Attached files
file | filename |
---|---|
EX-4.1 - EXHIBIT 4.1 - KID BRANDS, INC | c91800exv4w1.htm |
EX-32.1 - EXHIBIT 32.1 - KID BRANDS, INC | c91800exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - KID BRANDS, INC | c91800exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - KID BRANDS, INC | c91800exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - KID BRANDS, INC | c91800exv32w2.htm |
EX-3.1.A - EXHIBIT 3.1(A) - KID BRANDS, INC | c91800exv3w1wa.htm |
EX-3.1.C - EXHIBIT 3.1(C) - KID BRANDS, INC | c91800exv3w1wc.htm |
EX-3.1.B - EXHIBIT 3.1(B) - KID BRANDS, INC | c91800exv3w1wb.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
Or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 1-8681
KID BRANDS, INC.
(Exact name of registrant as specified in its charter)
New Jersey | 22-1815337 | |
(State of or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) | |
1800 Valley Road, Wayne, New Jersey | 07470 | |
(Address of principal executive offices) | (Zip Code) |
(201) 405-2400
(Registrants Telephone Number, including area code)
(Registrants Telephone Number, including area code)
RUSS BERRIE AND COMPANY, INC.
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o
Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares outstanding of each of the registrants classes of common stock, as of October
30, 2009 was as follows:
CLASS | SHARES OUTSTANDING | |
Common Stock, $0.10 stated value | 21,497,015 |
KID BRANDS, INC.
INDEX
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
23 | ||||||||
37 | ||||||||
37 | ||||||||
38 | ||||||||
38 | ||||||||
38 | ||||||||
39 | ||||||||
40 | ||||||||
Exhibit 3.1(a) | ||||||||
Exhibit 3.1(b) | ||||||||
Exhibit 3.1(c) | ||||||||
Exhibit 4.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KID BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
(UNAUDITED)
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
(UNAUDITED)
September 30, 2009 | December 31, 2008 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 2,014 | $ | 3,728 | ||||
Accounts receivable- trade, less allowances of $6,093 in 2009 and $4,285 in 2008 |
38,406 | 39,509 | ||||||
Inventories, net |
39,936 | 47,169 | ||||||
Prepaid expenses and other current assets |
2,075 | 3,252 | ||||||
Income tax receivable |
186 | 16 | ||||||
Deferred income taxes, net |
940 | 940 | ||||||
Total current assets |
83,557 | 94,614 | ||||||
Property, plant and equipment, net |
4,264 | 4,466 | ||||||
Intangible assets |
81,043 | 84,019 | ||||||
Note receivable, net of allowance of $15,815 in 2009 and $0 in 2008 |
| 15,300 | ||||||
Investment |
| 4,500 | ||||||
Deferred income taxes, net |
27,609 | 28,960 | ||||||
Other assets |
4,223 | 3,575 | ||||||
Total assets |
$ | 200,696 | $ | 235,434 | ||||
Liabilities and Shareholders Equity |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 13,533 | $ | 14,933 | ||||
Short-term debt |
18,325 | 12,114 | ||||||
Accounts payable |
14,738 | 23,546 | ||||||
Accrued expenses |
9,382 | 13,249 | ||||||
Income taxes payable |
6,827 | 5,726 | ||||||
Total current liabilities |
62,805 | 69,568 | ||||||
Income taxes payable, long-term |
| 4,252 | ||||||
Long-term debt, excluding current portion |
57,728 | 75,765 | ||||||
Deferred royalty income long-term |
| 5,065 | ||||||
Other long-term liabilities |
1,985 | 2,908 | ||||||
Total liabilities |
122,518 | 157,558 | ||||||
Commitments and contingencies |
||||||||
Shareholders equity: |
||||||||
Common stock: $0.10 stated value; authorized 50,000,000 shares; issued
26,727,780 shares at September 30, 2009 and December 31, 2008 |
2,674 | 2,674 | ||||||
Additional paid-in capital |
90,113 | 89,173 | ||||||
Retained earnings |
87,187 | 88,672 | ||||||
Accumulated other comprehensive income |
430 | 134 | ||||||
Treasury stock, at cost, 5,230,765 and 5,258,962 shares at September 30, 2009
and December 31, 2008, respectively |
(102,226 | ) | (102,777 | ) | ||||
Total shareholders equity |
78,178 | 77,876 | ||||||
Total liabilities and shareholders equity |
$ | 200,696 | $ | 235,434 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
Table of Contents
KID BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share and Per Share Data)
(UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share and Per Share Data)
(UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net sales |
$ | 60,085 | $ | 69,803 | $ | 176,329 | $ | 173,646 | ||||||||
Cost of sales |
41,613 | 47,192 | 122,289 | 115,883 | ||||||||||||
Gross profit |
18,472 | 22,611 | 54,040 | 57,763 | ||||||||||||
Selling, general and administrative expenses |
12,069 | 13,404 | 35,686 | 35,814 | ||||||||||||
Impairment and valuation reserve |
| | 15,620 | | ||||||||||||
Income from continuing operations |
6,403 | 9,207 | 2,734 | 21,949 | ||||||||||||
Other (expense) income: |
||||||||||||||||
Interest expense, including amortization and
write-off of deferred financing costs |
(1,559 | ) | (2,063 | ) | (5,452 | ) | (5,669 | ) | ||||||||
Interest and investment income |
| 29 | 10 | 111 | ||||||||||||
Other, net |
(67 | ) | (53 | ) | 136 | 217 | ||||||||||
(1,626 | ) | (2,087 | ) | (5,306 | ) | (5,341 | ) | |||||||||
Income (loss) from continuing operations
before income tax (benefit) provision |
4,777 | 7,120 | (2,572 | ) | 16,608 | |||||||||||
Income tax provision (benefit) |
1,909 | 1,129 | (1,087 | ) | 4,830 | |||||||||||
Net income (loss) from continuing operations |
2,868 | 5,991 | (1,485 | ) | 11,778 | |||||||||||
Discontinued operations: |
||||||||||||||||
Income (loss) from discontinued operations
before income tax provision (benefit) |
| 1,063 | | (15,622 | ) | |||||||||||
Income tax provision (benefit) from
discontinued operations |
| (1,151 | ) | | (1,910 | ) | ||||||||||
Income (loss) from discontinued
operations, net of tax |
| 2,214 | | (13,712 | ) | |||||||||||
Net income (loss) |
$ | 2,868 | $ | 8,205 | $ | (1,485 | ) | $ | (1,934 | ) | ||||||
Basic earnings (loss) per share: |
||||||||||||||||
Continuing operations |
$ | 0.13 | $ | 0.29 | $ | (0.07 | ) | $ | 0.55 | |||||||
Discontinued operations |
| 0.10 | | (0.64 | ) | |||||||||||
$ | 0.13 | $ | 0.39 | $ | (0 .07 | ) | $ | (0.09 | ) | |||||||
Diluted earnings (loss) per share: |
||||||||||||||||
Continuing operations |
$ | 0.13 | $ | 0.29 | $ | (0.07 | ) | $ | 0.55 | |||||||
Discontinued operations |
| 0.10 | | (0.64 | ) | |||||||||||
$ | 0.13 | $ | 0.39 | $ | (0.07 | ) | $ | (0.09 | ) | |||||||
Weighted average shares: |
||||||||||||||||
Basic |
21,371,000 | 21,300,000 | 21,370,000 | 21,300,000 | ||||||||||||
Diluted |
21,770,000 | 21,310,000 | 21,370,000 | 21,300,000 | ||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
Table of Contents
KID BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(UNAUDITED)
Nine Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (1,485 | ) | $ | (1,934 | ) | ||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
2,838 | 4,630 | ||||||
Provision for impairment of fixed assets |
| 7,041 | ||||||
Amortization of deferred financing costs |
1,190 | 605 | ||||||
Provision for impairment and valuation reserve |
15,620 | | ||||||
Accounts receivable allowance |
22,743 | 16,825 | ||||||
Provision for inventory reserve |
751 | 3,541 | ||||||
Share-based compensation expense |
1,413 | 1,357 | ||||||
Deferred income taxes |
1,351 | 4,082 | ||||||
Other |
| (444 | ) | |||||
Change in assets and liabilities: |
||||||||
Restricted cash |
| 16 | ||||||
Accounts receivable |
(21,430 | ) | (19,305 | ) | ||||
Income tax receivable |
11 | (447 | ) | |||||
Inventories |
6,843 | (1,563 | ) | |||||
Prepaid expenses and other current assets |
1,193 | 420 | ||||||
Other assets |
(31 | ) | 313 | |||||
Accounts payable |
(8,711 | ) | (1,216 | ) | ||||
Accrued expenses |
(5,393 | ) | 620 | |||||
Income taxes payable |
(3,152 | ) | (1,552 | ) | ||||
Net cash provided by operating activities |
13,751 | 12,989 | ||||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(472 | ) | (1,718 | ) | ||||
Payment for purchase of LaJobi Industries, Inc., net of cash acquired |
| (52,044 | ) | |||||
Other |
(4 | ) | (23 | ) | ||||
Payment for purchase of CoCaLo, Inc., net of cash acquired |
| (16,643 | ) | |||||
Payment of Kids Line, LLC earnout consideration |
| (3,622 | ) | |||||
Net cash used in investing activities |
(476 | ) | (74,050 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of common stock |
80 | | ||||||
Issuance of long-term debt |
| 100,000 | ||||||
Repayment of long-term debt |
(19,437 | ) | (53,721 | ) | ||||
Payment of deferred financing fees |
(1,646 | ) | (1,655 | ) | ||||
Net borrowing on revolving credit facility |
6,211 | 9,094 | ||||||
Payment of capital lease obligations |
| (165 | ) | |||||
Net cash (used in) provided by financing activities |
(14,792 | ) | 53,553 | |||||
Effect of exchange rate changes on cash and cash equivalents |
(197 | ) | (797 | ) | ||||
Net decrease in cash and cash equivalents |
(1,714 | ) | (8,305 | ) | ||||
Cash and cash equivalents at beginning of period |
3,728 | 21,925 | ||||||
Cash and cash equivalents at end of period |
$ | 2,014 | $ | 13,620 | ||||
Cash paid during the period for: |
||||||||
Interest |
$ | 5,310 | $ | 4,762 | ||||
Income taxes |
$ | 1,059 | $ | 704 | ||||
Noncash items: |
||||||||
Note payable CoCaLo purchase |
$ | | $ | 1,439 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
Table of Contents
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Kid Brands, Inc. (formerly Russ Berrie and Company, Inc.) (KID) and its subsidiaries
(collectively with KID, the Company) is a leading designer, importer, marketer and distributor of
infant and juvenile consumer products. The Company currently operates in one segment, the infant
and juvenile business.
On December 23, 2008, KID entered into, and consummated the transactions contemplated by, the
Purchase Agreement as of such date (the Purchase Agreement) with The Russ Companies, Inc., a
Delaware corporation (Buyer), for the sale of the capital stock of all of KIDs subsidiaries
actively engaged in the gift business (the Gift Business), and substantially all of KIDs assets
used in the Gift Business (the Gift Sale). As a result of the Gift Sale, the Consolidated
Statements of Operations for the three and nine months ended September 30, 2008 have been restated
to show the Gift Business as discontinued operations. The Consolidated Statement of Cash Flows for
the nine months ended September 30, 2008 has not been restated. The accompanying Notes to Unaudited
Consolidated Financial Statements have been restated where applicable to reflect the discontinued
operations presentation described above for the basic financial statements. As the Gift Sale was
completed in 2008, presentation of discontinued operations is not applicable with respect to 2009.
The Companys continuing operations, which currently consist of: Kids Line, LLC (Kids Line);
Sassy, Inc. (Sassy); LaJobi, Inc., (LaJobi); and CoCaLo, Inc., (CoCaLo), each direct or
indirect wholly-owned subsidiaries of KID, design, manufacture through third parties and market
products in a number of categories including, among others: infant bedding and related nursery
accessories and décor (Kids Line and CoCaLo); nursery furniture and related products (LaJobi); and
developmental toys and feeding, bath and baby care items with features that address the various
stages of an infants early years (Sassy). The Companys products are sold primarily to retailers
in North America, the UK and Australia, including large, national retail accounts and independent
retailers (including toy, specialty, food, drug, apparel and other retailers).
The accompanying unaudited interim consolidated financial statements have been prepared by the
Company in accordance with accounting principles generally accepted in the United States of America
for interim financial reporting and the instructions to the Quarterly Report on Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared under generally accepted accounting principles have been
condensed or omitted pursuant to such principles and regulations. The information furnished
reflects all adjustments, which are, in the opinion of management, of a normal recurring nature and
necessary for a fair presentation of the Companys consolidated financial position, results of
operations and cash flows for the interim periods presented. Results for interim periods are not
necessarily an indication of results to be expected for the year. This Quarterly Report on Form
10-Q should be read in conjunction with the Companys Annual Report on Form 10-K for the year ended
December 31, 2008, as amended (the 2008 10-K).
Certain prior year amounts have been reclassified to conform to the 2009 presentation.
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 168, The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. This statement
modifies the Generally Accepted Accounting Principles (GAAP) hierarchy by establishing only two
levels of GAAP, authoritative and non-authoritative accounting literature. Effective July 2009,
the FASB Accounting Standards Codification (ASC), also known collectively as the Codification,
is considered the single source of authoritative U.S. accounting and reporting standards, except
for additional authoritative rules and interpretive releases issued by the SEC. Non-authoritative
guidance and literature would include, among other things, FASB Concepts Statements, American
Institute of Certified Public Accountants Issue Papers and Technical Practice Aids and accounting
textbooks. The Codification was developed to organize GAAP pronouncements by topic so that users
can more easily access authoritative accounting guidance. It is organized by topic, subtopic,
section, and paragraph, each of which is identified by a numerical designation. This statement
applies beginning in the third quarter of 2009. All accounting references herein have been
updated, and therefore references to Statements of Financial Accounting Standards have been
replaced with ASC references. The issuance of the Codification did not change GAAP and therefore
its adoption by the Company will only affect how specific references to GAAP literature are
disclosed in the notes to our consolidated financial statements.
Effective this quarter the Company adopted ASC Topic,- 855, Subsequent Events . This
standard establishes general standards of accounting and disclosure
of events that occur after the
balance sheet date but before financial statements are issued. The adoption of this standard did
not impact the Companys financial position or results of operations. The Company evaluated all
events or transactions that occurred after September 30, 2009 up through November 4, 2009, the date
the Company issued these financial statements.
6
Table of Contents
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 ACQUISITIONS
LaJobi
As of April 2, 2008, LaJobi, Inc., a newly-formed and indirect, wholly-owned Delaware
subsidiary of KID (LaJobi), consummated the transactions contemplated by an Asset Purchase
Agreement (the Asset Agreement) with LaJobi Industries, Inc., a New Jersey corporation (Seller)
and each of Lawrence Bivona and Joseph Bivona (collectively, the Stockholders), for the purchase
of substantially all of the assets and specified obligations of the business of the Seller (the
Business). The aggregate purchase price for the Business was equal to $50.0 million.
In addition, provided that the EBITDA of the Business, as defined in the Asset Agreement (the
LaJobi Earnout EBITDA), has grown at a compound annual growth rate (CAGR) of not less than 4%
during the three years ending December 31, 2010 (the Measurement Date), determined in accordance
with the Asset Agreement, LaJobi will pay to the Stockholders an amount (the LaJobi Earnout
Consideration) equal to a percentage of the Agreed Enterprise Value of LaJobi as of the
Measurement Date (subject to acceleration under certain limited circumstances), with the Agreed
Enterprise Value defined as the product of (i) the LaJobi Earnout EBITDA during the twelve (12)
months ending on the Measurement Date, multiplied by (ii) an applicable multiple (ranging from 5 to
9) depending on the specified levels of CAGR achieved. The LaJobi Earnout Consideration can range
between $0 and a maximum of $15.0 million.
CoCaLo
On April 2, 2008, a newly-formed, wholly-owned Delaware subsidiary of KID, I&J Holdco, Inc.
(the CoCaLo Buyer), consummated the transactions contemplated by the Stock Purchase Agreement
(the Stock Agreement) with each of Renee Pepys Lowe and Stanley Lowe (collectively, the
Sellers), for the purchase of all of the issued and outstanding capital stock of CoCaLo, Inc., a
California corporation (CoCaLo). The aggregate base purchase price payable for CoCaLo was equal
to: (i) $16.0 million; minus (ii) the aggregate debt of CoCaLo outstanding at the closing of the
acquisition (including accrued interest) of $4.0 million; minus (iii) specified transaction
expenses ($0.3 million); plus (iv) a working capital adjustment of $1.5 million paid by the CoCaLo
Buyer. A portion of the purchase price ($1.6 million, which was discounted to $1.4 million for
financial statement purposes) was evidenced by a non-interest bearing promissory note and will be
paid as additional consideration in equal annual installments over a three-year period from the
closing date. The first payment of $533,000 was paid during April 2009.
In addition, the CoCaLo Buyer will pay to the Sellers the following earnout consideration
amounts (the CoCaLo Earnout Consideration) with respect to CoCaLos performance for the aggregate
three year period ending December 31, 2010: (i) $666,667 will be paid for the achievement of
specified initial performance targets with respect to each of net sales, gross profit and specified
CoCaLo EBITDA (the latter combined with specified Kids Line EBITDA) (the Initial Targets), for a
maximum payment of $2.0 million in the event of achievement of the Initial Targets in all three
categories; and (ii) up to an additional $666,667 will be paid, on a sliding scale basis, for
achievement in excess of the Initial Targets up to specified maximum performance targets in each
category, for a potential additional payment of $2.0 million in the event of achievement of the
maximum targets in all three categories. The CoCaLo Earnout Consideration can range between $0 up
to an aggregate maximum of $4.0 million.
Any LaJobi Earnout Consideration and/or CoCaLo Earnout Consideration will be recorded as
additional goodwill when and if paid.
