximately 16% of consolidated trade receivables (gross of allowances). The Company believes that its relationship with both of these customers is excellent. The Company will continue to follow the transaction and assess the effect, if any, that it may have on the Company.

       The Company, in the normal course of business, is theoretically exposed to interest rate change market risk with respect to borrowings under its revolving credit line. The seasonal nature of the Company's business typically requires it to build inventories during the course of the year in anticipation of heavy shipments to retailers for the upcoming holiday season. The Company's revolving credit borrowings generally peak during the third and fourth quarters. Therefore, a sudden increase in interest rates (which under the Company's revolving credit facility is presently the prime rate plus 1.25% or LIBOR plus 3.75%) may, especially during peak borrowing periods, have a negative impact on short-term results. The Company is also theoretically exposed to market risk with respect to changes in the global price level of certain commodities used in the production of the Company's products. The Company purchases substantially all of its men's personal leat her items and belts from third-party suppliers. An unanticipated material increase in the market price of leather could increase the cost of these products to the Company and therefore have a negative effect on the Company's results.

     *All other schedules have been omitted because they are not applicable or not required as the required information is included in the Consolidated Financial Statements of the Company or the Notes thereto.

REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM

Board of Directors
Swank, Inc.
Taunton, Massachusetts

We have audited the accompanying consolidated balance sheets of Swank, Inc. and subsidiaries (the "Company") as of December 31, 2004 and 2003 and the related consolidated statements of operations, changes in stockholders' equity and comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2004. We have also audited the financial statement schedule listed in the accompanying index. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Swank, Inc. and subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the schedule, listed in the index appearing under Item 15(a)(2) on page 56, presents fairly, in all material respects, the information set forth therein.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The financial covenants under the Company's credit facility require the Company to maintain a minimum level of earnings before interest, taxes, depreciation and amortization. The Company was in compliance with this covenant as of December 31, 2004. If the Company does not maintain the required level of earnings before interest, taxes, depreciation and amortization it will not be in compliance with its debt agreement. If the debt agreement was called there can be no assurance that the Company will be able to obtain alternative financing. This matter raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to this matter are also described in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

BDO Seidman, LLP

/s/ BDO Seidman, LLP
February 25, 2005
Boston, Massachusetts

       The Company is currently engaged in the importation, sale and distribution of men's belts, leather accessories, suspenders, and men's jewelry. These products are sold both domestically and internationally, principally through department stores, and also through a wide variety of specialty stores and mass merchandisers. The Company also operates a number of factory outlet stores primarily to distribute excess and out of line merchandise.

       The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During 2004, the Company was profitable, generated positive cash flow from operating activities, and successfully refinanced its revolving credit facility. The improvement in the Company's operating results was driven primarily by an increase in gross margin and a number of cost-saving and efficiency initiatives that the Company has undertaken over the past several years. Included among the various steps taken by the Company has been the closing of its Norwalk, Connecticut, Cartago, Costa Rica and Attleboro, Massachusetts manufacturing facilities in 2003, 2001 and 2000, respectively.

       In 2001, the Company entered into a sale-leaseback transaction with respect to the Company's Norwalk facility and sold certain assets (and discontinued the remaining operations) associated with the Company's women's costume jewelry division, generating net proceeds of $6,100,000 and $4,600,000, respectively, which were used to reduce the Company's outstanding revolving credit balance. During 2003, the Company received federal income tax refunds of $1,648,000 offset by Internal Revenue Service audit adjustments of $632,000 in connection with fiscal years 1996 through 2001, and received $4,247,000 in federal income tax refunds during 2002.

       The Company believes that the improvement in gross margin and the steps it has taken to restructure its business and reduce operating costs have contributed to a reduction in the Company's breakeven point which led to a significant improvement in 2004's operating results. However, due to a variety of factors including high overhead costs relative to sales volume, inefficient manufacturing operations, disappointing retail sales and generally lackluster economic conditions, the Company experienced operating losses and negative cash flows from operating activities during each of the years ended December 31, 2003 and 2002 that the Company was able to fund from its revolving credit arrangements.

       The Company's 2004 Loan Agreement (see Note D to the consolidated financial statements) requires it to maintain various covenants, including a minimum earnings before interest, taxes, depreciation, and amortization ("EBITDA") requirement on a trailing 12 month basis. The Company's ability to remain profitable and continue to meet the various covenants contained in the 2004 Loan Agreement going forward will be dependent on, among other things, achieving its planned sales revenue for fiscal 2005; maintaining its cash requirements within the constraints of the 2004 Loan Agreement; and continuing to monitor and control its cost structure consistent with its anticipated revenues. If the Company's actual results deviate from plan such that it does not maintain the required EBITDA, there can be no assurance that the Company's current lender will waive such noncompliance or that the Company would be able to obtain alternative financing. These matters raise a substantial doubt about the ability of the Company to operate as a going concern.

       Although no assurances can be given, the Company believes that achieving its revenue plan for 2005, continuing the current program of cost control initiatives, and maintaining its cash requirements within the constraints of its 2004 Loan Agreement will enable the Company to continue as a going concern. Accordingly, the consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets or liabilities or any other adjustments that would be necessary should the Company be unable to operate as a going concern.

       The consolidated financial statements include the accounts of Swank, Inc. Amounts are in thousands except for share and per share data. During 2001, the Company ceased operations at its manufacturing joint-venture in Cartago, Costa Rica and liquidated its assets. This subsidiary is presently inactive.

       The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

       Net sales are generally recorded upon shipment, provided there exists persuasive evidence of an arrangement, the fee is fixed or determinable and collectability of the related receivable is reasonably assured. Allowances, including cash discounts, in-store customer allowances, cooperative advertising allowances and customer returns, which are all accounted for in accordance with Emerging Issues Task Force Issue No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor's Products", are provided for at the time the revenue is recognized based upon historical experience, current trends in the retail industry and individual customer and product experience. Each spring upon the completion of processing returns from the preceding fall season, the Company records adjustments to net sales in the second quarter to reflect the difference between customer returns of prior year shipments actually received in the curren t year and the estimate used to establish the allowance for customer returns at the end of the preceding fiscal year.

       For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments purchased with original maturities of three months or less to be cash equivalents.

       The Company's allowances for receivables are comprised of cash discounts, doubtful accounts, in-store markdowns, cooperative advertising and customer returns. Provisions for doubtful accounts are reflected in selling and administrative expenses. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential bad debt losses. The Company does not typically require collateral from its customers. The allowance for customer returns results from the reversal of sales for estimated returns and associated costs. Allowances for in-store markdowns and cooperative advertising reflect the estimated costs of the Company's share of certain promotions by its retail customers. Allowances for accounts receivable are generally at their seasonal highs on December 31. Reductions of allowances occur principally in the first and second quarters when the balances are adjusted to reflect actual charges as processed. Allowances for accounts receivable are estimates made by management based on historical experience, adjusted for current conditions, and may differ from actual results. The provisions (recoveries) for bad debts in 2004, 2003 and 2002 were $(13,000), $(194,000) and $448,000, respectively.

       The Company sells products primarily to major retailers within the United States. The Company's three largest customers accounted for approximately 6%, 15% and 16%, respectively, of consolidated trade receivables (gross of allowances) at December 31, 2004 and approximately 10%, 8% and 12%, respectively, at December 31, 2003.

       Sales to the Company's three largest customers accounted for approximately 13%, 11%, and 10% of consolidated net sales in both 2004 and 2003 and approximately 15%, 14%, and 11% respectively, in 2002. In addition, sales to a fourth customer accounted for approximately 10% of consolidated net sales in 2003. No other customer accounted for more than 10% of consolidated net sales during fiscal years 2004, 2003 or 2002. Exports to foreign countries accounted for approximately 7% of consolidated net sales in fiscal year 2004 and less than 4% of consolidated net sales in each of the Company's fiscal years ended December 31, 2003 and 2002, respectively.