Pro Forma Information
The results of operations of LaJobi and CoCaLo and the fair value of assets acquired and
liabilities assumed are included in our consolidated financial statements beginning on their
acquisition date.
7
Table of Contents
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated results of operations of the Company for the
nine months ended September 30, 2008 assumes the acquisitions of LaJobi and CoCaLo occurred as of
January 1, 2008 (in thousands):
September 30, 2008 | ||||
Net sales |
$ | 196,148 | ||
Net loss |
$ | (1,284 | ) | |
Basic income (loss) per share: |
||||
Continuing operations |
$ | 0.58 | ||
Discontinued operations |
(0.64 | ) | ||
$ | (0.06 | ) | ||
Diluted income (loss) per share: |
||||
Continuing operations |
$ | 0.58 | ||
Discontinued operations |
(0.64 | ) | ||
$ | (0.06 | ) | ||
The above amounts are based upon certain assumptions and estimates, and do not reflect any
benefits from combined operations. The pro forma results have not been audited and do not
necessarily represent results which would have occurred if the acquisitions had taken place on the
basis assumed above, and may not be indicative of the results of future combined operations.
NOTE 3SALE OF GIFT BUSINESS AND DISCONTINUED OPERATIONS
On December 23, 2008, KID completed the sale of the Gift Business. The aggregate purchase
price payable by the Buyer for the Gift Business was: (i) 199 shares of the Common Stock, par value
$0.001 per share, of the Buyer (the Buyer Common Shares), representing a 19.9% interest in the
Buyer after consummation of the transaction that was accounted for at cost; and (ii) a
subordinated, secured promissory note issued by the Buyer to KID in the original principal amount
of $19.0 million (the Seller Note). During the 90-day period following the fifth anniversary of
the consummation of the sale of the Gift Business, KID will have the right to cause the Buyer to
repurchase any Buyer Common Shares then owned by KID, at its assumed original value (which was $6.0
million for all Buyer Common Shares), as adjusted in the event that the number of Buyer Common
Shares is adjusted, plus interest at an annual rate of 5%, compounded annually. The consideration
received from the Gift Sale was recorded at fair value as of December 23, 2008 at approximately
$19.8 million and was recorded as Note Receivable of $15.3 million and Investment of $4.5 million
on the Companys consolidated balance sheet.
In addition, in connection with the sale of the Gift Business, our newly-formed, wholly-owned
Delaware limited liability company (the Licensor) executed a license agreement (the License
Agreement) with the Buyer. Pursuant to the License Agreement, the Buyer will pay the Licensor a
fixed, annual royalty (the Royalty) equal to $1,150,000. The initial annual Royalty payment is
due and payable in one lump sum on December 31, 2009. Thereafter, the Royalty will be paid
quarterly at the close of each three-month period during the term. At any time during the term of
the License Agreement, the Buyer shall have the option to purchase all of the intellectual property
subject to the License Agreement, consisting generally of the Russ ® and Applause
® trademarks and trade names (the Retained IP) from the Licensor for $5.0 million, to the
extent that at such time (i) the Seller Note shall have been paid in full (including all principal
and accrued interest with respect thereto), and (ii) there shall be no continuing default under the
License Agreement. If the Buyer does not purchase the Retained IP by December 23, 2013 (or nine
months thereafter, if applicable), the Licensor will have the option to require the Buyer to
purchase all of the Retained IP for $5.0 million. In connection therewith the Company recorded
deferred royalty income of $5.0 million.
The consideration received from the sale of the Gift Business is reviewed for impairment
indicators on a quarterly basis. In connection with the preparation of the Companys financial
statements for the second quarter of 2009, a series of impairment indicators emerged in connection
with the Buyer. These indicators included the impact of current macro-economic factors on the
Buyer, the deterioration of conditions in the gift market, and other Buyer- specific factors,
including declining financial performance, operational and integration challenges and liquidity
issues. As a result of these impairment indicators, the Company tested for impairment its 19.9%
investment in the Buyer and critically evaluated the collectibility of its $15.3 million note
receivable. As a result of this review, the Company determined that its 19.9% investment in the
Buyer as well as the Applause® trade name were other than temporarily impaired and recorded
non-cash charges of approximately $4.5 million and $0.8 million, respectively, against these
assets. The Company also recorded a $10.3 million charge, to reserve against the difference between
the note receivable and deferred revenue liability. The aggregate impact of the actions resulted
in a non-cash charge to income/ (loss) from continuing operations in an aggregate amount of $15.6
million in the second quarter of 2009.
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KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Condensed results of discontinued operations are as follows (in thousands):
Three Months | Nine Months | |||||||
Ended | Ended | |||||||
September 30, 2008 | September 30, 2008 | |||||||
Sales |
$ | 38,272 | $ | 98,046 | ||||
Income (loss) before income taxes |
$ | 1,063 | $ | (15,622 | ) | |||
Benefit for income taxes |
$ | (1,151 | ) | $ | (1,910 | ) | ||
Income (loss) from discontinued operations |
$ | 2,214 | $ | (13,712 | ) |
NOTE 4 SHAREHOLDERS EQUITY
Share-Based Compensation
On January 1, 2006, the Company adopted the provisions of ASC Topic 718, "Compensation-Stock
Compensation", which requires the costs resulting from all share-based payment transactions to be
recognized in the financial statements at their grant date fair values.
The provisions of ASC Topic 718 require the cash flows related to tax benefits resulting from
tax deductions in excess of compensation costs recognized for those equity compensation grants
(excess tax benefits) to be classified as financing cash flows. For the three and nine months ended
September 30, 2008, there was no excess tax benefit recognized from share-based compensation costs
because the Company was not in a taxpaying position in the United States in 2008.
Equity Plans
As of September 30, 2009, the Company maintained (i) its Equity Incentive Plan (the EI
Plan), which is a successor to the Companys 2004 Stock Option, Restricted and Non-Restricted
Stock Plan (the 2004 Option Plan, and together with the EI Plan, the Plans) and (ii) the 2009
Employee Stock Purchase Plan (the 2009 ESPP), each approved by the Companys shareholders on July
10, 2008. In addition, the Company may issue equity awards outside of the Plans discussed above. As
of September 30, 2009, there were 370,000 stock options outstanding that were granted outside the
Plans. The exercise or measurement price for equity awards issued under the Plans or otherwise is
generally equal to the closing price of the Companys common stock on the New York Stock Exchange
as of the date the award is granted. Generally, equity awards under the Plans (or otherwise) vest
over a period ranging from three to five years from the grant date as provided in the award
agreement governing the specific grant. Options and stock appreciation rights generally expire 10
years from the date of grant. Shares in respect of equity awards are issued from authorized shares
reserved for such issuance or treasury shares.
The EI Plan, which became effective July 10, 2008 (at which time no further awards could be
made under the 2004 Option Plan), provides for awards in any one or a combination of: (a) Stock
Options, (b) Stock Appreciation Rights, (c) Restricted Stock, (d) Stock Units, (e) Non-Restricted
Stock, and/or (f) Dividend Equivalent Rights. Any award under the EI Plan may, as determined by the
committee administering the EI Plan (the Plan Committee) in its sole discretion, constitute a
Performance-Based Award (an award that qualifies for the performance-based compensation exemption
of Section 162(m) of the Internal Revenue Code of 1986, as amended). All awards granted under the
EI Plan will be evidenced by a written agreement between the Company and each participant (which
need not be identical with respect to each grant or participant) that will provide the terms and
conditions, not inconsistent with the requirements of the EI Plan, associated with such awards, as
determined by the Plan Committee in its sole discretion. A total of 1,500,000 shares of Common
Stock have been reserved for issuance under the EI Plan. In the event all or a portion of an award
is forfeited, terminated or cancelled, expires, is settled for cash, or otherwise does not result
in the issuance of all or a portion of the shares of Common Stock subject to the award in
connection with the exercise or settlement of such award (Unissued Shares), such Unissued Shares
will in each case again be available for awards under the EI Plan pursuant to a formula set forth
in the EI Plan. The preceding sentence applies to any awards outstanding on July 10, 2008 under the
2004 Option Plan, up to a maximum of an additional 1,750,000 shares of Common Stock. At September
30, 2009, 891,606 shares were available for issuance under the EI Plan.
The 2009 ESPP became effective on January 1, 2009. A total of 200,000 shares of Common Stock
have been reserved for issuance under the 2009 ESPP. At September 30, 2009, 200,000 shares were
available for issuance under the ESPP.
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KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Impact on Net Income
The components of share-based compensation expense follow (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Stock option expense |
$ | 193 | $ | 222 | $ | 577 | $ | 675 | ||||||||
Restricted stock expense |
170 | 184 | 510 | 548 | ||||||||||||
Restricted stock unit expense |
5 | | 13 | | ||||||||||||
Stock appreciation right expense
expense |
66 | | 197 | | ||||||||||||
Employee stock purchase plan expense |
34 | 45 | 116 | 134 | ||||||||||||
Total share-based payment expense |
$ | 468 | $ | 451 | $ | 1,413 | $ | 1,357 | ||||||||
The Company records share-based compensation expense in the statements of operations within
the same categories that payroll expense is recorded.
Stock Options
Stock options are rights to purchase the Companys Common Stock in the future at a
predetermined per share exercise price (generally the closing price for such stock on the New York
Stock Exchange on the date of grant). Stock Options may be either Incentive Stock Options (stock
options which comply with Section 422 of the Code), or Nonqualified Stock Options (stock options
which are not Incentive Stock Options).
As of September 30, 2009, the total remaining unrecognized compensation cost related to
non-vested stock options, net of forfeitures, was approximately $3.0 million, and is expected to be
recognized over a weighted-average period of 3.2 years.
The fair value of options is estimated on the date of grant using a Black-Scholes-Merton
options pricing model using the assumptions discussed below. Expected volatilities are calculated
based on the historical volatility of the Companys stock. The expected term of options granted is
derived from the vesting period of the award, as well as historical exercise behavior, and
represents the period of time that options granted are expected to be outstanding. Management
monitors stock option exercises and employee termination patterns to estimate forfeitures rates
within the valuation model. Separate groups of employees, directors and officers that have similar
historical exercise behavior are considered separately for valuation purposes. The risk-free
interest rate is based on the Treasury note interest rate in effect on the date of grant for the
expected term of the stock option. The assumptions used to estimate the fair value of the stock
options granted during the nine months ended September 30, 2009 and 2008 were as follows:
Nine Months Ended | Nine Months Ended | |||||||
September 30, 2009 | September 30, 2008 | |||||||
Dividend yield |
0 | % | 0 | % | ||||
Risk-free interest rate |
2.45 | % | 3.06 | % | ||||
Volatility |
80.0 | % | 40.51 | % | ||||
Expected term (years) |
5 | 5 | ||||||
Weighted-average fair value of options granted |
$ | 4.32 | $ | 4.53 |
Activity regarding outstanding options for the nine months ended September 30, 2009 is as
follows:
All Stock Options Outstanding | ||||||||
Weighted Average | ||||||||
Shares | Exercise Price | |||||||
Options Outstanding as of December 31, 2008 |
1,941,379 | $ | 17.31 | |||||
Options Granted |
105,000 | $ | 6.63 | |||||
Options Exercised |
| | ||||||
Options Forfeited / Cancelled * |
(247,404 | ) | $ | 19.75 | ||||
Options Outstanding at September 30, 2009 |
1,798,975 | $ | 16.35 | |||||
Option price range at September 30, 2009 |
$ | 6.63-$34.05 |
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KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
There was no aggregate intrinsic value on the unvested and vested outstanding options at
September 30, 2009. The aggregate intrinsic value is the total pretax value of in-the-money
options, which is the difference between the fair value at September 30, 2009 and the exercise
price of each option. No options were exercised in the quarter ended September 30, 2009. The
weighted average fair value of vested options for the nine months ended September 30, 2009 was
$11.63 per share underlying each option. The intrinsic value of stock options at December 31, 2008
was zero.
A summary of the Companys non-vested stock options at September 30, 2009 and changes during
the nine months ended September 30, 2009 is as follows:
Weighted Average Grant | ||||||||
Stock options | Options | Date Fair Value | ||||||
Unvested at December 31, 2008 |
672,837 | $ | 12.69 | |||||
Granted |
105,000 | $ | 6.63 | |||||
Vested |
(53,200 | ) | $ | 11.63 | ||||
Forfeited/cancelled* |
(21,360 | ) | $ | 16.77 | ||||
Unvested options at September 30, 2009 |
703,277 | $ | 11.74 | |||||
* For each period presented, all of the forfeited/cancelled options resulted from the
termination of the employment of the respective optionees and the resulting forfeiture of unvested
and/or vested but unexercised stock options. Pursuant to our equity compensation plans, upon the
termination of employment of an optionee, such optionees outstanding unexercised options are
typically cancelled and deemed terminated as of the date of termination; provided, that if the
termination is not for cause, all vested options generally remain outstanding for a period ranging
from 30 to 90 days, and then expire to the extent not exercised.
Restricted Stock
Restricted Stock is Common Stock that is subject to restrictions, including risks of
forfeiture, determined by the Plan Committee in its sole discretion, for so long as such Common
Stock remains subject to any such restrictions. A holder of restricted stock has all rights of a
shareholder with respect to such stock, including the right to vote and to receive dividends
thereon, except as otherwise provided in the award agreement relating to such award. Restricted
Stock Awards are equity-classified within the Consolidated Balance Sheets.
During the three and nine month periods ended September 30, 2009 and 2008, there were no
shares of restricted stock issued under the EI Plan or the 2004 Option Plan. At September 30, 2009
and December 31, 2008, there were 126,330 and 168,300 shares of restricted stock outstanding,
respectively. These restricted stock grants have vesting periods ranging from three to five years,
with fair values (per share) at date of grant ranging from $13.65 to $16.77. Compensation expense
is determined for the issuance of restricted stock by amortizing over the requisite service period,
or the vesting period, the aggregate fair value of the restricted stock awarded based on the
closing price of the Companys Common Stock effective on the date the award is made.
As of September 30, 2009, the total remaining unrecognized compensation cost related to
issuances of restricted stock was approximately $1.4 million, and is expected to be recognized over
a weighted-average period of 2.5 years.
Restricted Stock Units
A Restricted Stock Unit (RSU) is a notional account representing a grantees conditional
right to receive at a future date one (1) share of Common Stock or its equivalent in value. Shares
of Common Stock issued in settlement of an RSU may be issued with or without other consideration as
determined by the Plan Committee in its sole discretion. RSUs may be settled in the sole discretion
of the Plan Committee: (i) by the distribution of shares of Common Stock equal to the grantees
RSUs; (ii) by a lump sum payment of an amount in cash equal to the fair value of the shares of
Common Stock which would otherwise be distributed to the grantee; or (iii) by a combination of cash
and Common Stock. The RSUs issued under the EI Plan during 2008 vest (and will be settled) ratably
over a 5-year period commencing October 6, 2009 and are equity classified in the Consolidated
Balance Sheets. There were 5,000 RSUs issued to an officer of the Company during the third quarter
of 2009.
The fair value of each RSU grant is estimated using the closing price of the Companys Common
Stock on the New York Stock Exchange on the date of grant. Compensation expense for RSUs is
recognized ratably over the vesting period, based upon the market price of the shares underlying
the awards on the date of grant.
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KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Companys unvested RSUs at September 30, 2009 and changes during the nine
months ended September 30, 2009 is as follows:
Weighted | ||||||||
Restricted | Average | |||||||
Stock | Grant-Date | |||||||
Units | Fair Value | |||||||
Unvested at December 31, 2008 |
13,900 | $ | 6.43 | |||||
Granted |
5,000 | $ | 5.34 | |||||
Vested |
| | ||||||
Forfeited/cancelled |
| | ||||||
Unvested at September 30, 2009 |
18,900 | $ | 6.14 | |||||
As of September 30, 2009, there was approximately $93,000 of unrecognized compensation cost
related to unvested RSUs. That cost is expected to be recognized over a weighted-average period of
4.2 years.
Stock Appreciation Rights
A Stock Appreciation Right (a SAR) is a right to receive a payment in cash, Common Stock or
a combination thereof, as determined by the Plan Committee, in an amount or value equal to the
excess of: (i) the fair value, or other specified valuation (which may not exceed fair value), of a
specified number of shares of Common Stock on the date the right is exercised;, over (ii) the fair
value or other specified amount (which may not be less than fair value) of such shares of Common
Stock on the date the right is granted; provided, however, that if a SAR is granted in tandem with
or in substitution for a stock option, the designated fair value for purposes of the foregoing
clause (ii) will be the fair value on the date such stock option was granted. No SARs will be
exercisable later than ten (10) years after the date of grant. The SARs issued under the EI Plan
vest ratably over a period ranging from zero to five years, at an exercise price equal to the
closing price of the Companys Common Stock on the New York Stock Exchange on the date of grant,
and unless terminated earlier, expire on the tenth anniversary of the date of grant. There were
564,943 SARs granted to officers of the Company during the three months ended March 31, 2009. There
were 10,000 SARs granted to an officer of the Company during the three months ended September 30,
2009. No SARs were granted during the nine months ended September 30, 2008.
SARs are accounted for at fair value at the date of grant in the consolidated statement of
operations, are generally amortized on a straight line basis over the vesting term, and are
equity-classified in the Consolidated Balance Sheets.
As of September 30, 2009, the total remaining unrecognized compensation cost related to
unvested SARs, net of forfeitures, was approximately $0.6 million, and is expected to be recognized
over a weighted-average period of 4.3 years.
The fair value of SARs is estimated on the date of grant using a Black-Scholes-Merton options
pricing model using the assumptions discussed below. Expected volatilities are calculated based on
the historical volatility of the Companys stock. The expected term of SARs granted is derived from
the vesting period of the award, as well as historical exercise behavior, and represents the period
of time that SARs granted are expected to be outstanding. Management will monitor SAR exercises and
employee termination patterns to estimate forfeitures rates within the valuation model. Separate
groups of employees, directors and officers that have similar historical exercise behavior are
considered separately for valuation purposes. The risk-free interest rate is based on the Treasury
note interest rate in effect on the date of grant for the expected term of the SAR. The assumptions
used to estimate the fair value of the SARs granted during the nine months ended September 30, 2009
were as follows:
Nine Months Ended | ||||
September 30, 2009 | ||||
Dividend yield |
0 | % | ||
Risk-free interest rate |
1.64 | % | ||
Volatility |
0.836 | % | ||
Expected term (years) |
4.20 | |||
Weighted-average fair value of SARs granted |
$ | 0.90 |
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KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Activity regarding outstanding SARs for the first nine months of 2009 is as follows:
All SARs Outstanding | ||||||||
Weighted Average | ||||||||
SARs | Exercise Price | |||||||
SARs outstanding as of December 31, 2008 |
118,000 | $ | 6.43 | |||||
SARs Granted |
574,943 | $ | 1.56 | |||||
SARs Exercised |
| | ||||||
SARs Forfeited / Cancelled |
| | ||||||
SARs Outstanding as of September 30, 2009 |
692,943 | $ | 2.39 | |||||
SAR price range at September 30, 2009 |
$ | 1.36-$6.43 |
The aggregate intrinsic value on the unvested and vested outstanding SARs at September 30,
2009 was $2.7 million. The aggregate intrinsic value is the total pretax value of in-the-money
SARs, which is the difference between the fair value at September 30, 2009 and the exercise price
of each SAR. No SARs were exercised in the quarter ended September 30, 2009. The weighted average
fair value per vested SAR for the quarter ended September 30, 2009 was $0.69 per SAR. The
intrinsic value of SARs at December 31, 2008 was zero.
Employee Stock Purchase Plan
Under the 2009 ESPP, eligible employees are provided the opportunity to purchase the Companys
common stock at a discount. Pursuant to the 2009 ESPP, options are granted to participants as of
the first trading day of each plan year, which is the calendar year, and may be exercised as of the
last trading day of each plan year, to purchase from the Company the number of shares of common
stock that may be purchased at the relevant purchase price with the aggregate amount contributed by
each participant. In each plan year, an eligible employee may elect to participate in the 2009 ESPP
by filing a payroll deduction authorization form for up to 10% (in whole percentages) of his or her
compensation. No employee shall have the right to purchase Company common stock under the 2009 ESPP
that has a fair value in excess of $25,000 in any plan year. The purchase price is the lesser of
85% of the closing market price of the Companys common stock on either the first trading day or
the last trading day of the plan year. If an employee does not elect to exercise his or her option,
the total amount credited to his or her account during that plan year is returned to such employee
without interest, and his or her option expires. As of September 30, 2009, the 2009 ESPP had
200,000 shares reserved for future issuance. During the quarter ended September 30, 2009, there
were 87 enrolled participants in the 2009 ESPP and no shares thereunder were issued.
The fair value of each option granted under the 2009 ESPP and 2004 ESPP is estimated on the
date of grant using the Black-Scholes-Merton options-pricing model with the following assumptions:
Nine Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
Dividend yield |
0.0 | % | 0.0 | % | ||||
Risk-free interest rate |
0.40 | % | 3.17 | % | ||||
Volatility |
129.0 | % | 34.40 | % | ||||
Expected term (years) |
1.0 | 1.0 |
Expected volatilities are calculated based on the historical volatility of the Companys
stock. The risk-free interest rate is based on the U.S. Treasury yield with a term that is
consistent with the expected life of the options. The expected life of options under each of the
2009 ESPP and 2004 ESPP is one year, or the equivalent of the annual plan year.
NOTE 5 WEIGHTED AVERAGE COMMON SHARES
The
Company adopted ASC Topic 260, Earnings Per Share, (ASC Topic 260) on January 1, 2009, which requires the Company to include specified
participating securities in the two-class method of computing earnings per share (EPS). Under
the two-class method, EPS is computed by dividing earnings allocated to common stockholders by the
weighted-average number of common shares outstanding for the period. In determining the numbers of
common shares, outstanding earnings are allocated to both common shares and participating
securities based on the respective number of weighted-average shares outstanding for the period.
Participating securities include unvested restricted stock awards where, like our vested restricted stock
awards, carry a right to receive non-forfeitable dividends, if declared. There was no effect on our 2009 EPS as a result
of the adoption of this standard.
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KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
With respect to RSUs, as the right to receive dividends or dividend equivalents is contingent
upon vesting or exercise, in accordance with ASC Topic 260, we do not include unvested RSUs in the
calculation of basic earnings per share. To the extent such RSUs are
settled in stock, upon such settlement, such stock
will be included in the calculation of basic earnings per share.
The weighted average common shares outstanding included in the computation of basic and
diluted net income/loss per share is set forth below (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Weighted average common shares outstanding-Basic |
21,371 | 21,300 | 21,370 | 21,300 | ||||||||||||
Dilutive effect of common shares issuable upon
exercise of stock options and SARS |
399 | 10 | | | ||||||||||||
Weighted average common shares outstanding
assuming dilution |
21,770 | 21,310 | 21,370 | 21,300 | ||||||||||||
The computation of diluted net income/loss per common share for the three and nine months
ended September 30, 2009 did not include options to purchase approximately 1.8 million shares of
common stock because the exercise prices were greater than the average market price of the common
stock during such periods, and with respect to the computation of diluted net loss per common share
for the nine months ended September 30, 2009, as there was a net loss for the period, inclusion of
shares underlying such options would have been anti-dilutive. The computation of diluted net
income/loss per common share for the three and nine months ended September 30, 2008 did not include
options to purchase approximately 2.0 million shares of common stock because the exercise prices
were greater than the average market price of the common stock during such periods, and with
respect to the computation of diluted net loss per common share for the nine months ended September
30, 2008, as there was a net loss for the period, inclusion of shares underlying such options would
have been anti-dilutive.
NOTE 6 DEBT
Consolidated long-term debt at September 30, 2009 and December 31, 2008 consisted of the
following (in thousands):
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Term Loan (Credit Agreement) |
$ | 70,250 | $ | 89,200 | ||||
Note Payable (CoCaLo purchase) |
1,011 | 1,498 | ||||||
Total |
71,261 | 90,698 | ||||||
Less current portion |
13,533 | 14,933 | ||||||
Long-term debt |
$ | 57,728 | $ | 75,765 | ||||
At September 30, 2009 and December 31, 2008, there was approximately $18.3 million and $12.1
million, respectively, borrowed under the Revolving Loan (defined below), which is classified as
short-term debt. At September 30, 2009, Revolving Loan Availability was $26.9 million.
As of September 30, 2009, the applicable interest rate margins were: 4.00% for LIBOR Loans and
3.00% for Base Rate Loans. The weighted average interest rates for the outstanding loans as of
September 30, 2009 were as follows:
At September 30, 2009 | ||||||||
LIBOR Loans | Base Rate Loans | |||||||
Revolving Loan |
4.28 | % | 6.25 | % | ||||
Term Loan |
4.45 | % | 6.25 | % |
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KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Credit Agreement Summary
On March 14, 2006, Kids Line, LLC (KL) and Sassy, Inc. (Sassy) entered into a credit
agreement as borrowers, on a joint and several basis, with LaSalle Bank National Association as
administrative agent and arranger (the Agent), the lenders from time to time party thereto, KID
as loan party representative, Sovereign Bank as syndication agent, and Bank of America, N.A. as
documentation agent (as amended on December 22, 2006, the Original Credit Agreement). The
commitments under the Original Credit Agreement consisted of (a) a $35.0 million revolving credit
facility (the Original Revolving Loan), with a subfacility for letters of credit in an amount not
to exceed $5.0 million, and (b) a term loan facility in the original amount of $60 million (the
Original Term Loan).
In connection with the purchase of LaJobi and CoCaLo as of April 2, 2008, KID, KL, Sassy, the
CoCaLo Buyer, LaJobi and CoCaLo (via a Joinder Agreement) entered into an Amended and Restated
Credit Agreement (the Credit Agreement) with certain financial institutions party to the Original
Credit Agreement or their assignees (the Lenders), LaSalle Bank National Association, as Agent
and Fronting Bank, Sovereign Bank as Syndication Agent, Wachovia Bank, N.A. as Documentation Agent
and Banc of America Securities LLC as Lead Arranger. KL, Sassy, the CoCaLo Buyer, LaJobi and CoCaLo
are referred to herein collectively as the Borrowers, and the CoCaLo Buyer, LaJobi and CoCaLo are
referred to herein as the New Borrowers. The Credit Agreement amended and restated the Original
Credit Agreement, and added the New Borrowers as parties thereto. The Pledge Agreement dated as of
March 14, 2006 between KID and the Agent (as amended on December 22, 2006) was also amended and
restated as of April 2, 2008 (the Amended and Restated Pledge Agreement), to provide, among other
things, for a pledge of the capital stock of the CoCaLo Buyer by KID. In connection with the Credit
Agreement, 100% of the equity of each Borrower, including each New Borrower, has been pledged as
collateral to the Agent. In addition, the Guaranty and Collateral Agreement (as defined in the
Credit Agreement) was also amended and restated as of April 2, 2008 (the Amended and Restated
Guaranty and Collateral Agreement), to add the New Borrowers as parties and to include
substantially all of the existing and future assets and properties of the New Borrowers as security
for the satisfaction of the obligations of all Borrowers, including the New Borrowers, under the
Credit Agreement and the other related loan documents.
The Credit Agreement was amended via a First Amendment to Credit Agreement as of August 13,
2008 to clarify the definition of Covenant EBITDA (defined below). In addition, the Amended and
Restated Pledge Agreement was further amended, in order to, among other things, permit the creation
of RB Trademark Holdco, LLC (IP Sub), and the transfer to KID of various inactive subsidiaries
and the interest in the Shining Stars Website.
As of March 20, 2009, KID and the Borrowers entered into a Second Amendment to Credit
Agreement with the Lenders and the Agent (the Second Amendment). In connection with the Second
Amendment: (i) the Amended and Restated Pledge Agreement and the Amended and Restated Guaranty and
Collateral Agreement were further amended to provide, among other things, for a pledge to the Agent
by KID of the membership interests in IP Sub; and (ii) KID executed a Joinder Agreement in favor of
the Agent, the effect of which was to add KID as a guarantor under the Credit Agreement and each
other Loan Document to which a Guarantor is a party and to include substantially all of the
existing and future assets and properties of KID (subject to specified exceptions) as security for
the satisfaction of the obligations of all the Borrowers under the Credit Agreement, as amended,
and the other related loan documents. In connection with the Second Amendment, the Company paid
the Agent and Lenders aggregate amendment and arrangement fees of 1.25% of the revised commitments.
The scheduled maturity date is April 1, 2013 (subject to customary early termination provisions).
The following constitute the material changes to the Credit Agreement effected by the Second
Amendment:
(i) The commitments now consist of: (a) a $50.0 million revolving credit facility (the
Revolving Loan), with a subfacility for letters of credit in an amount not to exceed $5.0
million, and (b) an $80.0 million term loan facility (the Term Loan). Previously, the maximum
Revolving Loan commitment was $75.0 million and the maximum Term Loan commitment was $100.0
million.
(ii) The Loans under the Credit Agreement bear interest at a rate per annum equal to the Base
Rate (for Base Rate Loans) or the LIBOR Rate (for LIBOR Loans) at the option of the Borrowers, plus
an applicable margin, in accordance with a pricing grid based on the most recent quarter-end
Total Debt to Covenant EBITDA Ratio. The applicable interest rate margins (to be added to the
applicable interest rate) under the Credit Agreement now range from 2.0% 4.25% for LIBOR Loans
and from 1.0% 3.25% for Base Rate Loans, based on a pricing grid set forth in the Second
Amendment (until delivery of specified financial statements and compliance certificates with
respect to the quarter ending September 30, 2009, the applicable margins will be a minimum of 4.00%
for LIBOR Loans and 3.00% for Base Rate Loans). Previously, the margins ranged from 2.00% 3.00%
for LIBOR Loans and from 0.50% 1.50% for Base Rate Loans, depending on the Total Debt to
Covenant EBITDA Ratio. The Second Amendment also amended the Base Rate definition to include a
floor of 30 day LIBOR plus 1%.
15
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KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(iii) The Credit Agreement now contains the following financial covenants: (a) a
minimum Fixed Charge Coverage Ratio of 1.20:1.00 for the first two quarters of 2009, with a step
down to 1.15:1.00 for the third quarter of 2009 and a step up to 1.25:1.00 for the fourth quarter of 2009 and the first quarter of 2010 and 1.35:1.00 for each
fiscal quarter thereafter; (b) a maximum Total Debt to Covenant EBITDA Ratio of 4.00:1.00 for the
first two quarters of 2009, with a step down to 3.75:1.00 for the third quarter of 2009, a step
down to 3.50:1.00 for the fourth quarter of 2009, a step down to 3.25:1.00 for first three quarters
of 2010 and, a step down to 2.75:1.00 for the fourth quarter of 2010 and each fiscal quarter
thereafter; and (c) an annual capital expenditure limitation. Previously, the minimum Fixed Charge
Coverage Ratio was 1.25:1.00, with a step-up to 1.35:1.00 at June 30, 2010, and the maximum Total
Debt to Covenant EBITDA Ratio was 3.25:1.00, with a step-down to 3.00:1.00 at June 30, 2009 and
2.75:1.00 at December 31, 2010. Covenant EBITDA, as defined in the Second Amendment, is a non-GAAP
financial measure used to determine our compliance with the minimum Fixed Charge Coverage Ratio and
Total Debt to Covenant EBITDA ratio, as well as to determine Total Debt to Covenant EBITDA for
purposes of the relevant interest rate margins applicable to the Loans under the Credit Agreement,
and whether certain dividends and repurchases can be made if other pre-requisites described in the
Second Amendment are met. Covenant EBITDA is determined on a consolidated basis, and is defined
generally as consolidated net income (after excluding specified non-cash, non-recurring and other
specified items), as adjusted for interest expense; income tax expense; depreciation; amortization;
other non-cash charges (gains); specified costs in connection with each of our senior financing,
specified acquisitions, and specified requirements under the Credit Agreement; non-cash transaction
losses (gains) due solely to fluctuations in currency values; and specified costs in connection
with the sale of our Gift Business. For purposes of the Fixed Charge Coverage Ratio, Covenant
EBITDA is further adjusted for unfinanced capital expenditures; specified cash taxes and
distributions pertaining thereto; and specified cash dividends.
(iv) The Credit Agreement also contains customary affirmative and negative covenants.
Upon the occurrence of an event of default under the Credit Agreement, including a failure to
remain in compliance with all applicable financial covenants, the lenders could elect to declare
all amounts outstanding under the Credit Agreement to be immediately due and payable. In addition,
an event of default under the Credit Agreement could result in a cross-default under certain
license agreements that we maintain. The Borrowers were in compliance with all applicable
financial covenants in the Credit Agreement as of September 30, 2009.
(v) The principal of the Term Loan will be repaid in quarterly installments of $3.25 million
on the last day of each fiscal quarter commencing with the quarter ended March 31, 2009 through
December 31, 2012, and a final payment of $28.0 million due on April 1, 2013 (previously, the
quarterly installments were in the amount of $3.6 million with $31.6 million due on April 1, 2013).
(vi) The Borrowers are required to make prepayments of the Term Loan upon the occurrence of
certain transactions, including most asset sales or debt or equity issuances, and extraordinary
receipts. In addition, IP Sub must make mandatory prepayments of 100% of any net cash proceeds of
any asset sale.
(vii) Restrictions in the Credit Agreement on the activities of KID (requirement to act as a
holding company, with all operations conducted through its subsidiaries) were eliminated.
(viii) The Second Amendment eliminated all restrictions on the ability of the Borrowers to
distribute cash to KID for the payment of KIDs overhead expenses. However, KID will not be
permitted to pay a dividend to its shareholders unless: (1) the LaJobi and CoCaLo Earnout
Consideration, if any, have been paid in full; (2) before and after giving effect to any such
dividend, (a) no default or event of default exists or would result therefrom, (b) Excess Revolving
Loan Availability will equal or exceed $4.0 million, and (c) before and after giving effect to any
such payment, the applicable financial covenants will be satisfied; and (3) the Total Debt to
Covenant EBITDA Ratio for the two most recently completed fiscal quarters shall have been less than
2.00:1.00. Previously, the Borrowers were not permitted (except in specified situations) to
distribute cash to KID to pay KIDs overhead expenses unless: (i) before and after giving effect to
such distribution, no event of default would exist and (ii) before and after giving effect to such
distribution, Excess Revolving Loan Availability equaled or exceeded $5.0 million; provided that
the aggregate amount of such distributions could not exceed $3.5 million per year. In addition,
pursuant to the Second Amendment, KID is not permitted to repurchase or redeem stock (with certain
limited exceptions) unless (1) the LaJobi and CoCaLo Earnout Consideration, if any, have been paid
in full, (2) before and after giving effect to any such dividend, (a) no default or event of
default exists or would result therefrom, (b) Excess Revolving Loan Availability will equal or
exceed $5.0 million, and (c) before and after giving effect to any such payment, the applicable
financial covenants will be satisfied, and (3) the Total Debt to Covenant EBITDA Ratio for the two
most recently completed fiscal quarters shall have been less than 2.00:1.00. Other restrictions on
dividends and distributions are set forth in the Credit Agreement, as amended by the Second
Amendment.
(ix) The following fees are now applicable to the Credit Agreement: an agency fee of $35,000
per annum, an annual non-use fee of 0.55% to 0.80% of the unused amounts under the Revolving Loan,
as well as other customary fees as are set forth in the Credit Agreement, as amended. Prior to the
Second Amendment, the annual non-use fee was 0.40% to 0.60% of the unused amounts under the
Revolving Loan.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Other provisions of the Credit Agreement as amended, include the following:
(i) The definition of Borrowing Base is 85% of eligible receivables plus the lesser of (x)
$25.0 million and (y) 55% of eligible inventory.