       The Company, in the normal course of business, is theoretically exposed to interest rate change market risk with respect to borrowings under its revolving credit line. The seasonal nature of the Company's business typically requires it to build inventories during the course of the year in anticipation of heavy shipments to retailers for the upcoming holiday season. The Company's revolving credit borrowings generally peak during the third and fourth quarters. Therefore, a sudden increase in interest rates (which under the Company's 2004 Loan Agreement is presently the prime rate plus a margin of 1.25% or LIBOR plus a margin of 3.75%) may, especially during peak borrowing periods, have a negative impact on short-term results. The Company is also theoretically exposed to market risk with respect to changes in the global price level of certain commodities used in the production of the Company's products.

       The Company purchases substantially all of its small leather goods, principally wallets, from a single supplier in India. Unexpected disruption of this source of supply could have an adverse effect on the Company's small leather goods business in the short-term depending upon the Company's inventory position and on the seasonal shipping requirements at that time. However, the Company believes that alternative sources for small leather goods are available and could be utilized by the Company within several months. The Company also purchases substantially all of its finished belts and other accessories from a number of suppliers in the United States and abroad. The Company believes that alternative suppliers are readily available for substantially all such purchased items.

       On February 28, 2005, Federated Department Stores, Inc. ("Federated") and The May Department Stores Company ("May") jointly announced that they entered into a merger agreement under which issued and outstanding shares of common stock of May would be converted into a combination of cash and shares of Federated common stock. The announcement indicated that the merger, which is subject to regulatory review and approval by the shareholders of both companies, is expected to close during the third quarter of 2005. The announcement further stated that the parties expected substantial cost savings resulting from consolidation of the parties' corporate headquarters, division integrations (including the likely conversion of May department stores into Macy's) and the adoption of other "best practices". During fiscal 2004, net sales to Federated were approximately 13% of consolidated net sales of the Company and Federated accounted for approximately 6% of consolidated trade receivables (gross of allowances) at December 31, 2004. During the same period, net sales to May were approximately 10% of consolidated net sales of the Company and May accounted for approximately 16% of consolidated trade receivables (gross of allowances). The Company believes that its relationship with both of these customers is excellent. The Company will continue to follow the transaction and assess the effect, if any, that it may have on the Company.

       Inventories are stated at the lower of cost (principally average cost which approximates FIFO) or market. The Company's inventory is somewhat fashion oriented and, as a result, is subject to risk of rapid obsolescence. Management believes that inventory has been adequately adjusted, where appropriate, and that the Company has adequate channels to dispose of excess and obsolete inventory.

       Property, plant and equipment are stated at cost. The Company provides for depreciation of plant and equipment by charges against income which are sufficient to write off the cost of the assets over estimated useful lives of 10-45 years for buildings and improvements and 3-12 years for machinery, equipment and software. Improvements to leased premises are amortized on a straight-line basis over the shorter of the useful life of the improvement or the term of the lease.

       The Company's capital lease obligations for certain equipment are recorded at the lesser of the present value of the minimum lease payments or the fair market value of the leased property at the inception of the lease. The cost of the leased assets is amortized on a straight-line basis over the lesser of the term of the lease obligation or the life of the asset, generally 3 to 5 years. As of December 31, 2004, the capital lease assets were fully depreciated and the capital lease obligations have been fully satisfied.

       Expenditures for maintenance and repairs and minor renewals are charged to expense; betterments and major renewals are capitalized. Upon disposition, cost and related accumulated depreciation are removed from the accounts with any related gain or loss reflected in results of operations.

       The Company reviews the carrying value of its long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, whenever events and circumstances indicate that the assets might be impaired and the carrying value may not be recoverable. Recoverability of these assets is measured by comparison of the carrying value of the assets to the undiscounted cash flows estimated to be generated by those assets over their remaining economic life. If such assets are considered impaired, the impairment loss is measured by comparing the fair value of the assets to their carrying values. Fair value is determined by either a quoted market price or a value determined by a discounted cash flow technique, whichever is more appropriate under the circumstances involved. During the fourth quarter of 2003, the Company wrote-down the carrying value of certain machinery and equipm ent at its Norwalk, CT facility, to its estimated fair market value, and recognized an expense of $99,000, which was included in restructuring expenses for the year ending December 31, 2003.

        The carrying amounts of financial instruments, including cash and equivalents, accounts receivable, accounts payable, accrued expenses and notes payable approximated fair value as of December 31, 2004 and 2003. Included on the balance sheet in prepaid and other current assets are securities available for sale, stated at fair market value, of approximately $15,000 and $48,000 at December 31, 2004 and 2003, respectively.

       The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant, and accounts for stock-based compensation for employees in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and follows the disclosure-only alternative under SFAS 123 (see Note H).

       Had compensation expense for the Company's stock plans been determined consistent with SFAS 123, the pro forma net income (loss) per share would have been as follows:

       Net income (loss) per common share or basic earnings per share amounts are adjusted to include, where appropriate, shares held by the Company's employee stock ownership plan and deemed to be allocated to participants. Net income (loss) per share assuming full dilution includes the effects of options and convertible securities issued by the Company. For the years ended December 31, 2003 and 2002, basic net loss per share is equal to fully diluted net loss per share as the effect of all options is anti-dilutive. There were 638,333 stock options outstanding at both December 31, 2003 and 2002.

       Reporting comprehensive income (loss) requires that certain items recognized under generally accepted accounting standards as separate components of stockholders' equity be reported as comprehensive income (loss) in an annual financial statement that is displayed with the same prominence as the other annual financial statements. This statement also requires that an entity classify items of other comprehensive income (loss) by their nature in an annual financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional capital in excess of par value in the equity section of the balance sheet. Reportable other comprehensive income (loss) was $36,000, $25,000 and $(32,000) in 2004, 2003 and 2002, respectively. Income (loss) in these years resulted primarily from adjustments associated with unrecognized actuarial gains and losses relating to the Company's defined benefit plan and f rom unrealized gains on securities available for sale.

       Certain prior year amounts have been reclassified to be consistent with the current year's presentation.

        In December 2004, the FASB issued SFAS No. 123 (revised 2004, "SFAS 123R"), Share-Based Payment. SFAS 123R addresses the accounting for share-based payments to employees, including grants of employee stock options. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB Opinion No. 25, Accounting For Stock Issued To Employees. Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of operations. SFAS 123R will be effective for periods beginning after June 15, 2005 and allows, but does not require, companies to restate the full fiscal year of 2005 to reflect the impact of expensing share-based payments under SFAS 123R. The Company does not expect that the adoption of SFAS 123R will have a significant impact on its financial conditio n, results of operations, or cash flows.

       During the first quarter of 2004, the Company and the landlord of its former Norwalk, Connecticut belt manufacturing facility entered into an agreement under which the lease for that facility was terminated effective April 1, 2004. During 2004, the Company paid $500,000 to the landlord in connection with this termination agreement including $250,000 paid upon the signing of the agreement and $250,000 on April 30, 2004. The agreement also provided for payments to the landlord of an additional $1,000,000, in installments, during the period from January 2005 through March 2006. As a result, during the first quarter, the Company recorded a net gain of $1,090,000 consisting of a $3,348,000 gain associated with the recognition of the remaining balance of a deferred gain on real estate offset in part by $2,084,000 in costs related to the lease termination (including $1,500,000 in lease termination costs, $455,000 in asset impairment charges, and $129,000 for other plant closing expenses), and $174,000 in severance and related expenses recorded in connection with employee terminations. The net gain was stated separately as a non-recurring item on the Company's consolidated statement of operations. On January 3, 2005, the Company paid the landlord $925,000 to settle all of its remaining obligations under the termination agreement. The Company will record a gain of $75,000 during the first quarter of 2005 to recognize the difference between the amount of the liability outstanding at December 31, 2004 under the termination agreement and the final amount paid.