(ii) Payment of the amounts outstanding under the promissory note under the Stock Agreement is
prohibited if before and after giving effect to any such repayment, a default or event of default
would exist.
(iii) Payment of either of the LaJobi or CoCaLo Earnout Consideration is prohibited if before
and after giving effect to any such repayment, (a) a default or event of default would exist, (b)
Excess Revolving Loan Availability will not equal or exceed $9.0 million, or (c) before and after
giving effect to any such repayment, the financial covenants under the Credit Agreement will not be
satisfied (the Earnout Conditions).
(iv) The Credit Agreement contains specified events of default related to the LaJobi and
CoCaLo Earnout Consideration (including the failure to deliver to the Agent specified
certifications and calculations within a specified time period, the reasonable determination by the
Agent that any Earnout Conditions will not be satisfied as of the applicable payment date, if any,
material information provided to the Agent with respect to the Earnout Conditions shall be
incorrect in any material respect and remain unremedied prior to the relevant payment date, or any
Earnout Consideration payments are paid at any time that the Earnout Conditions are not satisfied).
(v) The Borrowers are required to maintain in effect Hedge Agreements that protect against
potential fluctuations in interest rates with respect to a minimum of 50% of the outstanding amount
of the Term Loan. Pursuant to the requirement to maintain Hedge Agreements discussed above, on May
2, 2008, the Borrowers entered into an interest rate swap agreement with a notional amount of $70
million as a risk management tool to lock the interest cash outflows on the floating rate debt.
However, because we did not meet the criteria for hedge accounting under ASC Topic 815 Derivatives
and Hedging for this instrument, changes in the fair value of the interest rate swap will be
remeasured through the statement of operations each period. Changes between its cost and its fair
value as of September 30, 2009 resulted in income of approximately $348,000 and $904,000 for the
three and nine months ended September 30, 2009, respectively, and such amounts are included in
interest expense in the unaudited consolidated statements of operations.
Financing costs associated with the amended revolver and term loans were subject to the
provisions of ASC Topic 470, Debt. Based upon the calculations
required by ASC Topic 470, the Company recorded a non-cash charge to results of operations of
approximately $0.4 million for deferred financing costs in the quarter ended March 31, 2009.
NOTE 7 INTANGIBLE ASSETS
As of September 30, 2009 and December 31, 2008, the components of intangible assets consist of the
following (in thousands):
Weighted Average | September 30, | December 31, | ||||||||
Amortization Period | 2009 | 2008 | ||||||||
Sassy trade name |
Indefinite life | $ | 5,400 | $ | 5,400 | |||||
Applause trade name |
5 years | | 911 | |||||||
Kids Line customer relationships |
20 years | 29,545 | 30,711 | |||||||
Kids Line trade name |
Indefinite life | 5,300 | 5,300 | |||||||
LaJobi trade name |
Indefinite life | 18,600 | 18,600 | |||||||
LaJobi customer relationships |
20 years | 11,748 | 12,224 | |||||||
LaJobi royalty agreements |
5 years | 1,820 | 2,146 | |||||||
CoCaLo trade name |
Indefinite life | 6,100 | 6,100 | |||||||
CoCaLo customer relationships |
20 years | 2,498 | 2,599 | |||||||
CoCaLo foreign trade name |
Indefinite life | 32 | 28 | |||||||
Total intangible assets |
$ | 81,043 | $ | 84,019 | ||||||
Aggregate amortization expense was approximately $690,000 and $2,160,000 for the three and
nine months ended September 30, 2009, respectively. Amortization expense was approximately $637,000
and $1,280,000 for the three and nine months ended September 30, 2008 respectively.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In accordance with ASC Topic 350 Intangibles Goodwill and Other, goodwill and other
indefinite-lived intangible assets are no longer amortized but are reviewed for impairment at least
annually, and more frequently if a triggering event occurs indicating that an impairment may exist.
The Companys annual impairment testing is performed in the fourth quarter of each year (unless
specified triggering events warrant more frequent testing). All intangible assets, both
definite-lived and indefinite-lived, were tested
for impairment in the fourth quarter of 2008. An impairment of $819,000 for the Applause®
trade name was recorded in the quarter ended June 30, 2009. See Note 3.
The Company tested the non-amortizing intangible trade names recorded on our consolidated
balance sheet as of December 31, 2008, which consisted of: Kids Line®; Sassy®; LaJobi®; and
CoCaLo®. In addition, the Company also tested for the impairment of its Applause® trade name,
which is a definite-lived intangible asset, as a result of the Gift Sale. Testing for impairment
of indefinite-lived trade names is based on whether the fair value of such trade names exceeds
their carrying value. The Company determined fair value by performing a projected discounted cash
flow analysis based on the Relief-From-Royalty Method for all indefinite-lived trade names. With
respect to Applause®, fair value was based on the terms of its license to the buyer of the Gift
business. The difference between the fair value of the trade names and their carrying value
resulted in an aggregate impairment charge of $3.7 million, which was related to CoCaLo® ($1.9
million), Sassy® ($1.7 million) and LaJobi® ($0.1 million). In addition, as a result of the Gift
Sale, an impairment charge of $6.7 million was recorded in the fourth quarter of 2008 with respect
to the Applause® trade name.
In the Companys analysis, it used a five-year projection period, which has been its prior
practice, with single digit long-term growth rates, as well as royalty rates of 5%, 2%, 5% and 4%
for Kids Line, Sassy, LaJobi and CoCaLo, respectively. For the 2008 testing, the royalty rate for
Sassy was decreased from the rate used in 2007 due to lower gross profit margins reported and
expected by Sassy and the previously-disclosed anticipated reduction in revenue and cash flows
resulting from the termination of the MAM Agreement. At the time of the assessment of impairment
(the fourth quarter of 2008), combined net revenues of Sassy and Kids Line had declined by
approximately 1% from the prior year, and further softness in sales was anticipated during the
remainder of 2009 with respect to Sassy, primarily as a result of a substantial decrease in net
revenues due to the termination of the MAM Agreement, and with respect to Kids Line, primarily as a
result of anticipated continued revenue softness reflecting worsening economic conditions.
However, the Company applied conservative long-term growth rates thereafter for each of Sassy and
Kids Line based on the following. With respect to Sassy, the Companys assumptions were based on
anticipated new product introductions, a re-branding initiative, new packaging for the product
line, and the expiration at the end of 2009 of certain non-competition restrictions associated with
the MAM Agreement. Although the long -term growth rate for Kids Line branded products in 2009 (as
opposed to licensed products) was reduced from historical growth rates due to anticipated revenue
reduction, we assumed growth in the four years thereafter reflecting planned new product
introductions and expansion. With respect to the Applause® trade name, in connection with the Gift
Sale, the buyer agreed to pay an annual royalty for the Applause® and Russ® trademarks and trade
names of $1.15 million, as well as a $5 million purchase price for such intellectual property at
the end of five years. Accordingly, the Company determined that the fair value of the allocated
royalty stream of the Applause® and Russ® trade names, based on a present value analysis, was
$913,000 for the Applause® trade names, resulting in the impairment charge recorded. The Russ®
trade names do not have any value ascribed to them on our financial statements.
The Companys other intangible assets with definite lives (consisting of the Applause® trade
name, customer lists and royalty agreements) continue to be amortized over their estimated useful
lives and are tested if events or changes in circumstances indicate that an asset may be impaired.
In testing for impairment, the Company compares the carrying value of such assets to the estimated
undiscounted future cash flows anticipated from the use of the assets and their eventual
disposition. When the estimated undiscounted future cash flows are less than their carrying amount,
an impairment charge is recognized in an amount equal to the difference between the assets fair
value and its carrying value. As previously disclosed, based upon current economic conditions, and
in connection with the annual impairment testing of intangibles during the fourth quarter of 2008,
the Company determined that the Kids Line customer relationships would be amortized over a 20-year
period rather than having an indefinite life. In connection therewith, the Company recorded
$389,000 of amortization expense for the three months and year ended December 31, 2008. In
addition, as discussed above, an impairment charge to the Applause® trade name was recorded in the
fourth quarter of 2008 as a result of the Gift Sale. Other than the foregoing, the Company
determined that the carrying value of its definite-lived intangible assets was fully recoverable.
As many of the factors used in assessing fair value are outside the control of management, the
assumptions and estimates used in such assessment may change in future periods, which could require
that we record additional impairment charges to our assets. The Company will continue to monitor
circumstances and events in future periods to determine whether additional asset impairment testing
or recordation is warranted.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 CONCENTRATION OF RISK
The following table represents net sales of the Company by geographic area (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net domestic sales |
$ | 58,075 | $ | 67,034 | $ | 170,067 | $ | 166,533 | ||||||||
Net foreign sales
(Australia and United
Kingdom) |
2,010 | 2,769 | 6,262 | 7,113 | ||||||||||||
Total net sales |
$ | 60,085 | $ | 69,803 | $ | 176,329 | $ | 173,646 | ||||||||
The Companys consolidated net sales by product category, as a percentage of total
consolidated net sales, for the three and nine months ended September 30, 2009 and 2008 were as
follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Functional Soft Goods |
43.1 | % | 42.6 | % | 44.5 | % | 43.1 | % | ||||||||
Functional Hard Goods |
34.3 | % | 32.8 | % | 33.8 | % | 30.2 | % | ||||||||
Accessories and Décor |
12.0 | % | 12.9 | % | 11.4 | % | 13.3 | % | ||||||||
Toys and Entertainment |
9.8 | % | 11.1 | % | 9.5 | % | 12.9 | % | ||||||||
Other |
0.8 | % | 0.6 | % | 0.8 | % | 0.5 | % | ||||||||
Total |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
With respect to customers, (i) Toys R Us, Inc. and Babies R Us, Inc., in the aggregate,
accounted for 45.5% and 47.5% of the Companys consolidated net sales during the three and nine
month periods ended September 30, 2009, respectively, and 49.7% and 46.1% for the three and nine
month periods ended September 30, 2008, respectively, and (ii) Target accounted for approximately
12.6% and 12.0% for the three and nine month periods ended September 30, 2009 and 10.8% and 10.8%
for the three and nine month periods ended September 30, 2008, respectively. The loss of these
customers or any other significant customers, or a significant reduction in the volume of business
conducted with such customers, could have a material adverse impact on the Company. The Company
does not normally require collateral or other security to support credit sales.
As part of its ongoing risk assessment procedures, the Company monitors concentrations of
credit risk associated with financial institutions with which it conducts business. The Company
avoids concentration with any single financial institution.
During 2008, approximately 59% of the Companys dollar volume of purchases was attributable to
manufacturing in the Peoples Republic of China (PRC), compared to 67% for the nine months ended
September 30, 2009. The PRC currently enjoys permanent normal trade relations (PNTR) status
under U.S. tariff laws, which provides a favorable category of U.S. import duties. The loss of such
PNTR status would result in a substantial increase in the import duty for products manufactured for
the Company in the PRC and imported into the United States and would result in increased costs for
the Company.
The supplier accounting for the greatest dollar volume of the Companys purchases accounted
for approximately 23% of such purchases for the year ended December 31, 2008 and 21% for the nine
months ended September 30, 2009. The five largest suppliers accounted for approximately 49% of the
Companys purchases in the aggregate for the year ended December 31, 2008 and 46% for the nine
months ended September 30, 2009. The Company believes that there are many alternate manufacturers
for the Companys products and sources of raw materials.
Total
foreign assets (i.e., Australia and the United Kingdom) as of September 30, 2009 and
December 31, 2008 were $3.7 million and $2.7 million, respectively.
NOTE 9 FINANCIAL INSTRUMENTS
The Company adopted on January 1, 2008, the first day of its 2008 fiscal year, ASC Topic 820,
Fair Value Measurements and Disclosures, for its financial assets and liabilities that are remeasured and reported
at fair value at each reporting period. ASC Topic 820 defines fair value of assets and liabilities
as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (an exit price). The statement
outlines a valuation framework and creates a fair value hierarchy in order to increase the
consistency and comparability of fair value measurements and the related disclosures. Under
generally accepted accounting principles, certain assets and liabilities must be measured at fair
value, and ASC Topic 820 details the disclosures that are required for items measured at fair
value.
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KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Financial assets and liabilities are measured using inputs from the three levels of the ACS
Topic 820 fair value hierarchy. The three levels are as follows:
Level 1Inputs are unadjusted quoted prices in active markets for identical assets or
liabilities. The Company currently has no Level 1 assets or liabilities that are measured at a
fair value on a recurring basis.
Level 2Inputs include quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are not active, inputs
other than quoted prices that are observable for the asset or liability (i.e., interest rates,
yield curves, etc.), and inputs that are derived principally from or corroborated by observable
market data by correlation or other means (market corroborated inputs). Most of the Companys
assets and liabilities fall within Level 2 and include foreign exchange contracts (when applicable)
and interest rate swap agreements. The fair value of foreign currency and interest rate swap
contracts are based on third-party market maker valuation models that discount cash flows resulting
from the differential between the contract rate and the market-based forward rate or curve
capturing volatility and establishing intrinsic and carrying values.
Level 3Unobservable inputs that reflect our assessment about the assumptions that market
participants would use in pricing the asset or liability. The Company currently has no Level 3
assets or liabilities that are measured at a fair value on a recurring basis.
This hierarchy requires the Company to minimize the use of unobservable inputs and to use
observable market data, if available, when determining fair value. Observable inputs are based on
market data obtained from independent sources, while unobservable inputs are based on the Companys
market assumptions. Unobservable inputs require significant management judgment or estimation. In
some cases, the inputs used to measure an asset or liability may fall into different levels of the
fair value hierarchy. In those instances, the fair value measurement is required to be classified
using the lowest level of input that is significant to the fair value measurement. In accordance
with ASC Topic 820, the Company is not permitted to adjust quoted market prices in an active
market.
In accordance with the fair value hierarchy described above, the following table shows the
fair value of the Companys interest rate swap agreement as of September 30, 2009 (in thousands):
Fair Value Measurements as of September 30, 2009 | ||||||||||||||||
September 30, 2009 | Level 1 | Level 2 | Level 3 | |||||||||||||
Interest Rate Swap Agreement |
$ | (1,169 | ) | $ | | $ | (1,169 | ) | $ | |
Cash and cash equivalents, trade accounts receivable, inventory, income tax receivable, trade
accounts payable, accrued expenses and short-term debt are reflected in the consolidated balance
sheets at carrying value, which approximates fair value due to the short-term nature of these
instruments.
The carrying value of the Companys term loan borrowings approximates fair value because
interest rates under the term loan borrowings are variable, based on prevailing market rates.
There were no material changes to the Companys valuation techniques during the nine months
ended September 30, 2009 compared to those used in prior periods.
NOTE 10 COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), representing all changes in Shareholders Equity during the
period other than changes resulting from the issuance or repurchase of the Companys common stock
and payment of dividends, is reconciled to net income for the three and nine months ended September
30, 2009 and 2008 as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net income (loss) |
$ | 2,868 | $ | 8,205 | $ | (1,485 | ) | $ | (1,934 | ) | ||||||
Other comprehensive income: |
||||||||||||||||
Foreign currency translation adjustments |
149 | (2,587 | ) | 296 | (2,035 | ) | ||||||||||
Comprehensive income (loss) |
$ | 3,017 | $ | 5,618 | $ | (1,189 | ) | $ | (3,969 | ) | ||||||
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KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 INCOME TAXES
ASC Topic 740, Income Taxes prescribes a comprehensive model for how a company should
recognize, measure, present and disclose in its financial statements uncertain tax positions that
the company has taken or expects to take on a tax return. ASC
Topic 740 states that a tax benefit from an uncertain tax position may be recognized only if
it is more likely than not that the position is sustainable, based on its technical merits. The
tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50%
likely of being realized upon settlement with a taxing authority having full knowledge of all
relevant information. Under ASC Topic 740, the liability for unrecognized tax benefits is
classified as noncurrent unless the liability is expected to be settled in cash or the relevant
statute will expire within twelve months of the reporting date.
The Company operates in multiple tax jurisdictions, both within the United States and outside
of the United States, and faces audits from various tax authorities regarding the inclusion of
certain items in taxable income, the deductibility of certain expenses, transfer pricing, the
utilization and carryforward of various tax credits, and the utilization of various carryforward
items such as charitable contributions and net operating loss carryforwards (NOLs). At September
30, 2009, the amount of liability for unrecognized tax benefits related to federal, state, and
foreign taxes was approximately $5.0 million, including
approximately $0.1 million of accrued
interest. The Company has various tax attributes such as NOLs, charitable contribution carryovers,
and foreign tax credit carryovers which could be utilized to offset these uncertain tax positions.
Activity regarding the liability for unrecognized tax benefits for the nine months ended
September 30, 2009 is as follows:
(in thousands) | ||||
Balance at January 1, 2009 |
$ | 9,582 | ||
Increase related to interest expense |
15 | |||
Balance at March 31, 2009 |
9,597 | |||
Increase related to interest expense |
15 | |||
Balance at June 30, 2009 |
9,612 | |||
Close statute of
limitations |
(4,660 | ) | ||
Increase related to interest expense |
10 | |||
Balance at September 30, 2009 |
$ | 4,962 | ||
The Company is currently under examination in several tax jurisdictions and remains subject to
examination until the statute of limitations expires for the respective tax jurisdiction. Based
upon the expiration of statutes of limitations and/or the conclusion of tax examinations in several
jurisdictions, the Company believes it is reasonably possible that the total amount of previously
unrecognized tax benefits discussed above may decrease by up to $5.0 million within twelve months
of September 30, 2009 and such amount is reflected on the
Companys consolidated balance sheet as current taxes payable. The Company
anticipates that the valuation allowances of the deferred tax assets associated with various tax
attributes such as foreign tax credit carryforwards and charitable contribution carryforwards would
be increased.
The Companys policy is to classify interest and penalties related to unrecognized tax
benefits as income tax expense.
NOTE 12 LITIGATION; COMMITMENTS AND CONTINGENCIES
In the ordinary course of its business, the Company is party to various copyright, patent and
trademark infringement, unfair competition, breach of contract, customs, employment and other legal
actions incidental to its business, as plaintiff or defendant. In the opinion of management, the
amount of ultimate liability with respect to such actions that are currently pending will not
materially adversely affect the consolidated results of operations, financial condition or cash
flows of the Company.
The Company enters into various license and distribution agreements relating to trademarks,
copyrights, designs, and products which enable the Company to market items compatible with its
product line. Most of these agreements are for two to four year terms with extensions if agreed to
by both parties. Several of these agreements require prepayments of certain minimum guaranteed
royalty amounts. The amount of minimum guaranteed royalty payments with respect to all license
agreements pursuant to their original terms aggregates approximately $17.4 million, of which
approximately $10.2 million remained unpaid at September 30, 2009, approximately $0.2 million of
which is due prior to December 31, 2009. Royalty expense for the three and nine months ended
September 30, 2009 was $1.8 million and $4.8 million, respectively, compared to $1.3 million and
$4.0 million for the three and nine months ended September 30, 2008, respectively.
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KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In connection with the sale of the Gift Business, KID and U.S. Gift (our subsidiary at the
time) sent a notice of termination, effective December 23, 2010, with respect to the lease (the
Lease) originally entered into by KID (and subsequently assigned to U.S. Gift) of a facility in
South Brunswick, New Jersey. Although this Lease has become the obligation of the Buyer of the Gift
Business (through its ownership of U.S. Gift), KID remains obligated for the payments due
thereunder (to the extent they are not paid by U.S. Gift) until the termination of the Lease
becomes effective (i.e., for a maximum potential remaining obligation of approximately $4.3 million). It is
our understanding that U.S. Gift has failed to pay certain amounts due under the Lease and that
Buyer, U.S. Gift and the landlord have initiated discussions with respect thereto. No payments
have been made by KID in connection with the Lease since the sale of the Gift Business, but there
can be no assurance that payments will not be required of KID with respect thereto to the extent
U.S. Gift
continues to fail to make such payments and no accommodation is secured from the landlord.
The amount of payments required by KID, if any, cannot be ascertained at this time. To the extent
KID is required to make any payments to the landlord in respect of the Lease, it intends to seek
reimbursement from the Buyer under the purchase agreement governing the sale of our former Gift
Business. However, we cannot assure that we will be able to recover any such amounts in a timely
manner, or at all.
The purchase agreement pertaining to the sale of the Gift Business contains various
indemnification, reimbursement and similar obligations. In addition, the Company may remain
obligated with respect to certain contracts and other obligations that were not novated in
connection with their transfer. No payments have been made by the Company in connection with the
foregoing as of September 30, 2009, but there can be no assurance that payments will not be
required of the Company in the future.
As of September 30, 2009 the Company had obligations under certain letters of credit that
contingently require the Company to make payments to guaranteed parties aggregating $0.9 million
upon the occurrence of specified events.
Pursuant to the Asset Agreement and the Stock Agreement, the Company may be required to pay
earnout consideration amounts, ranging from (i) $0.0 to $15.0 million in respect of the LaJobi
acquisition and (ii) $0.0 to $4.0 million in respect of the CoCaLo acquisition. See Note 2.
In connection with the sale of the Gift Business, the Company entered into a transition
services agreement (the TSA), pursuant to which, for periods of time and consideration specified
in the TSA, the Company and the Buyer will provide certain specified transitional services to each
other. For the nine months ended September 30, 2009, the Company accrued $75,000 pursuant to the
TSA, not including payments made by the Australian and U.K. subsidiaries of Kids Line for the
sublease of certain office and warehouse space, which amounts are payable to the Buyer.
NOTE 13 RECENTLY ISSUED ACCOUNTING STANDARDS
In
June 2009 the ASC Topic 810, Consolidation was issued and
requires an enterprise to determine whether its variable interest or interests give it a
controlling financial interest in a variable interest entity. The primary beneficiary of a
variable interest entity is the enterprise that has both (1) the power to direct the activities of
a variable interest entity that most significantly impact the entitys economic performance and (2)
the obligation to absorb losses of the entity that could potentially be significant to the variable
interest entity or the right to receive benefits from the entity that could potentially be
significant to the variable interest entity. It also requires ongoing reassessments of whether an
enterprise is the primary beneficiary of a variable interest entity. ASC 810 is effective for all
variable interest entities and relationships with variable interest entities existing as of January
1, 2010. The Company does not expect that the adoption of ASC 810 will have a material impact on
its financial position or results of operations.
The Company will adopt new U.S. GAAP guidance concerning the determination of the useful life
of intangible assets beginning in its first quarter of fiscal 2010. The Company is currently
evaluating the effect of adopting this new guidance on its consolidated financial statements. The
new guidance amends the factors that are to be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset. The new guidance is
intended to improve the consistency between the useful life of a recognized intangible asset and
the period of expected cash flows originally used to measure the fair value of the intangible asset
under U.S. GAAP.
NOTE 14 RELATED PARTY TRANSACTIONS
Lawrence Bivona, the President of LaJobi, along with various family members, established L&J
Industries, in Asia. The purpose of the entity is to provide quality control services to LaJobi
for goods being shipped from Asian ports. The Company has used this service since April 2008. For
the three and nine months ended September 30, 2009, the Company incurred costs, recorded in cost of
goods sold, aggregating approximately $0.2 million and $0.8 million respectively, related to the
services provided. Such costs were based on the actual, direct costs incurred by L&J Industries for
such individuals.
CoCaLo contracts for warehousing and distribution services from a company, one of the partners
of which is the estate of the father of Renee Pepys Lowe, an executive officer of the Company,
which company is also managed by Ms. Pepys Lowes spouse. For the three and nine months ended
September 30, 2009, CoCaLo paid approximately $0.7 million and $1.6 million to such company for
these services, respectively. In addition, CoCaLo rents certain office space from the same company
at a rental cost for the three and nine months ended September 30, 2009 of approximately $34,000
and $102,000, respectively. These expenses were recorded in selling, general and administrative
expense.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The financial and business analysis below provides information which we believe is relevant to
an assessment and understanding of our consolidated financial condition, changes in financial
condition and results of operations. This financial and business analysis should be read in
conjunction with our Unaudited Consolidated Financial Statements and accompanying Notes to
Unaudited Consolidated Financial Statements set forth in Part I, Financial Information, Item 1,
Financial Statements of this Quarterly Report on Form 10-Q, and our Annual Report on Form 10-K
for the year ended December 31, 2008, as amended (the 2008 10-K), including the consolidated
financial statements and notes thereto, and our Quarterly Reports on Form 10-Q for the quarters
ended March 31, 2009 (the March 10-Q) and June 30, 2009 (the June 10-Q).
OVERVIEW
We are a leading designer, importer, marketer and distributor of branded infant and juvenile
consumer products. We generated net sales from continuing operations of $60.1 million and $176.3
million in the three and nine month periods ended September 30, 2009.
Shift to Infant and Juvenile Business
During 2008, we strategically refocused our business to further enhance our position in the
infant and juvenile business. In April 2008, we consummated the acquisitions of each of the net
assets of LaJobi Industries, Inc. (LaJobi) and the capital stock of CoCaLo, Inc. (CoCaLo).
LaJobi designs, imports and sells infant and juvenile furniture and related products, and CoCaLo
designs, imports and sells infant bedding and related accessories. In addition, on December 23,
2008, we sold our gift segment business (the Gift Business).
Together with our 2004 acquisition of Kids Line, LLC (Kids Line) which designs, imports
and sells infant bedding and related accessories and our 2002 acquisition of Sassy, Inc.
(Sassy) which designs, imports and sells developmental toys and feeding, bath and baby care
items these actions have focused our operations on the infant and juvenile business, and have
enabled us to offer a more complete range of products for the baby nursery.
Prior to December 23, 2008, we had two reportable segments: (i) our infant and juvenile
segment; and (ii) our gift segment. As a result of the sale of the Gift Business, we currently
operate in one segment, the infant and juvenile business. Consistent with our strategy of building
a confederation of complementary businesses, each subsidiary in our infant and juvenile business is
operated substantially independently by a separate group of managers. Our senior corporate
management, together with senior management of our subsidiaries, coordinates the operations of all
of our businesses and seeks to identify cross-marketing, procurement and other complementary
business opportunities.
Prior to the Gift Sale, the gift segment designed, manufactured through third parties and
marketed a wide variety of gift products, primarily under the trademarks Russ ® and
Applause ®, to retail stores throughout the United States and the world via wholly-owned
subsidiaries and independent distributors. The consideration received from the Gift Sale (the Gift
Sale Consideration) was recorded at fair value as of December 23, 2008 at approximately $19.8
million, and consisted of a Note Receivable of $15.3 million and an Investment of $4.5 million on
our consolidated balance sheet. The Gift Sale Consideration, as well as a related license to the
Buyer of the Russ ® and Applause ® trademarks and tradenames, is discussed
in more detail in Liquidity and Capital Resources below under the section captioned Recent
Disposition . During the quarter ended June 30, 2009, in conjunction with the preparation of our
financial statements for such period, a series of impairment indicators emerged in connection with
the Buyer, which resulted in the Company recording in the quarter ended June 30, 2009 certain
non-cash impairment charges and a valuation reserve aggregating $15.6 million against the Gift Sale
Consideration and the Applause® trade name (See Note 3 of Notes to Unaudited
Consolidated Financial Statements).
Prior to its divestiture, the Gift Business had revenues of approximately $38.3 million and
$98.0 million for the three and nine months ended September 30, 2008, respectively. The income from
discontinued operations, net of tax, for the three months ended September 30, 2008 was $2.2
million. The loss from discontinued operations, net of tax, for the nine months ended September
30, 2008 was $13.7 million. The nine month loss of $13.7 million included: (i) an impairment charge
of $7.0 million related to the write-down of fixed assets; (ii) a $1.0 million charge in cost of
goods sold related to the write-off of Shining Stars website development; and (iii) a $1.6 million
inventory charge in the second quarter of 2008 in connection with the unfavorable results of a
voluntary quality test on certain gift products.
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As a result of the Gift Sale, the Consolidated Statements of Operations have been restated to
show the Gift Business as discontinued operations for the three and nine months ended September 30,
2008. Neither the Consolidated Balance Sheet for the year
ended December 31, 2008 nor the quarter ended September 30, 2009 include the Gift Business
assets and liabilities, as a result of the consummation of the Gift Sale as of December 23, 2008,
but each include the fair value of the consideration received from the Gift Sale, which was fully
impaired and reserved during the quarter ended June 30, 2009. The Consolidated Statement of Cash
Flows for the nine months ended September 30, 2008 has not been restated. The Notes to Unaudited
Consolidated Financial Statements have been restated to reflect the discontinued operations
presentation described above for the basic financial statements where applicable.
Continuing Operations
Our infant and juvenile business which currently consists of Kids Line, LaJobi, Sassy and
CoCaLo designs, manufactures through third parties, imports and sells products in a number of
complementary categories including, among others: infant bedding and related nursery accessories
(Kids Line and CoCaLo); infant furniture and related products (LaJobi); and developmental toys and
feeding, bath and baby care items with features that address the various stages of an infants
early years (Sassy). Our products are sold primarily to retailers in North America, the UK and
Australia, including large, national retail accounts and independent retailers (including toy,
specialty, food, drug, apparel and other retailers). We maintain a direct sales force and
distribution network to serve our customers in the United States, the UK and Australia, and sell
through independent manufacturers representatives and distributors in certain other countries.
International sales from continuing operations, defined as sales outside of the United States,
including export sales, constituted 7.8% and 8.9% of our net sales for the nine months ended
September 30, 2009 and 2008, respectively. One of our strategies is to increase our international
sales, both in absolute terms and as a percentage of total sales, as we seek to expand our presence
outside of the United States.
Aside from funds provided by our senior credit facility, revenues from the sale of products
have historically been the major source of cash for the Company, and cost of goods sold and payroll
expenses have been the largest uses of cash. As a result, operating cash flows primarily depend on
the amount of revenue generated and the timing of collections, as well as the quality of customer
accounts receivable. The timing and level of the payments to suppliers and other vendors also
significantly affect operating cash flows. Management views operating cash flows as a good
indicator of financial strength. Strong operating cash flows provide opportunities for growth both
internally and through acquisitions, and also enable us to pay down debt.
We do not ordinarily sell our products on consignment (although we may do so in limited
circumstances), and we ordinarily accept returns only for defective merchandise. In the normal
course of business, we may grant certain accommodations and allowances to certain customers in
order to assist these customers with inventory clearance or promotions. Such amounts, together
with discounts, are deducted from gross sales in determining net sales.
Our products are manufactured by third parties, principally located in the PRC and other
Eastern Asian countries. Our purchases of finished products from these manufacturers are primarily
denominated in U.S. dollars. Expenses for these manufacturers are primarily denominated in Chinese
Yuan. As a result, any material increase in the value of the Yuan relative to the U.S. dollar, as
occurred in 2008, would increase our expenses, and therefore, adversely affects our profitability.
Conversely, a small portion of our revenues are generated by our subsidiaries in Australia and the
U.K. and are denominated primarily in those local currencies. Any material increase in the value of
the U.S. dollar relative to the value of the Australian dollar or British pound would result in a
decrease in the amount of these revenues upon their translation into U.S. dollars for reporting
purposes.
Additionally, if our suppliers experience increased raw materials, labor or other costs, and
pass along such cost increases to us through higher prices for finished goods, our cost of sales
would increase. To the extent we are unable to pass such price increases along to our customers,
our gross margins would decrease. For example, increased costs in the PRC, primarily for raw
materials, labor, taxes and currency lead our vendors to raise our prices, resulting in increased
cost of goods sold and reduced gross margins in 2008.
Our gross profit may not be comparable to those of other entities, since some entities include
the costs of warehousing, outbound handling costs and outbound shipping costs in their costs of
sales. We account for the above expenses as operating expenses and classify them under selling,
general and administrative expenses. For the three and nine months ended September 30, 2009, the
costs of warehousing, outbound handling costs and outbound shipping costs were $1.7 million and
$5.2 million, respectively. In addition, the majority of outbound shipping costs are paid by our
customers, as many of our customers pick up their goods at our distribution centers.
In addition, our gross profit margins have declined in recent periods as a result of: (i) a
shift in product mix toward lower margin products, including increased sales of licensed products,
which typically generate lower margins as a result of required royalty payments (which are recorded
in cost of goods sold); and (ii) our acquisition of LaJobi, which has experienced significant sales
growth but which also typically generates lower gross margins, on average, than our other business
units; and (iii) increased pressure from major retailers, primarily as a result of prevailing
economic conditions, to offer additional mark downs and other pricing accommodations to clear
existing inventory and secure new product placements.
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We continue to seek to mitigate this margin pressure through the development of new products
that can command higher pricing, the identification of alternative, lower-cost sources of supply
and, where possible, price increases. Particularly in the mass market, our ability to increase
prices or resist requests for mark-downs and/or other allowances is limited by market and
competitive factors, and, while we have implemented selective price increases, we have generally
focused on maintaining (or increasing) shelf space at retailers and, as a result, our market share.
We have previously carried significant goodwill and intangible assets on our balance sheet. We
recorded, in our consolidated financial statements for the fourth quarter and fiscal year ended
December 31, 2008, non-cash impairment charges to: (i) goodwill related to our continuing infant
and juvenile operations in the approximate amount of $130.2 million, in connection with our annual
assessment of goodwill in accordance with ASC Topic 350 Intangibles-Goodwill and Other"; (ii) our
Applause® trademark in connection with the Gift Sale of $6.7 million; and (iii) intangible assets
related to our continuing infant and juvenile operations of $3.7 million, in connection with our
annual assessment of indefinite-life intangible assets in accordance with ASC Topic 350. We will
continue to evaluate the carrying amount of our indefinite-life intangible assets in accordance
with ASC Topic 350, and there can be no assurance that we will not incur additional impairment
charges in the future. See Note 7 of Notes to Consolidated Financial Statements for details with
respect to impairment changes incurred during 2008. Due to current economic conditions and the
impairment recorded on all of our goodwill in the fourth quarter of 2008, we evaluated the useful
life of our Kids Line customer relationships intangible asset and determined that the Kids Line
customer relationships is a finite-lived asset and, as such, will be amortized over a 20-year life.
In connection with such determination, we recorded $389,000 of amortization expense in the three
months and year ended December 31, 2008.
We completed our annual goodwill assessment for our continuing operations as of December 31,
2008 in accordance with ASC Topic 350. As required by ASC Topic 350, the goodwill impairment test
is accomplished using a two-step process. The first step compares the fair value of a reporting
unit that has goodwill to its carrying value. The fair value of a reporting unit using discounted
cash flow analysis is estimated. If the fair value of the reporting unit is determined to be less
than its carrying value, a second step is performed to compute the amount of goodwill impairment,
if any. Step two allocates the fair value of the reporting unit to the reporting units net assets
other than goodwill. The excess of the fair value of the reporting unit (using fair-value based
tests) over the amounts assigned to its net assets other than goodwill is considered the implied
fair value of the reporting units goodwill. The implied fair value of the reporting units
goodwill is then compared to the carrying value of its goodwill. Any shortfall represents the
amount of goodwill impairment.
As of December 31, 2008, after completing the first step of the impairment test, there was
indication of impairment because our carrying value exceeded our market capitalization.
Managements determination of the fair value of the goodwill for the second step in the
analysis was performed with the assistance of a public accounting firm, other than the Companys
auditors. The analysis used a variety of testing methods that are judgmental in nature and involve
the use of significant estimates and assumptions, including: (i) the Companys operating forecasts;
(ii) revenue growth rates; (iii) risk-commensurate discount rates and costs of capital; and (iv)
price or market multiples. The Companys estimates of revenues and costs are based on historical
data, various internal estimates and a variety of external sources, and are developed by the
Companys routine long-range planning process.
During the year ended December 31, 2008, stock market valuations in general, and the Companys
stock price in particular, declined substantially. Such decline in the Companys stock price in
2008 indicated the potential for impairment of the Companys goodwill. In addition, during 2008,
continuing gross margins for Kids Line and Sassy declined substantially from the previous year, and
Sassy terminated a distribution agreement (the MAM Agreement) that had contributed approximately
$22 million in revenues that was not expected to recur in 2009. These adverse conditions,
resulting in part from difficult equity and credit market conditions, led the Company to revise its
estimates with respect to net sales and gross margins, which in turn negatively impacted our cash
flow forecasts for Kids Line and Sassy. These revised cash flows forecasts resulted in the
conclusion in the Step 2 test that the Companys goodwill was entirely impaired (it was determined
to have no implied value), and as a result, the Company recorded a goodwill impairment charge in
the amount of $130.2 million, representing the shortfall between the fair value of its continuing
operations for which goodwill had been allocated and its carrying value.
Inventory, which consists of finished goods, is carried on our balance sheet at the lower of
cost or market. Cost is determined using the weighted average cost method and includes all costs
necessary to bring inventory to its existing condition and location. Market represents the lower
of replacement cost or estimated net realizable value of such inventory. Inventory reserves are
recorded for damaged, obsolete, excess and slow-moving inventory if management determines that the
ultimate expected proceeds from the disposal of such inventory will be less than its carrying cost
as described above. Management uses estimates to determine the necessity of recording these
reserves based on periodic reviews of each product category based primarily on the following
factors: length of time on hand, historical sales, sales projections (including expected sales
prices), order bookings, anticipated demand,
market trends, product obsolescence, the effect new products may have on the sale of existing
products and other factors. Risks and exposures in making these estimates include changes in
public and consumer preferences and demand for products, changes in customer buying patterns,
competitor activities, our effectiveness in inventory management, as well as discontinuance of
products or product lines. In addition, estimating sales prices, establishing markdown percentages
and evaluating the condition of our inventories all require judgments and estimates, which may also
impact the inventory valuation. However, we believe that, based on our prior experience of managing
and evaluating the recoverability of our slow moving, excess, damaged and obsolete inventory in
response to market conditions, including decreased sales in specific product lines, our established
reserves are materially adequate. If actual market conditions and product sales were less favorable
than we have projected, however, additional inventory reserves may be necessary in future periods.
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Company Outlook
The principal elements of our global business strategy include:
| focusing on design-led and branded product development at each of our subsidiaries to enable us to continue to introduce compelling new products; | ||
| pursuing organic growth opportunities to capture additional market share, including: |
(i) | expanding our product offerings into related categories; | ||
(ii) | increasing our existing product penetration (selling more products to existing customer locations); | ||
(iii) | increasing our existing store penetration (selling to more store locations within each large, national retail customer); and | ||
(iv) | expanding and diversifying of our distribution channels, with particular emphasis on sales into international markets; |
| growing through licensing, distribution or other strategic alliances, including pursuing acquisition opportunities in businesses complementary to ours; | ||
| implementing strategies to further capture synergies within and between our confederation of businesses, through cross-marketing opportunities, consolidation of certain operational activities and other collaborative activities; and | ||
| continuing efforts to manage costs within each of our businesses. |
We believe that we have made substantial progress in successfully implementing this strategy.
As noted above, we acquired each of LaJobi and CoCaLo on April 2, 2008, which enabled us to
significantly expand our infant and juvenile business and offer a more complete range of products
for the baby nursery. We also sold our Gift Business on December 23, 2008, enabling us to focus our
efforts and resources on our infant and juvenile business. In addition, during 2008 and 2009, we
expanded our product line to offer products at a broader variety of price points and also added
several environmentally friendly products. For example, Kids Line significantly increased its sales
of Carters ® brand bedding separates, while Kids Line and CoCaLo each introduced new
organic, eco-friendly brands. CoCaLo also expanded and refined its CoCaLo Couture brand, which
targets higher price points. LaJobi also developed a new brand Nursery 101 ®
introduced in 2009, which represents products at a lower price point than the rest of its line.
Effective December 2008, Sassy terminated its distribution agreement with MAM Babyartikel
GmbH, which accounted for approximately $22 million of sales in 2008 that will not recur in 2009,
and also terminated its license agreement with Leap Frog during 2008 due to unacceptable levels of
sales and profitability associated with this agreement. During the fourth quarter of 2008, Sassy
right-sized its operations in light of the termination of the MAM distribution agreement. Under
this plan, in addition to reducing approximately 30% of its full-time workforce, Sassy repositioned
its operations around its core strength as a developmental product company and developed new
products and packaging to support this effort.
As discussed in the section captioned Continuing Operations above, in the year ended
December 31, 2008, we recorded an impairment charge to goodwill in the approximate amount of $130.2
million, resulting from decreased cash flow forecasts due in part to adverse equity and credit
market conditions that caused, among other things, a sustained decrease in our stock price and a
continued challenging retail environment. As a result of the current challenging retail
environment, future sales and/or margins may be lower
than what was historically forecasted, which would negatively impact our prior cash flow
forecasts. However, we expect the acquisitions of LaJobi and CoCaLo to partially mitigate the
impact of such lower forecasts. There can be no assurance that the outcome of future reviews will
not result in further impairment charges. Impairment assessments inherently involve judgments as
to assumptions about expected future cash flows and the impact of market conditions on those
assumptions. Future events and changing market conditions may impact our assumptions as to prices,
costs or other factors that may result in changes in our estimates of future cash flows. Although
we believe the assumptions we use in testing for impairment are reasonable, significant changes in
any of our assumptions could produce a significantly different result.
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General Economic Conditions as they Impact Our Business
Economic conditions have deteriorated significantly in the United States and many of the other
regions in which we do business and may remain depressed for the foreseeable future. Global
economic conditions have been challenged by slowing growth and the sub-prime debt devaluation
crisis, causing worldwide liquidity and credit concerns. Continuing adverse global economic
conditions in our markets may result in, among other things: (i) reduced demand for our products;
(ii) increased price competition for our products; and/or (iii) increased risk in the
collectibility of cash from our customers. See Item 1A, Risk FactorsThe state of the economy may
impact our business of the 2008 10-K. In addition, our operations and performance depend
significantly on levels of consumer spending, which have deteriorated significantly in many
countries and regions as a result of fluctuating energy costs, conditions in the residential real
estate and mortgage markets, stock market conditions, labor and healthcare costs, access to credit,
consumer confidence and other macroeconomic factors affecting consumer spending behavior.
In addition, if internal funds are not available from our operations, we may be required to
rely on the banking and credit markets to meet our financial commitments and short-term liquidity
needs. Continued disruptions in the capital and credit markets, could adversely affect our ability
to draw on our bank revolving credit facility. Our access to funds under that credit facility is
dependent on the ability of the banks that are parties to the facility to meet their funding
commitments. Those banks may not be able to meet their funding commitments to us if they experience
shortages of capital and liquidity or if they experience excessive volumes of borrowing requests
from us and other borrowers within a short period of time. Such disruptions could require us to
take measures to conserve cash until the markets stabilize or until alternative credit arrangements
or other funding for our business needs can be arranged. See Item 1A, Risk FactorsIf the
national and world-wide financial crisis intensifies, potential disruptions in the credit markets
may adversely affect the availability and cost of short-term funds for liquidity requirements and
our ability to meet long-term commitments, which could adversely affect our results of operations,
cash flows, and financial condition of the 2008 10-K.
SEGMENTS
The Company currently operates in one segment, the infant and juvenile business.
BASIS OF PRESENTATION
As discussed above, as a result of the Gift Sale, the Consolidated Statement of Operations has
been restated to show the Gift Business as discontinued operations for the three and nine months
ended September 30, 2008. The discussion below conforms to such presentation. In addition, as
each of LaJobi and CoCaLo was acquired on April 2, 2008, the results of operations of each such
entity are not included in the consolidated results of operations for the first quarter of 2008.
RESULTS OF OPERATIONSTHREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
Net sales for the three months ended September 30, 2009 decreased by 13.9% to $60.1 million,
compared to $69.8 million for the three months ended September 30, 2008. This decrease was the
result of a significant decline at Sassy, including the loss of approximately $5.4 million in Sassy
sales generated in the third quarter of 2008 by the MAM Agreement, and an approximate 16% decline
in Kids Line sales from the prior year period primarily resulting from sustained conservative
retailer ordering associated with the continued challenging retail environment, partially offset by
strong sales growth at LaJobi as compared to the prior year period.
Gross profit was $18.5 million, or 30.7% of net sales, for the three months ended September
30, 2009, as compared to $22.6 million, or 32.4% of net sales, for the three months ended September
30, 2008. Gross profit margins were negatively impacted in the third quarter of 2009 primarily by:
(i) sales mix changes resulting in higher sales of lower margin products, including higher sales of
licensed products, including Carters® and Graco® branded products; and (ii) increases in mark downs
and advertising allowances provided to support retail sales or promotions in light of the present
economic environment.
Selling, general and administrative expense was $12.1 million, or 20.1% of net sales, for the
three months ended September 30, 2009, compared to $13.4 million, or 19.2% of net sales, for the
three months ended September 30, 2008. On an absolute basis, selling, general and administrative
expense decreased at all of the Companys operating subsidiaries (other than LaJobi), primarily as
a result of focused efforts to control spending in the current economic climate, as well as the
impact of workforce reductions
implemented by Sassy in late 2008. Only LaJobi experienced higher selling, general and
administrative expenses on an absolute basis, driven by higher sales volume for the period.
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Other expense was $1.6 million for the three months ended September 30, 2009 as compared to
$2.1 million for the three months ended September 30, 2008. This decrease of approximately $0.5
million was due to lower borrowings, lower borrowing costs and a net favorable change in the fair
value of an interest rate swap agreement entered into in connection with our Credit Agreement.
Income from continuing operations before income tax provision was $4.8 million for the three
months ended September 30, 2009 as compared to income of $7.1 million for the three months ended
September 30, 2008, primarily as a result of the declines in net sales and gross margin percentage
described above.
The income tax provision for the three months ended September 30,
2009 was $1.9 million as compared to an income tax provision from continuing operations of $1.1
million in the same period of 2008. The Companys effective tax rate for the three months ended
September 30, 2009 was 40.0% compared to 15.9% for the three months ended September 30, 2008. The
2008 effective tax rate differed from the statutory rate primarily due to the release of the
Companys tax reserve due to the closing of the statute of
limitations.
As a result of the foregoing, income from continuing operations for the three months ended
September 30, 2009 was $2.9 million, compared to income from continuing operations of $6.0 million
for the three months ended September 30, 2008.
Income from discontinued operations, net of tax, was $2.2 million for the three months ended
September 30, 2008. Net sales for the Gift Business were $38.3 million for the three months ended
September 30, 2008. The income tax provision from discontinued operations was a benefit of $1.2
million in the third quarter of 2008.
As a result of the foregoing, net income for the three months ended September 30, 2009 was
$2.9 million, or $0.13 per diluted share, compared to net income from continuing operations of $6.0
million, or $0.29 per diluted share, and net income of $8.2 million, or $0.39 per diluted share,
for the three months ended September 30, 2008.
RESULTS OF OPERATIONSNINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
Net sales for the nine months ended September 30, 2009 increased by 1.5% to $176.3 million,
compared to $173.6 million for the nine months ended September 30, 2008. This increase was
attributable to the inclusion of $26.7 million in sales generated by LaJobi and CoCaLo in the first
quarter of 2009 which were not included in the comparable period in 2008, partially offset by a
decline of 25% in net sales for Kids Line and Sassy. The decline in net sales was the result of the
termination of the MAM Agreement effective December 2008, which generated approximately $16.4
million of net sales for Sassy in the nine months ended September 30, 2008, as well as sustained
conservative retailer ordering at Kids Line and Sassy associated with the current economic
environment.
Gross profit was $54.0 million, or 30.6% of net sales, for the nine months ended September 30,
2009, as compared to $57.8 million or 33.3% of net sales, for the nine months ended September 30,
2008. Gross profit margin was negatively impacted in the first nine months of 2009 primarily by:
(i) sales mix changes resulting in higher sales of lower margin products, including higher sales of
licensed products; (ii) increases in mark downs and advertising allowances provided to assist
retailers in clearing existing inventory and to secure product placements for the balance of the
year; and (iii) the inclusion in the first quarter of 2009 of sales from LaJobi, which typically
carry lower gross profit margins, on average, than our other business units.
Selling, general and administrative expense was $35.7 million, or 20.2% of net sales, for the
nine months ended September 30, 2009, compared to $35.8 million, or 20.6% of net sales, for the
nine months ended September 30, 2008. Selling, general and administrative expense decreased as
percent of sales and on an absolute basis due to: lower SG&A expenses at both Kids Line and Sassy due to lower sales volume
and cost containment programs, partially offset by: (i) the inclusion in the first quarter of 2009
of approximately $4.5 million of SG&A expenses from LaJobi and CoCalo, which costs were not
included in SG&A for the first quarter of 2008; (ii) severance costs recorded in the first
quarter of 2009 of approximately $400,000 associated with a former
executive and (iii) increased investments across our operations
for trade shows and other business-building efforts.
In connection with an impairment test conducted during the preparation of the Companys
financial statements for the second quarter of 2009 triggered by the emergence of a series of
impairment indicators concerning the buyer of the Gift Business, the Company concluded that the
consideration received in connection with the Gift Sale was fully impaired, and, in connection
therewith, recorded a non-cash charge to income/(loss) from continuing operations in an aggregate
amount of $15.6 million ($4.5 million and $0.8 million, respectively, against the investment in The
Russ Companies, Inc. and the Applause® trade name, and $10.3 million to reserve against the
difference between the note receivable and deferred revenue liability).
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Other expense was $5.3 million for the nine months ended September 30, 2009 and 2008.
However, there was a decrease interest expense related to the lower
borrowings,
(approximately $0.5 million) for the 2009 period a decrease in interest, investment income and other income
(approximately $0.4 million), offset by a net favorable change of $0.9 million in the fair value of
an interest rate swap agreement entered into in connection with our Credit Agreement.
Loss from continuing operations before income tax provision was $2.6 million for the nine
months ended September 30, 2009 as compared to income of $16.6 million for the nine months ended
September 30, 2008, primarily as a result of the aggregate $15.6 million of non-cash impairment
charges and valuation reserves recorded in the second quarter of 2009 discussed above.
The income tax benefit for the nine months ended September 30, 2009
was $1.1 million as compared to an income tax provision from continuing operations of $4.8 million
for the nine months ended September 30, 2008, which was primarily the result of the impairment
charges and valuation reserves associated with the Gift Sale consideration discussed above. The
Companys effective tax rate for the nine months ended September 30, 2009 was 42.3% compared to
29.1% for the nine months ended September 30, 2008. The 2008 effective tax rate differed from the
statutory rate primarily due to the release of the Companys tax reserve due to the closing of the
statute of limitations.
As a result of the foregoing, loss from continuing operations for the nine months ended
September 30, 2009 was $1.5 million, compared to income from continuing operations of $11.8 million
for the nine months ended September 30, 2008.
Loss from discontinued operations, net of tax, was $13.7 million in the nine months ended
September 30, 2008. Net sales for the Gift Business were $98.0 million for the nine months ended
September 30, 2008. The income tax benefit from discontinued operations was a benefit of $1.9
million for the nine months ended September 30, 2008.
As a result of the foregoing, the net loss for the nine months ended September 30, 2009 was
$1.5 million, or ($0.07) per diluted share, compared to a net loss of $1.9 million, or ($0.09) per
diluted share, for the nine months ended September 30, 2008.
Liquidity and Capital Resources
Our principal sources of liquidity are cash and cash equivalents, funds from operations, and
availability under our bank facility. Our operating activities generally provide sufficient cash to
fund our working capital requirements and, together with borrowings under our bank facility, are
expected to be sufficient to fund our operating needs and capital requirements for at least the
next 12 months. Any significant future business or product acquisitions may require additional debt
or equity financing.
The proceeds of our bank facility have historically been used to fund acquisitions, and cash
flows from operations are typically swept on a daily basis and utilized to pay down our revolving
credit facility and required amortization of our term loan. Accordingly, with the exception of
funding short-term working capital requirements (which are necessitated by our strategy of sweeping
cash to pay down debt), we typically do not actively utilize our revolving credit facility to fund
operations.
As of September 30, 2009, the Company had cash and cash equivalents of $2.0 million compared
to $3.7 million at December 31, 2008. Cash and cash equivalents decreased by $1.7 million during
the nine months ending September 30, 2009 compared to a decrease of $8.3 million during the nine
months ending September 30, 2008, primarily reflecting the use of existing cash flows from
operations to reduce debt. As of September 30, 2009 and December 31, 2008, working capital was
$20.4 million and $25.0 million, respectively. The reduction in working capital primarily results
from aggressive inventory management in light of economic conditions, resulting in a $7.2 million
reduction in inventory during the first nine months of 2009 and the use of the cash proceeds
therefrom primarily to repay long term debt. .
Net cash provided by operating activities was $13.8 million during the nine months ended
September 30, 2009 compared to net cash provided by operating activities of $13.0 million during
the nine months ended September 30, 2008. The increase in cash provided by operating activities for
the nine months ended September 30, 2009 as compared to the same period in 2008 was primarily the
result of the acquisitions of LaJobi and CoCaLo in April 2008.
Net cash used in investing activities was $0.5 million for the nine months ended September 30,
2009 compared to net cash used of $74.1 million for the nine months ended September 30, 2008. The
cash used for the nine months ended September 30, 2009 was used to fund capital expenditures. The
cash used for the nine months ended September 30, 2008 was primarily related to: (i) the payment of
the aggregate purchase price for the LaJobi and CoCaLo acquisitions; (ii) the $3.6 million payment
of the Kids Line Earnout Consideration in January 2008; and (iii) capital expenditures.
Net cash used in financing activities was $14.8 million for the nine months ended September
30, 2009 as compared to net cash provided by financing activities of $53.6 million for the nine
months ended September 30, 2008. The cash used in the nine
months ended September 30, 2009 was primarily used to pay down debt under the Credit
Agreement. The cash provided in the nine months ended September 30, 2008 was primarily the result
of borrowings under the Credit Agreement to fund the acquisitions of LaJobi and CoCaLo.
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Recent Acquisitions
LaJobi
As of April 2, 2008, LaJobi, Inc. a newly-formed and indirect, wholly-owned Delaware
subsidiary of KID (LaJobi) consummated the transactions contemplated by an Asset Purchase
Agreement (the Asset Agreement) with LaJobi Industries, Inc., a New Jersey corporation
(Seller), and each of Lawrence Bivona and Joseph Bivona (collectively, the Stockholders), for
the purchase of substantially all of the assets and specified obligations of the business of the
Seller (the Business). The aggregate purchase price for the Business was equal to $50.0 million
(the $2.5 million deposited in escrow at the closing was released from escrow on October 2, 2009).
In addition, provided that the EBITDA of the Business, as defined in the Asset Agreement (the
LaJobi Earnout EBITDA) has grown at a compound annual growth rate (CAGR) of not less than 4%
during the three years ending December 31, 2010 (the Measurement Date), determined in accordance
with the Asset Agreement, LaJobi will pay to the Stockholders an amount (the LaJobi Earnout
Consideration) equal to a percentage of the Agreed Enterprise Value of LaJobi as of the
Measurement Date (subject to acceleration under certain limited circumstances), with the Agreed
Enterprise Value defined as the product of (i) the LaJobi Earnout EBITDA during the twelve (12)
months ending on the Measurement Date, multiplied by (ii) an applicable multiple (ranging from 5 to
9) depending on the specified levels of CAGR achieved. The LaJobi Earnout Consideration can range
between $0 and a maximum of $15.0 million. In addition, we have agreed to pay 1% of the Agreed
Enterprise Value to a financial institution (which has been previously paid a finders fee in
connection with the Assets Agreement), payable in the same manner and at the same time as the
LaJobi Earnout Consideration is paid to the Stockholders.
CoCaLo
On April 2, 2008, a newly-formed, wholly-owned Delaware subsidiary of KID, I&J Holdco, Inc.
(the CoCaLo Buyer), consummated the transactions contemplated by the Stock Purchase Agreement
(the Stock Agreement) with each of Renee Pepys Lowe and Stanley Lowe (collectively, the
Sellers), for the purchase of all of the issued and outstanding capital stock of CoCaLo, Inc., a
California corporation (CoCaLo). The aggregate base purchase price payable for CoCaLo was equal
to: (i) $16.0 million; minus (ii) the aggregate debt of CoCaLo outstanding at the closing of the
acquisition (including accrued interest) of $4.0 million; minus (iii) specified transaction
expenses ($0.3 million); plus (iv) a working capital adjustment of $1.5 million paid by the CoCaLo
Buyer. A portion of the purchase price ($1.6 million, which was discounted to $1.4 million for
financial statement purposes) was evidenced by a non-interest bearing promissory note and will be
paid as additional consideration in equal annual installments over a three-year period from the
closing date. The first payment of $533,000 was paid during April 2009.
In addition, the CoCaLo Buyer will pay to the Sellers the following earnout consideration
amounts (the CoCaLo Earnout Consideration) with respect to CoCaLos performance for the
aggregate three year period ending December 31, 2010: (i) $666,667 will be paid for the achievement
of specified initial performance targets with respect to each of net sales, gross profit and
specified CoCaLo EBITDA (the latter combined with specified Kids Line EBITDA) (the Initial
Targets), for a maximum payment of $2.0 million in the event of achievement of the Initial Targets
in all three categories; and (ii) up to an additional $666,667 will be paid, on a sliding scale
basis, for achievement in excess of the Initial Targets up to specified maximum performance targets
in each category, for a potential additional payment of $2.0 million in the event of achievement of
the maximum targets in all three categories. The CoCaLo Earnout Consideration can range between $0
up to an aggregate maximum of $4.0 million.
Any LaJobi Earnout Consideration and/or CoCaLo Earnout Consideration will be recorded as
additional goodwill when and if paid.
The results of operations of LaJobi and CoCaLo and the fair value of assets acquired and
liabilities assumed are included in our consolidated financial statements beginning on their
acquisition date.
Detailed descriptions of the LaJobi and CoCaLo acquisitions can be found in the Companys
Current Report on Form 8-K filed on April 8, 2008.
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Recent Disposition
On December 23, 2008, KID completed the sale of the Gift Business to The Russ Companies, Inc.
(the Buyer). The aggregate purchase price payable by the Buyer for the Gift Business was: (i)
199 shares of the Common Stock, par value $0.001 per share, of the Buyer (the Buyer Common
Shares), representing a 19.9% interest in the Buyer after consummation of the transaction, and
(ii) a subordinated, secured promissory note issued by Buyer to KID in the original principal
amount of $19.0 million (the Seller Note). During the 90-day period following the fifth
anniversary of the consummation of the sale of the Gift Business, KID will have the right to cause
the Buyer to repurchase any Buyer Common Shares then owned by KID, at its assumed original value
(which was $6.0 million for all Buyer Common Shares), as adjusted in the event that the number of
Buyer Common Shares is adjusted, plus interest at an annual rate of 5%, compounded annually. The
consideration received from the Gift Sale was recorded at fair value as of December 23, 2008 at
approximately $19.8 million and was recorded as Note Receivable of $15.3 million and Investment of
$4.5 million on the Companys consolidated balance sheet.
In addition, in connection with the sale of the Gift Business, our newly-formed, wholly-owned
Delaware limited liability company (the Licensor) executed a license agreement (the License
Agreement) with the Buyer. Pursuant to the License Agreement, the Buyer will pay the Licensor a
fixed, annual royalty (the Royalty) equal to $1,150,000. The initial annual Royalty payment is
due and payable in one lump sum on December 31, 2009. Thereafter, the Royalty will be paid
quarterly at the close of each three-month period during the term. At any time during the term of
the License Agreement, the Buyer shall have the option to purchase all of the intellectual property
subject to the License Agreement, consisting generally of the Russ ® and Applause
® trademarks and trade names (the Retained IP) from the Licensor for $5.0 million, to the
extent that at such time (i) the Seller Note shall have been paid in full (including all principal
and accrued interest with respect thereto), and (ii) there shall be no continuing default under the
License Agreement. If the Buyer does not purchase the Retained IP by December 23, 2013 (or nine
months thereafter, if applicable), the Licensor will have the option to require the Buyer to
purchase all of the Retained IP for $5.0 million. In connection therewith the Company recorded
deferred royalty income of $5.0 million.
In connection with the preparation of the Companys financial statements for the second
quarter of 2009, a series of impairment indicators emerged in connection with the Buyer. These
indicators included the impact of current macro-economic factors on the Buyer, the deterioration of
conditions in the gift market, and other Buyer-specific factors, including declining financial
performance, operational and integration challenges and liquidity issues. As a result of these
impairment indicators, the Company tested for impairment its 19.9% investment in the Buyer and
critically evaluated the collectibility of its $15.3 million note receivable from the Buyer. As a
result of this review, the Company determined that its 19.9% investment in the Buyer well as the
Applause® trade name were other than temporarily impaired and recorded non-cash charges of
approximately $4.5 million and $0.8 million, respectively, against these assets. The Company also
recorded a $10.3 million charge, to reserve against the difference between the note receivable and
deferred revenue liability. The aggregate impact of the actions resulted in a non-cash charge to
income/ (loss) from continuing operations in an aggregate amount of $15.6 million, representing
full impairment of the Gift Sale consideration.
A detailed description of the Gift Sale can be found in the Companys Current Report on Form
8-K filed on December 29, 2008.
Debt Financing
Consolidated long-term debt at September 30, 2009 and December 31, 2008 consisted of the
following (in thousands):
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Term Loan (Credit Agreement) |
$ | 70,250 | $ | 89,200 | ||||
Note Payable (CoCaLo purchase) |
1,011 | 1,498 | ||||||
Total |
71,261 | 90,698 | ||||||
Less current portion |
13,533 | 14,933 | ||||||
Long-term debt |
$ | 57,728 | $ | 75,765 | ||||
At September 30, 2009 and December 31, 2008, there was approximately $18.3 million and $12.1
million, respectively, borrowed under the Revolving Loan (defined below), which is classified as
short-term debt. At September 30, 2009, Revolving Loan Availability was $26.9 million.
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As of September 30, 2009, the applicable interest rate margins were: 4.00% for LIBOR Loans;
and 3.00% for Base Rate Loans. The weighted average interest rates for the outstanding loans as of
September 30, 2009 were as follows:
At September 30, 2009 | ||||||||
LIBOR Loans | Base Rate Loans | |||||||
Revolving Loan |
4.28 | % | 6.25 | % | ||||
Term Loan |
4.45 | % | 6.25 | % |
Credit Agreement Summary
On March 14, 2006, Kids Line, LLC (KL) and Sassy, Inc. (Sassy) entered into a credit
agreement as borrowers, on a joint and several basis, with LaSalle Bank National Association as
administrative agent and arranger (the Agent), the lenders from time to time party thereto, KID
as loan party representative, Sovereign Bank as syndication agent, and Bank of America, N.A. as
documentation agent (as amended on December 22, 2006, the Original Credit Agreement). The
commitments under the Original Credit Agreement consisted of (a) a $35.0 million revolving credit
facility (the Original Revolving Loan), with a subfacility for letters of credit in an amount not
to exceed $5.0 million, and (b) a term loan facility in the original amount of $60 million (the
Original Term Loan).
In connection with the purchase of LaJobi and CoCaLo as of April 2, 2008, KID, KL, Sassy, the
CoCaLo Buyer, LaJobi and CoCaLo (via a Joinder Agreement) entered into an Amended and Restated
Credit Agreement (the Credit Agreement) with certain financial institutions party to the Original
Credit Agreement or their assignees (the Lenders), LaSalle Bank National Association, as Agent
and Fronting Bank, Sovereign Bank as Syndication Agent, Wachovia Bank, N.A. as Documentation Agent
and Banc of America Securities LLC as Lead Arranger. KL, Sassy, the CoCaLo Buyer, LaJobi and CoCaLo
are referred to herein collectively as the Borrowers, and the CoCaLo Buyer, LaJobi and CoCaLo are
referred to herein as the New Borrowers. The Credit Agreement amended and restated the Original
Credit Agreement, and added the New Borrowers as parties thereto. The Pledge Agreement dated as of
March 14, 2006 between KID and the Agent (as amended on December 22, 2006) was also amended and
restated as of April 2, 2008 (the Amended and Restated Pledge Agreement), to provide, among other
things, for a pledge of the capital stock of the CoCaLo Buyer by KID. In connection with the Credit
Agreement, 100% of the equity of each Borrower, including each New Borrower, has been pledged as
collateral to the Agent. In addition, the Guaranty and Collateral Agreement (as defined in the
Credit Agreement) was also amended and restated as of April 2, 2008 (the Amended and Restated
Guaranty and Collateral Agreement), to add the New Borrowers as parties and to include
substantially all of the existing and future assets and properties of the New Borrowers as security
for the satisfaction of the obligations of all Borrowers, including the New Borrowers, under the
Credit Agreement and the other related loan documents.
The Credit Agreement was amended via a First Amendment to Credit Agreement as of August 13,
2008 to clarify the definition of Covenant EBITDA (defined below). In addition, the Amended and
Restated Pledge Agreement was further amended, in order to, among other things, permit the creation
of RB Trademark Holdco, LLC (IP Sub),and the transfer to KID of various inactive subsidiaries and
the interest in the Shining Stars Website.
As of March 20, 2009, KID and the Borrowers entered into a Second Amendment to Credit
Agreement with the Lenders and the Agent (the Second Amendment). In connection with the Second
Amendment: (i) the Amended and Restated Pledge Agreement and the Amended and Restated Guaranty and
Collateral Agreement were further amended to provide, among other things, for a pledge to the Agent
by KID of the membership interests in IP Sub; and (ii) KID executed a Joinder Agreement in favor of
the Agent, the effect of which was to add KID as a guarantor under the Credit Agreement and
each other Loan Document to which a Guarantor is a party and to include substantially all of the
existing and future assets and properties of KID (subject to specified exceptions) as security for
the satisfaction of the obligations of all the Borrowers under the Credit Agreement, as amended,
and the other related loan documents. In connection with the Second
Amendment, the Company paid the Agent
and Lenders aggregate amendment and arrangement fees of 1.25% of the revised commitments. The
scheduled maturity date is April 1, 2013 (subject to customary early termination provisions).
The following constitute the material changes to the Credit Agreement effected by the Second
Amendment:
(i) The commitments now consist of: (a) a $50.0 million revolving credit facility (the
Revolving Loan), with a subfacility for letters of credit in an amount not to exceed $5.0
million, and (b) an $80.0 million term loan facility (the Term Loan). Previously, the maximum
Revolving Loan commitment was $75.0 million and the maximum Term Loan commitment was $100.0
million.
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(ii) The Loans under the Credit Agreement bear interest at a rate per annum equal to the Base
Rate (for Base Rate Loans) or the LIBOR Rate (for LIBOR Loans) at the option of the Borrowers, plus
an applicable margin, in accordance with a pricing grid based on the most recent quarter-end Total
Debt to Covenant EBITDA Ratio. The applicable interest rate margins (to be added to the applicable
interest rate) under the Credit Agreement now range from 2.0% 4.25% for LIBOR Loans and from
1.0% 3.25% for
Base Rate Loans, based on a pricing grid set forth in the Second Amendment (until delivery of
specified financial statements and compliance certificates with respect to the quarter ending
September 30, 2009, the applicable margins will be a minimum of 4.00% for LIBOR Loans and 3.00% for
Base Rate Loans). Previously, the margins ranged from 2.00% 3.00% for LIBOR Loans and from
0.50% 1.50% for Base Rate Loans, depending on the Total Debt to Covenant EBITDA Ratio. The
Second Amendment also amended the Base Rate definition to include a floor of 30 day LIBOR plus 1%.
(iii) The Credit Agreement now contains the following financial covenants: (a) a minimum Fixed
Charge Coverage Ratio of 1.20:1.00 for the first two quarters of 2009, with a step down to
1.15:1.00 for the third quarter of 2009 and a step up to 1.25:1.00 for the fourth quarter of 2009
and the first quarter of 2010 and 1.35:1.00 for each fiscal quarter thereafter; (b) a maximum Total
Debt to Covenant EBITDA Ratio of 4.00:1.00 for the first two quarters of 2009, with a step down to
3.75:1.00 for the third quarter of 2009, a step down to 3.50:1.00 for the fourth quarter of 2009, a
step down to 3.25:1.00 for first three quarters of 2010 and, a step down to 2.75:1.00 for the
fourth quarter of 2010 and each fiscal quarter thereafter; and (c) an annual capital expenditure
limitation. Previously, the minimum Fixed Charge Coverage Ratio was 1.25:1.00, with a step-up to
1.35:1.00 at June 30, 2010, and the maximum Total Debt to Covenant EBITDA Ratio was 3.25:1.00, with
a step-down to 3.00:1.00 at June 30, 2009 and 2.75:1.00 at December 31, 2010. Covenant EBITDA, as
defined in the Second Amendment, is a non-GAAP financial measure used to determine our compliance
with the minimum Fixed Charge Coverage Ratio and Total Debt to Covenant EBITDA ratio, as well as to
determine Total Debt to Covenant EBITDA for purposes of the relevant interest rate margins
applicable to the Loans under the Credit Agreement, and whether certain dividends and repurchases
can be made if other pre-requisites described in the Second Amendment are met. Covenant EBITDA is
determined on a consolidated basis, and is defined generally as consolidated net income (after
excluding specified non-cash, non-recurring and other specified items), as adjusted for interest
expense; income tax expense; depreciation; amortization; other non-cash charges (gains); specified
costs in connection with each of our senior financing, specified acquisitions, and specified
requirements under the Credit Agreement; non-cash transaction losses (gains) due solely to
fluctuations in currency values; and specified costs in connection with the sale of our Gift
Business. For purposes of the Fixed Charge Coverage Ratio, Covenant EBITDA is further adjusted for
unfinanced capital expenditures; specified cash taxes and distributions pertaining thereto; and
specified cash dividends.
(iv) The Credit Agreement also contains customary affirmative and negative covenants. Upon the
occurrence of an event of default under the Credit Agreement, including a failure to remain in
compliance with all applicable financial covenants, the lenders could elect to declare all amounts
outstanding under the Credit Agreement to be immediately due and payable. In addition, an event of
default under the Credit Agreement could result in a cross-default under certain license agreements
that we maintain. The Borrowers were in compliance with all applicable financial covenants in the
Credit Agreement as of September 30, 2009.
(v) The principal of the Term Loan will be repaid in quarterly installments of $3.25 million
on the last day of each fiscal quarter commencing with the quarter ended March 31, 2009 through
December 31, 2012, and a final payment of $28.0 million due on April 1, 2013 (previously, the
quarterly installments were in the amount of $3.6 million with $31.6 million due on April 1, 2013).
(vi) The Borrowers are required to make prepayments of the Term Loan upon the occurrence of
certain transactions, including most asset sales or debt or equity issuances, and extraordinary
receipts. In addition, IP Sub must make mandatory prepayments of 100% of any net cash proceeds of
any asset sale.
(vii) Restrictions in the Credit Agreement on the activities of KID (requirement to act as a
holding company, with all operations conducted through its subsidiaries) were eliminated.
(viii) The Second Amendment eliminated all restrictions on the ability of the Borrowers to
distribute cash to KID for the payment of KIDs overhead expenses. However, KID will not be
permitted to pay a dividend to its shareholders unless: (1) the LaJobi and CoCaLo Earnout
Consideration, if any, have been paid in full; (2) before and after giving effect to any such
dividend, (a) no default or event of default exists or would result therefrom, (b) Excess Revolving
Loan Availability will equal or exceed $4.0 million, and (c) before and after giving effect to any
such payment, the applicable financial covenants will be satisfied; and (3) the Total Debt to
Covenant EBITDA Ratio for the two most recently completed fiscal quarters shall have been less than
2.00:1.00. Previously, the Borrowers were not permitted (except in specified situations) to
distribute cash to KID to pay KIDs overhead expenses unless: (i) before and after giving effect to
such distribution, no event of default would exist and (ii) before and after giving effect to such
distribution, Excess Revolving Loan Availability equaled or exceeded $5.0 million; provided that
the aggregate amount of such distributions could not exceed $3.5 million per year. In addition,
pursuant to the Second Amendment, KID is not permitted to repurchase or redeem stock (with certain
limited exceptions) unless (1) the LaJobi and CoCaLo Earnout Consideration, if any, have been paid
in full, (2) before and after giving effect to any such dividend, (a) no default or event of
default exists or would result therefrom, (b) Excess Revolving Loan Availability will equal or
exceed $5.0 million, and (c) before and after giving effect to any such payment, the applicable
financial covenants will be satisfied, and (3) the Total Debt to Covenant EBITDA Ratio for the two
most recently completed fiscal quarters shall have been less than 2.00:1.00. Other restrictions on
dividends and distributions are set forth in the Credit Agreement, as amended by the Second
Amendment.
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(ix) The following fees are now applicable to the Credit Agreement: an agency fee of $35,000
per annum, an annual non-use fee of 0.55% to 0.80% of the unused amounts under the Revolving Loan,
as well as other customary fees as are set forth in the Credit Agreement, as amended. Prior to the
Second Amendment, the annual non-use fee was 0.40% to 0.60% of the unused amounts under the
Revolving Loan.
Other provisions of the Credit Agreement as amended, include the following:
(i) The definition of Borrowing Base is 85% of eligible receivables plus the lesser of (x)
$25.0 million and (y) 55% of eligible inventory.
(ii) Payment of the amounts outstanding under the promissory note under the Stock Agreement is
prohibited if before and after giving effect to any such repayment, a default or event of default
would exist.
(iii) Payment of either of the LaJobi or CoCaLo Earnout Consideration is prohibited if before
and after giving effect to any such repayment, (a) a default or event of default would exist, (b)
Excess Revolving Loan Availability will not equal or exceed $9.0 million, or (c) before and after
giving effect to any such repayment, the financial covenants under the Credit Agreement will not be
satisfied (the Earnout Conditions).
(iv) The Credit Agreement contains specified events of default related to the LaJobi and
CoCaLo Earnout Consideration (including the failure to deliver to the Agent specified
certifications and calculations within a specified time period, the reasonable determination by the
Agent that any Earnout Conditions will not be satisfied as of the applicable payment date, if any,
material information provided to the Agent with respect to the Earnout Conditions shall be
incorrect in any material respect and remain unremedied prior to the relevant payment date, or any
Earnout Consideration payments are paid at any time that the Earnout Conditions are not satisfied).
(v) The Borrowers are required to maintain in effect Hedge Agreements that protect against
potential fluctuations in interest rates with respect to a minimum of 50% of the outstanding amount
of the Term Loan. Pursuant to the requirement to maintain Hedge Agreements discussed above, on May
2, 2008, the Borrowers entered into an interest rate swap agreement with a notional amount of $70
million as a risk management tool to lock the interest cash outflows on the floating rate debt.
However, because we did not meet the criteria for hedge accounting
under ASC Topic 815 Derivatives
and Hedging- for this instrument, changes in the fair value of the interest rate swap will be
remeasured through the statement of operations each period. Changes between its cost and its fair
value as of September 30, 2009 resulted in income of approximately $348,000 and $904,000 for the
three and nine months ended September 30, 2009, respectively and such amounts are included in
interest expense in the unaudited consolidated statements of operations.
Financing costs associated with the amended revolver and term loans were subject to the
provisions of ASC Topic 470, Debt. Based upon the
calculations, required by ASC Topic 470, the Company recorded a non-cash charge to results of
operations of approximately $0.4 million for deferred financing costs in the quarter ended March
31, 2009.
Other Events and Circumstances Pertaining to Liquidity
During
March 2008, Sassy terminated its distribution agreement with MAM
Babyartikel GmbH of Vienna, Austria (the MAM Agreement)
effective as of December 23, 2008. As a result of such
termination, we anticipate that Sassy will experience a sales decline
of approximately $22 million (although a loss of only limited
profitability) during 2009, of which approximately $16.0 million
was experienced during the nine months ended September 30,
2009. Pursuant to the MAM Agreement, we are restricted from selling
products competitive with the MAM products until December 23, 2009.
In
connection with the sale of the Gift Business, KID and U.S. Gift
(our subsidiary at the time) sent a notice of termination, effective
December 23, 2010, with respect to the lease (the
Lease) originally entered into by KID (and subsequently
assigned to U.S. Gift) of a facility in South Brunswick, New
Jersey. Although this Lease has become the obligation of the Buyer of
the Gift Business (through its ownership of U.S. Gift), KID
remains obligated for the payments due thereunder (to the extent they
are not paid by U.S. Gift) until the termination of the Lease
becomes effective for a maximum potential remaining obligation of
approximately $4.3 million). It is our understanding that
U.S. Gift has failed to pay certain amounts due under the Lease
and that Buyer, U.S. Gift and the landlord have initiated
discussions with respect thereto. No payments have been made by KID
in connection with the Lease since the sale of the Gift Business, but
there can be no assurance that payments will not be required of KID
with respect thereto to the extent U.S. Gift continues to fail
to make such payments and no accommodation is secured from the
landlord. The amount of payments required by KID, if any, cannot be
ascertained at this time. To the extent KID is required to make any
payments to the landlord in respect of the Lease, it intends to seek
reimbursement from the Buyer under the purchase agreement governing
the sale of our former Gift Business. However, we cannot assure that
we will be able to recover any such amounts in a timely manner, or at
all
In
addition, the purchase agreement pertaining to the sale of the Gift
Business contains various KID indemnification, reimbursement and
similar obligations. In addition, KID may remain obligated with
respect to certain contracts or other obligations that were not
novated in connection with their transfer. No payments have been made
by KID in connection with any of these obligations as of
October 29, 2009, but there can be no assurance that payments
will not be required of KID in the future.
We
are subject to legal proceedings and claims arising in the ordinary
course of our business. We believe such proceedings and claims will
not have a material adverse impact on our consolidated financial
condition, results of operations or cash flows.
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In addition, the purchase agreement pertaining to the sale of the Gift Business contains
various KID indemnification, reimbursement and similar obligations. In addition, KID may remain
obligated with respect to certain contracts or other obligations that were not novated in
connection with their transfer. No payments have been made by KID in connection with any of these
obligations as of October 29, 2009, but there can be no assurance that payments will not be
required of KID in the future.
We are subject to legal proceedings and claims arising in the ordinary course of our business.
We believe such proceedings and claims will
not have a material adverse impact on our consolidated financial condition, results of operations
or cash flows.
Consistent with our past practices and in the normal course of our business, we regularly
review acquisition opportunities of varying sizes.
We may consider the use of debt or equity financing to fund potential acquisitions. Our
current credit agreement includes provisions that place limitations on our ability to enter into
acquisitions, mergers or similar transactions, as well as a number of other activities, including
our ability to: incur additional debt; create liens on our assets or make guarantees; make certain
investments or loans; pay dividends; repurchase our common stock; or dispose of or sell assets.
These covenants could restrict our ability to pursue opportunities to expand our business
operations. We are required to make prepayments of our debt upon the occurrence of certain
transactions, including most asset sales or debt or equity issuances and extraordinary receipts.
Contractual Obligations
The following table summaries the Companys significant known contractual obligations as of
September 30, 2009 and the future periods in which such obligations are expected to be settled in
cash (in thousands):
Total | 2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | ||||||||||||||||||||||
Operating Lease Obligations |
$ | 11,762 | $ | 505 | $ | 1,918 | $ | 1,942 | $ | 1,944 | $ | 2,012 | $ | 3,441 | ||||||||||||||
Capitalized Leases |
10 | 2 | 7 | 1 | | | | |||||||||||||||||||||
Purchase Obligations(1) |
41,581 | 41,581 | | | | | | |||||||||||||||||||||
Debt Repayment
Obligations(2) |
70,250 | 3,250 | 13,000 | 13,000 | 13,000 | 28,000 | | |||||||||||||||||||||
Note Payable(3) |
1,067 | | 533 | 534 | | | | |||||||||||||||||||||
Interest on Debt Repayment
Obligations(4) |
8,333 | 858 | 3,025 | 2,375 | 1,725 | 350 | | |||||||||||||||||||||
Royalty Obligations |
10,206 | 221 | 3,360 | 2,630 | 2,895 | 1,100 | | |||||||||||||||||||||
Total Contractual
Obligations(5) |
$ | 143,209 | $ | 46,417 | $ | 21,843 | $ | 20,482 | $ | 19,564 | $ | 31,462 | $ | 3,441 | ||||||||||||||
(1) | The Companys purchase obligations consist primarily of purchase orders for inventory. | |
(2) | Reflects repayment obligations under the Second Amendment effective as of March 20, 2009. See Note 6 of Notes to Unaudited Consolidated Financial Statements for a description of the Second Amendment, including amounts and dates of repayment obligations and provisions that create, increase and/or accelerate obligations thereunder. Excludes, as of September 30, 2009, approximately $18.3 million borrowed under the Revolving Loan. The estimated 2009 interest payment for this Revolving Loan using a 5.0% interest rate is $0.9 million. Such amounts are estimates only and actual interest payments could differ materially. The Revolving Loan facility matures in April 2013, at which time any amounts outstanding are due and payable. | |
(3) | Reflects a note payable with respect to the CoCaLo acquisition. The present value of the note is $1,011,000 and the aggregate remaining imputed interest at 5.5% is $56,000. Upon the occurrence of an event of default under the note, the holder could elect to declare all amounts outstanding to be immediately due and payable. |
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(4) | This amount reflects estimated interest payments on the long-term debt repayment obligation as of September 30, 2009 calculated using an interest rate of 5.0% and then-current levels of outstanding long-term debt. Such amounts are estimates only and actual interest payments could differ materially. This amount also excludes interest on amounts borrowed under the Revolving Loan. | |
(5) | Does not include contingent obligations under the Lease (or contingent obligations under other off-balance sheet arrangements described below), as the amount if any and/or timing of their potential settlement is not reasonably estimable. See Other Events and Circumstances Pertaining to Liquidity above. In connection with the acquisitions of LaJobi and CoCaLo, the Company has agreed to make certain potential Earnout Consideration payments based on the performance of the acquired businesses. See Managements Discussion and Analysis of Results of Operations and Financial ConditionRecent Acquisitions. These amounts are not included in the above table as the timing of their potential settlement is not reasonably estimable. |
The Company has classified the $6.8 million of total income tax payable, as current; as such
amount is expected to be resolved within one year. These amounts are not included in the above
table as the timing of their potential settlement is not reasonably estimable.
Off Balance Sheet Arrangements
As of September 30, 2009, there have been no material changes in the information provided
under the caption Off Balance Sheet Arrangements of Item 7 of the 2008 10-K. But see Other
Events and Circumstances Pertaining to Liquidity above with
respect to the Companys contingent
liability pertaining to the Lease
by a subsidiary of the Buyer of the Gift Business of a facility in South Brunswick, New Jersey,
which may require payments to be made by the Company to the landlord of such facility.
CRITICAL ACCOUNTING POLICIES
The SEC has issued disclosure advice regarding critical accounting policies, defined as
accounting policies that management believes are both most important to the portrayal of the
Companys financial condition and results and require application of managements most difficult,
subjective or complex judgments, often as a result of the need to make estimates about the effects
of matters that are inherently uncertain.
Management is required to make certain estimates and assumptions during the preparation of its
consolidated financial statements that affect the reported amounts of assets, liabilities, revenue
and expenses, and related disclosure of contingent assets and liabilities. Estimates and
assumptions are reviewed periodically, and revisions made as determined to be necessary by
management. There have been no material changes to the Companys significant accounting estimates
and assumptions or the judgments affecting the application of such estimates and assumptions during
the period covered by this report from those described in the Companys 2008 10-K.
Also see Note 2 of Notes to Consolidated Financial Statements of the 2008 10-K for a summary
of the significant accounting policies used in the preparation of the Companys consolidated
financial statements. See Note 4 of Notes to Unaudited Consolidated Financial Statements herein for
a discussion of the assumptions used in share-based payment valuations.
Recently Issued Accounting Standards
See Notes 1, 9 and 13 of the Notes to Unaudited Consolidated Financial Statements for a
discussion of recently issued accounting pronouncements.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements. Additional
written and oral forward-looking statements may be made by us from time to time in Securities and
Exchange Commission (SEC) filings and otherwise. The Private Securities Litigation Reform Act of
1995 provides a safe-harbor for forward-looking statements. These statements may be identified by
the use of forward-looking words or phrases including, but not limited to, anticipate, project,
believe, expect, intend, may, planned, potential, should, will or would. We
caution readers that results predicted by forward-looking statements, including, without
limitation, those relating to our future business prospects, revenues, working capital, liquidity,
capital needs, interest costs and income are subject to certain risks and uncertainties that could
cause actual results to differ materially from those indicated in the forward-looking statements.
Specific risks and uncertainties include, but are not limited to, those set forth
under Item 1A, Risk Factors, of the 2008 10-K. We undertake no obligation to publicly
update any forward-looking statement, whether as a result of new information, future events or
otherwise.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2009, there have been no material changes in the Companys market risks as
described in Item 7A of our 2008 10-K, and Item 3 of our March 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rules 13a-15(e) or 15d-15(e) of
the Securities Exchange Act of 1934, as amended (the Exchange Act) that are designed to ensure
that information required to be disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms and that such information is accumulated and communicated to our
management, including our principal executive officer and principal financial officer (together,
the Certifying Officers), to allow for timely decisions regarding required disclosure.
In designing and evaluating disclosure controls and procedures, management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable, not
absolute assurance of achieving the desired objectives.
Under the supervision and with the participation of management, including the Certifying
Officers, we carried out an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to paragraph (b) of Exchange Act Rules 13a-15 or 15d-15
as of September 30, 2009. Based upon that evaluation, the Certifying Officers have concluded that
our disclosure controls and procedures are effective as of September 30, 2009.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection
with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 or 15d-15 that occurred
during the fiscal quarter ended September 30, 2009 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors set forth in Part I, Item 1A, Risk
Factors, of the Companys 2008 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 22, 2009 the Company held its annual meeting of shareholders (the 2009 Annual
Meeting). Each of the eight nominated directors was elected, without contest, as a member of the
Board of Directors at the 2009 Annual Meeting. The votes for and the votes withheld for each of
the nominees for director were as follows:
Nominee | For | % | Withheld | % | ||||||||||||
Raphael Benaroya |
17,350,377 | 87.0 | 2,597,068 | 13.0 | ||||||||||||
Mario Ciampi |
18,978,388 | 95.1 | 969,057 | 4.9 | ||||||||||||
Bruce G. Crain |
19,729,628 | 98.9 | 217,817 | 1.1 | ||||||||||||
Frederick J. Horowitz |
18,941,991 | 95.0 | 1,005,454 | 5.0 | ||||||||||||
Lauren Krueger |
17,531,007 | 87.9 | 2,416,438 | 12.1 | ||||||||||||
Salvatore M. Salibello |
17,475,714 | 87.6 | 2,471,731 | 12.4 | ||||||||||||
John Schaefer |
18,398,196 | 92.2 | 1,549,249 | 7.8 | ||||||||||||
Michael Zimmerman |
19,655,652 | 98.5 | 219,793 | 1.5 |
A brief description of each matter voted upon at the 2009 Annual Meeting other than the
election of directors follows:
Approval of an amendment to the Restated Certificate of Incorporation of the Company to change
its name to Kid Brands, Inc., effective as of the date of the 2009 Annual Meeting:
For | % | Against | % | Abstain | % | Broker non-vote | % | |||||||
19,927,668 | 99.9 | 17,255 | .01 | 2,522 | | | |
ITEM 6. EXHIBITS
Exhibits to this Quarterly Report on Form 10-Q.
3.1(a) | Restated Certificate of Incorporation of the Company and amendment thereto. | ||
(b) | Certificate of Amendment to Restated Certificate of Incorporation of the Company filed April 30, 1987. | ||
(c) | Certificate of Amendment to Restated Certificate of Incorporation of the Company filed September 22, 2009. | ||
4.1 | Form of Common Stock Certificate. | ||
31.1 | Certification of CEO required by Section 302 of the Sarbanes Oxley Act of 2002. | ||
31.2 | Certification of CFO required by Section 302 of the Sarbanes Oxley Act of 2002. | ||
32.1 | Certification of CEO required by Section 906 of the Sarbanes Oxley Act of 2002. | ||
32.2 | Certification of CFO required by Section 906 of the Sarbanes Oxley Act of 2002. |
Items 1, 2, 3, and 5 are not applicable and have been omitted.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
KID BRANDS, INC. (Registrant) |
||||
By | /s/ Guy A. Paglinco | |||
Date: November 4, 2009 | Guy A. Paglinco | |||
Vice President and Chief Financial Officer | ||||
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EXHIBIT INDEX
3.1 (a) | Restated Certificate of Incorporation of the Company and amendment thereto. |
|
(b) | Certificate of Amendment to Restated Certificate of Incorporation of the Company filed April 30, 1987. |
|
(c) | Certificate of Amendment to Restated Certificate of Incorporation of the Company filed September 22, 2009. |
|
4.1 | Form of Common Stock Certificate. |
|
31.1 | Certification of CEO required by Section 302 of the Sarbanes Oxley Act of 2002. |
|
31.2 | Certification of CFO required by Section 302 of the Sarbanes Oxley Act of 2002. |
|
32.1 | Certification of CEO required by Section 906 of the Sarbanes Oxley Act of 2002. |
|
32.2 | Certification of CFO required by Section 906 of the Sarbanes Oxley Act of 2002. |
40