       During the quarter ended December 31, 2004, the Company recorded a non-cash impairment charge of $362,000 in connection with certain fixed assets associated with its former jewelry manufacturing and administrative office facility in Attleboro, Massachusetts. Although the Company ceased jewelry manufacturing operations in 2000, the Attleboro building continued to house the Company's main administrative offices. In December 2004, the Company consolidated its administrative staff into its Taunton, Massachusetts distribution center and is presently evaluating options with regard to alternative uses or the disposition of its Attleboro facility. The impairment charge was included as a non-recurring expense in the Company's consolidated statement of operations for the quarter and year ended December 31, 2004.

       During the fourth quarter of 2003, the Company ceased manufacturing operations at its belt and suspender manufacturing facility in Norwalk and began sourcing the balance of its belt and suspender merchandise requirements from third-party vendors. As part of this transition, beginning early in the third quarter the Company gradually began to reduce production levels at Norwalk and subsequently reorganized its sourcing and production organizations to better reflect the Company's new supply chain model. In connection with the plant closure, the Company recorded and included in cost of goods sold during the fourth quarter $1,360,000 in non-recurring charges associated with obsolete raw materials and supplies. In addition, the Company also recorded during the fourth quarter a $280,000 restructuring charge associated with severances and other expenses incurred in connection with the plant closure. The restructuring charge is stated separately in the acco mpanying Consolidated Statements of Operations for the year ending December 31, 2003. At December 31, 2003, $181,000 had been paid representing all of the severance liability payable to the affected employees. An additional $99,000 was recorded as a reduction in the cost basis of the machinery and equipment formerly used in the Company's belt and suspender manufacturing operations, to reflect their estimated fair market values. No restructuring expenses were recorded in 2002.

       The average amounts outstanding and weighted average interest rates during each year are based on average monthly balances outstanding under the Company's revolving credit facility for seasonal working capital needs.

       On June 30, 2004, the Company signed a new $25,000,000 Loan and Security Agreement (the "2004 Loan Agreement") with Wells Fargo Foothill, Inc ("WFF"). The 2004 Loan Agreement replaced the Company's previous loan and security agreement between it and its prior lender (the "2003 Loan Agreement"). The 2004 Loan Agreement is collateralized by substantially all of the Company's assets, including accounts receivable, inventory, and machinery and equipment. The 2004 Loan Agreement contains a $5,000,000 sublimit for the issuance of letters of credit and also prohibits the Company from paying dividends, imposes limits on additional indebtedness for borrowed money, and contains minimum monthly EBITDA requirements. The terms of the 2004 Loan Agreement permit the Company to borrow against a percentage of eligible accounts receivable and eligible inventory at an interest rate based on Wells Fargo Bank, N.A.'s prime lending rate plus 1.25% or at WFF's LIBOR ra te plus 3.75% or 6.50% and 6.15%, respectively at December 31, 2004. The Company is required to pay a monthly unused line fee of .5% of the maximum revolving credit amount less the average daily balance of loans and letters of credit outstanding during the immediately preceding month. As a result of the new financing agreement, during the quarter ended June 30, 2004, the Company recorded an expense of $589,000 in connection with the write-off of deferred financing costs, early termination fees and other charges related to the termination of the 2003 Loan Agreement. These expenses are included in interest expense in the Company's consolidated statement of operations for 2004. As of December 31, 2004, the Company was in compliance with the financial covenants contained within the 2004 Loan Agreement.

The components of income taxes are as follows: