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EX-31.3 - EXHIBIT 31.3 - KID BRANDS, INC | c21556exv31w3.htm |
EX-32.3 - EXHIBIT 32.3 - KID BRANDS, INC | c21556exv32w3.htm |
EX-32.4 - EXHIBIT 32.4 - KID BRANDS, INC | c21556exv32w4.htm |
EX-31.4 - EXHIBIT 31.4 - KID BRANDS, INC | c21556exv31w4.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
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 (State of or other jurisdiction of incorporation or organization) |
22-1815337 (I.R.S. Employer Identification Number) |
One Meadowlands Plaza, 8th Floor, East Rutherford, New Jersey (Address of principal executive offices) |
07073 (Zip Code) |
(201) 405-2400
(Registrants Telephone Number, including area code)
(Registrants Telephone Number, including area code)
(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 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 August
12, 2011 was as follows:
CLASS | SHARES OUTSTANDING | |
Common Stock, $0.10 stated value | 21,652,345 |
EXPLANATORY NOTE
The sole purpose of this Amendment No. 1 (the Amendment) to the Quarterly Report on Form 10-Q for
the three months ended June 30, 2011 filed by Kid Brands, Inc. (the Company) with the Securities
and Exchange Commission on August 15, 2011 (the Original Filing), is to correct the following
inadvertent typographical error: In the first paragraph of Results of Operations Six Months
Ended June 30, 2011 and 2010 of Part I, Item 2, Managements Discussion and Analysis of Financial
Condition and Results of Operations, the net sales volume at LaJobi is reported to be down
approximately 7.6%, whereas the correct number is 17.6%.
This typographical error was discovered after the Original Filing was submitted to the Securities
and Exchange Commission, and did not have an impact on any other amounts reported in the Companys
Consolidated Financial Statements. In accordance with Rule 12b-15 under the Securities Exchange
Act of 1934, as amended (Rule 12b-15), each Item of the Original Filing that is affected by this
Amendment has been amended and restated in its entirety. All other Items of the Original Filing
are unaffected by this Amendment and such Items have not been included in this Amendment. Except
as otherwise noted, information included in this Amendment is stated as of June 30, 2011 and does
not reflect any subsequent information or events.
As required by Rule 12b-15, new certifications of our principal executive officer and principal
financial officer are being filed as exhibits to this Amendment.
PART I FINANCIAL INFORMATION
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, our Quarterly Report on Form 10-Q for
the quarter ended March 31, 2011 (the Q1 10-Q) and our Annual Report on Form 10-K for the year
ended December 31, 2010, as amended (the 2010 10-K), including the consolidated financial
statements and notes thereto.
OVERVIEW
We are a leading designer, importer, marketer and distributor of branded infant and juvenile
consumer products. Through our four wholly-owned operating subsidiaries Kids Line, LLC (Kids
Line); LaJobi, Inc. (LaJobi); Sassy, Inc. (Sassy); and CoCaLo, Inc. (CoCaLo) we design
and market branded infant and juvenile products in a number of complementary categories including,
among others: infant bedding and related nursery accessories and décor, food preparation and
nursery appliances, bath/spa products and diaper bags (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®). In addition to our branded products, we also market
certain categories of products under various licenses, including Carters®,
Disney®, Graco® and Serta®. Our products are sold primarily to
retailers in North America, the United Kingdom (U.K.) 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 U.K. and Australia. We also maintain relationships with several independent
representatives to service select domestic and foreign retail customers, as well as international
distributors to service certain retail customers in several foreign countries.
We generated net sales of approximately $60.3 million and $120.1 million for the
three and six months ended June 30, 2011, respectively. International sales, defined as sales
outside of the United States, including export sales, constituted 9.0% of our net sales for each of
the six months ended June 30, 2011 and 2010. 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.
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.
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 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 past periods, or higher rates of inflation in the country of origin, 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 their 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. See Item 1A, Risk Factors
Currency exchange rate fluctuations could increase our expenses, of the 2010 10-K.
27
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. The costs of warehousing, outbound handling costs and
outbound shipping costs were $1.8 million and $1.7 million, for the three months ended June 30,
2011 and 2010, respectively. The costs of warehousing, outbound handling costs and outbound
shipping costs were $3.9 million and $3.4 million, for the six months ended June 30, 2011 and 2010,
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.
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.
Many of our suppliers are currently experiencing significant cost pressures related to labor rates,
raw material costs and currency inflation, which has and, we believe, will continue to put pressure
on our gross margins, at least for the foreseeable future. To the extent we are unable to pass
such price increases along to our customers or otherwise reduce our cost of goods, our gross profit
margins would decrease. Our gross profit margins have also been impacted in recent periods by: (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); (ii) our LaJobi subsidiary, which has experienced significant
sales growth but which also typically generates lower gross margins, on average, than our other
business units, due to the nature of the furniture category; (iii) increased pressure from major
retailers, largely 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; and
(iv) increased freight cost and other costs of goods. We believe that our future gross margins
will continue to be under pressure as a result of the items listed above, and such pressures may be
more acute over the next several quarters as a result of anticipated product cost increases. See
Note 10 of the Notes to Unaudited Consolidated Financial Statements for a description of accruals
for anticipated customs duty and interest payment requirements related to (i) certain wooden
furniture imported by our LaJobi subsidiary from the PRC (until January of 2011), which accruals
have further adversely impacted our gross margins and net loss income for the three and six months
ended June 30, 2011, and the fourth quarter and year ended December 31, 2010 and (ii) the findings
of our ongoing Customs Review, which accruals have further adversely impacted our gross margins and
net loss for the three and six months ended June 30, 2011.
We continue to seek to mitigate margin pressure through the development of new products that
can command higher pricing; the identification of alternative, lower-cost sources of supply,
re-engineering of certain existing products to reduce manufacturing costs; 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 and will likely continue to seek to do so, we
have generally focused on maintaining (or increasing) shelf space at retailers and, as a result,
our market share.
Inventory and Intangible Assets
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.
Indefinite-lived intangible assets 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 2010. There were no
impairments of intangible assets in 2010. In accordance with applicable accounting standards, the
Company determined that interim testing of intangible assets (definite and indefinite-lived) was
not warranted for the three and six months ended June 30, 2011 as no triggering events occured during such period.
We will continue to evaluate the
carrying amounts of our intangible assets.
28
Recent Developments
Refinancing of Senior Indebtedness
KID and specified domestic subsidiaries executed a Second Amended and Restated Credit
Agreement as of August 8, 2011, with certain financial institutions, including Bank of America,
N.A., among other things, as Administrative Agent. This amendment and restatement represents a
refinancing of the Companys senior secured debt under the Existing Credit Agreement, and provides
for an aggregate $175.0 million revolving credit facility (without borrowing base limitations),
with a $25.0 million sub-facility for letters of credit, and a $5.0 million sub-facility for
swing-line loans. KID is entitled to increase the amount of this new revolver by up to an
additional $35.0 million, provided that, among other things, no defaults have occurred and are
continuing and commitments are received for such increase (from existing lenders or certain third
party financial institutions). The refinancing, among other things, increases borrowing capacity
previously available under the Existing Credit Agreement (which provided for a $50.0 million
revolver based on eligible receivables and inventory, with a $5.0 million sub-facility for letters
of credit, and an $80.0 million term loan), lowers minimum and maximum interest rate margins and is
described in detail under Liquidity and Capital Resources below under the section captioned Debt
Financings.
TRC Matters
As has been previously disclosed, on April 21, 2011, The Russ Companies, Inc. (TRC), the
acquirer of KIDs former gift business, and TRCs domestic subsidiaries (collectively, the
Debtors), filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code (the
Code) in the United States Bankruptcy Court for the District of New Jersey (the Bankruptcy
Court). On June 16, 2011, the Bankruptcy Court entered an order (the Order) which, among other
things, approved a settlement with the secured creditors of the Debtors, including KID (the
Settlement). The Order was effective and enforceable on its entry. The time for an aggrieved
party to file an appeal from the Order expired on July 1, 2011.
Background. On December 23, 2008, KID completed the sale of its former gift business (the
Gift Sale) to TRC. The aggregate purchase price payable by TRC for such gift business was: (i)
199 shares of the Common Stock of TRC, representing a 19.9% interest in TRC after consummation of
the transaction; and (ii) a subordinated, secured promissory note issued by TRC to KID in the
original principal amount of $19.0 million (the Seller Note). As has been previously disclosed,
in the second quarter of 2009, KID fully impaired or reserved against all such consideration.
In connection with the Seller Note: (i) TRC and specified subsidiaries granted a lien (junior
to the lien of Wells Fargo Bank, National Association (WF), TRCs senior lender) to KID on
substantially all of their respective assets, and such subsidiaries guaranteed the payment (subject
to intercreditor arrangements described below) of all obligations to KID under the Seller Note; and
(ii) KID entered into an Intercreditor Agreement with WF, pursuant to which payment of the Seller
Note was fully subordinated to payment of TRCs obligations under its credit facility with WF.
In addition, in connection with the Gift Sale, a limited liability company wholly-owned by KID
(the Licensor) executed a license agreement (the License Agreement) with TRC permitting TRC to
use specified intellectual property, consisting generally of the Russ and Applause trademarks
and trade names (the Retained IP). Pursuant to the License Agreement, TRC was required to pay the
Licensor a fixed, annual royalty (the Royalty) equal to $1,150,000. The initial annual royalty
payment was due and payable in one lump sum on December 31, 2009. Thereafter, the Royalty was
required to be paid quarterly at the close of each three-month period during the term. TRC did not
pay the initial lump sum Royalty payment. KID received $287,500 in respect of the Royalty payment
due March 23, 2010, which was recorded as other income in the first quarter of 2010, but did not
receive any other payments in respect of the Royalty, and therefore recorded no further income
related to such Royalties.
In connection with the Gift Sale, KID and Russ Berrie U.S. Gift, Inc. (U.S. Gift), KIDs
subsidiary at the time (and currently a subsidiary of TRC), sent a notice of termination with
respect to the lease (the TRC Lease), originally entered into by KID (and subsequently assigned to
U.S. Gift) of a facility in South Brunswick, New Jersey. Although the TRC Lease became the obligation
of TRC (through its ownership of U.S. Gift), KID remains potentially obligated for rental and other
specified payments due thereunder (to the extent they are owed but have not been paid by U.S.
Gift). On April 27, 2011, KID received a letter on behalf of the landlord under the TRC Lease (the
TRC Landlord) demanding payment by KID of specified rent and other additional charges allegedly
owed by U.S. Gift in an aggregate amount of approximately $5.9 million (including, among other
things, approximately $3.8 million in rent and other charges for periods subsequent to the
effective date of the termination of the TRC Lease (December 23, 2010), for which KID does not believe
it is responsible, and approximately $1.0 million in specified repairs (Repair Charges)). On
July 18, 2011, the TRC Landlord filed a complaint in the Superior Court of New Jersey Law Division:
Middlesex County, alleging that KID, having agreed
via an assignment agreement to remain liable for the obligations of
the tenant under the TRC
Lease, has breached the TRC Lease and such assignment by failing to pay rent and other charges due and
owing pursuant to the TRC Lease, in an aggregate amount of approximately $12 million as of June 11,
2011. Under specified circumstances, we currently estimate that KIDs potential liability for
rental and related amounts under the TRC Lease is approximately $1.1 million and, accordingly, we have
accrued such amount for the three and six month period ended June 30, 2011. With respect to the
alleged Repair Charges, KID is currently unable to assess its potential liability therefor, if any,
under the TRC Lease. As a result, the aggregate amount of any payments that may potentially be required
to be made by KID with respect to the TRC Lease cannot be ascertained at this time. See Note 10 of
Notes to Unaudited Consolidated Financial Statements and Part II, Item 1, Legal Proceedings, for
further discussion of this matter.
29
The Settlement. The Settlement, among other things: (i) includes a release of KID by and on
behalf of the Debtors estates (without the requirement of any cash payment) from all claims,
including fraudulent conveyance and preference claims under the Code, and claims pertaining to
KIDs sale of the gift business to TRC; (ii) confirms that the Seller Note and KIDs security
interests therein are valid, and are junior only to TRCs senior lender; (iii) allows KID to retain
ownership of the Retained IP, provided, that the trustee in the bankruptcy may include such
intellectual property as part of a global sale of TRCs business as long as KID receives at least
$6.0 million therefor; (iv) includes a set-off against the Seller Note of all amounts owed by KID
and its subsidiaries to TRC and its subsidiaries, for which KID had accrued an aggregate of
approximately $2.0 million, without the requirement of any cash payment; (v) establishes
distribution priorities for any proceeds obtained from the sale of TRCs assets under which KID is
generally entitled to receive, to the extent proceeds are available therefor after the payment of
amounts owed to TRCs senior lender and approximately $1.4 million in specified expenses have been
funded, approximately $1.0 million, and to the extent further proceeds are available subsequent to
the payment of approximately $1.0 million to the Debtors estates for additional specified
expenses, 60% of any remaining proceeds (40% of any such remaining proceeds will go to the Debtors
estates for the benefit of general unsecured creditors, and KID may participate therein as an
unsecured creditor to the extent of 50% of any deficiency claims, including for unpaid royalties).
As it is not possible to determine the amount, if any, that the trustee in the bankruptcy will
obtain through the sale of TRCs assets, KID may obtain only limited recovery on its claims, or may
obtain no recovery at all. In addition, the Settlement provides that the Trustee will cooperate, at
KIDs expense, with KIDs efforts to resolve the claim asserted by the landlord under the TRC Lease
described above (however, the Settlement does not impact amounts potentially owed to such landlord
under the TRC Lease). The Debtors estates rights with respect to the Retained IP will terminate at
the earlier of 6 months from the date of the entry of the Bankruptcy Courts sale order and the
date of liquidation of TRCs operations in the United States, Canada, the United Kingdom and
Australia. Pursuant to the Settlement, KID waives its claims to Royalties as a result of the
liquidation, except that it will be entitled to a 5% royalty on any inventory sold by a third party
liquidator retained by the Trustee as part of the liquidation process. In addition, any bidder for
the stock of the Debtors U.K., Australia or Canada subsidiaries may include a request to use KIDs
Retained IP on a non-exclusive basis in the U.K., Australia or Canada, respectively, for a five
percent (5%) royalty for a period of up to two (2) years. The Trustee has also agreed to
cooperate in the removal of any persons designated by TRC to the board of directors of the
Licensor, and shall waive the right to designate any additional members to such board. Further
details of the Settlement are described in the Current Report on Form 8-K filed by the Company on
June 22, 2011. The Company has recorded income of approximately $2.0 million during the three and
six months ended June 30, 2011 related to the set-off against the Seller Note discussed above. See
Results of Operations below immediately following the discussion of Selling, general and
administrative expense.
LaJobi Matters
See Note 10 of Notes to Unaudited Consolidated Financial Statements for a description of: (i)
the Focused Assessment of our LaJobi subsidiarys import practices and procedures by U.S.
Customs, charges recorded in the first and second quarter of 2011, respectively and the fourth
quarter and year ended December 31, 2010 in connection therewith, and actions taken by the Company
as a result thereof; and (ii) a discussion of certain payment practices with respect to individuals
providing quality control, compliance and certain other services in the PRC, Hong Kong, Vietnam and
Thailand, and actions taken by the Company in connection therewith, as well as a description of an
informal investigation by the SEC into these matters.
Customs Compliance Investigation
Following the discovery of the matters described
above with respect to LaJobi, our Board authorized a review, supervised by the Special Committee and conducted by outside counsel,
of customs compliance practices at the Companys non-LaJobi operating subsidiaries, consisting of Kids Line, CoCaLo and Sassy (the
Customs Review). Although such review is ongoing, based on work to date involving a sampling of customs filings, the Special
Committee has identified instances in which these subsidiaries filed incorrect entries and invoices with U.S. Customs as a result
of, in the case of Kids Line, incorrect descriptions, classifications and valuations of certain products imported by Kids Line and,
in the case of CoCaLo, incorrect classifications of certain products imported by CoCaLo. As a result of these findings to date,
the Company currently estimates that it will incur aggregate costs of approximately $2.4 million (pretax) relating to customs duty
for the years ended 2006 through 2010 and the six months ended June 30, 2011. The impact on prior periods was deemed to be immaterial
to the previously reported financial statements and therefore such
amounts were accrued in the period they were identified (the quarter
ended June 30, 2011). Of the amount accrued, the Company recorded $2.2 million in cost of sales
and $0.2 million in interest expense for the three months ended June 30, 2011. As the Customs Review is still pending, it is possible
that the actual amount of duty owed will be higher upon its completion and, in any event, additional interest will continue to accrue
until payment is made. In addition, the Company may be assessed by U.S. Customs a penalty of up to 100% of any such duty owed, as well
as possibly being subject to additional fines, penalties or other measures from U.S. Customs or other governmental authorities.
Promptly after becoming aware of the foregoing, the Company submitted voluntary prior disclosures to U.S. Customs identifying such
issues. Following the completion of the Customs Review, the Company intends to remit to U.S. Customs the amount of duties owed and
any interest and penalties thereon. Our Board has also recently authorized an investigation, supervised by the Special Committee and
conducted by a second outside counsel, to more fully review the customs practices at these operating subsidiaries, including whether
there was any misconduct by personnel (the Customs Investigation). The Company has also voluntarily disclosed to the SEC the existence
of the Customs Review and the Customs Investigation. Because the Customs Review and the
Customs Investigation are ongoing, there can be no assurance as to how the resulting consequences, if any, may impact our internal
controls, business, reputation, results of operations or financial condition.
30
Company Outlook
The principal elements of our current 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 or online penetration (selling to
more store locations within each large, national retail customer or their
associated websites); and |
(iv) | expanding and diversifying of our distribution channels, with
particular emphasis on sales into international markets and non-traditional
infant and juvenile retailers; |
| 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 and across each of our businesses. |
General Economic Conditions as they Impact Our Business
Our business, financial condition and results of operations have and may continue to be
affected by various economic factors. Periods of economic uncertainty, such as the recession
experienced in 2008 and much of 2009, as well as more recent market disruptions, can lead to
reduced consumer and business spending, including by our customers, and the purchasers of their
products, as well as reduced consumer confidence, which we believe has resulted in lower birth
rates, although recent third party forecasts have suggested declining birth trends are likely to
reverse with modest improvements in the economy. Reduced access to credit has and may continue to
adversely affect the ability of consumers to purchase our products from retailers, as well as the
ability of our customers to pay us. If such conditions are experienced in future periods, our
industry, business and results of operations may be negatively impacted. 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 2010 10-K.
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 our credit facility is
dependent on the ability of the banks that are parties to such 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 FactorsFurther
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 2010 10-K.
31
SEGMENTS
The Company operates in one segment: the infant and juvenile business.
RESULTS OF OPERATIONSTHREE MONTHS ENDED JUNE 30, 2011 AND 2010
Net sales for the three months ended June 30, 2011 decreased 11.2% to $60.3 million, compared
to $67.9 million for the three months ended June 30, 2010. This decrease was primarily the result
of lower sales volume at LaJobi (down approximately 22.8%), Sassy (down approximately 16.0%) and
Kids Line (down approximately 2.3%), partially offset by growth at CoCaLo (up approximately
21.0%).
Gross profit was $14.3 million, or 23.8% of net sales, for the three months ended June 30,
2011, as compared to $20.7 million, or 30.5% of net sales, for the three months ended June 30,
2010. Gross profit decreased primarily as a result of: (i) a $2.2 million accrual for anticipated
customs duty payment requirements resulting from the Customs Review; (ii) an accrual aggregating
$0.7 million for remediation activities to bring certain LaJobi cribs into compliance with new
federal crib safety standards that went into effect on June 28, 2011; (iii) additional inventory
reserves related to certain underperforming product lines (approximately $0.8 million primarily
related to a discontinued product program at Kids Line); (iv) $0.2 million of additional warehouse expense as a
result of higher inventory levels; and (v) on an absolute basis, lower net sales, all of which was
partially offset by a reduction in customer allowances (which was
partially due to a lower net sales base).
Selling, general and administrative expense was $14.8 million, or 24.5% of net sales, for the
three months ended June 30, 2011 compared to $12.8 million, or 18.9% of net sales, for the three
months ended June 30, 2010. Selling, general and administrative expense increased as a percentage
of sales primarily as a result of: (i) an accrual for a contingent liability in connection with the
TRC Lease in the amount of $1.1 million; (ii) costs incurred in the aggregate amount of
approximately $0.7 million in connection with the Companys internal investigation of LaJobis
import, business and staffing practices in Asia (the LaJobi Investigation) and related litigation
and other costs (collectively, the LaJobi Matters); and (iii) a lower sales base. In absolute
terms, the increase in SG&A costs was primarily a function of: (i) the $1.1 million TRC Lease accrual
described above; (ii) costs related to the LaJobi Matters; and (iii) increased warehouse, outbound
handling and outbound shipping costs of $0.1 million.
TRC valuation reserve adjustment of $2.0 million resulted from the TRC bankruptcy. As a result
of prior discussions with TRC with respect to the potential restructuring of the
consideration received by KID for the sale of its former gift business to TRC, KID had been
accruing, but not paying (since December 2009), amounts owed to TRC and certain of its subsidiaries
for the sublease of office and warehouse space (and related services) under a transition services
agreement (see Note 12 to the Notes to Unaudited Consolidated Financial Statements). The
Settlement (discussed in Recent Developments above) includes, among other things, a set-off
against the Seller Note of all amounts owed by the Company to TRC and its subsidiaries, including
the sublease and related amounts discussed above. As a result, such amounts were set-off and were taken into income in the three month period ended June 30, 2011 by reducing the valuation allowance previously
recorded in June 2009 against the consideration received in connection with the Gift Sale (the
2009 Valuation Allowance).
Other expense was $1.1 million for the three months ended June 30, 2011 as compared to $0.8
million for the three months ended June 30, 2010. This increase of approximately $0.3 million was
primarily due to: (i) a favorable change of $0.2 million in the fair market value of an interest
rate swap agreement in the second quarter of 2010, which was not a factor in the second quarter of
2011; and (ii) an additional $0.2 million of interest recorded in the second quarter of 2011
associated with anticipated customs duty payment requirements in connection with the LaJobi
Investigation and the Customs Review, all of which was offset by a
reduction ($0.1 million) in interest expense
due to lower borrowings and lower borrowing costs in such period compared to the same period in
2010.
The income tax provision for the three months ended June 30, 2011 was $4.4 million on income before income tax
provision of $0.4 million. The difference between the effective tax rate for the three months ended June 30, 2011 and
the U.S. federal tax rate of 35% primarily relates to a change in valuation allowance against deferred tax assets
associated with the sale of the Gift business in light of The Russ Companies (TRC) bankruptcy filing (discrete item
of $3.6 million), and an adjustment to the state deferred tax asset related to the enactment of a single sales factor
in New Jersey (discrete item of $0.6 million). The difference between the U.S, federal tax rate of 35% and the
estimated effective tax rate for the year excluding discrete items of 41.8% primarily relates to provision for state
tax, net of federal benefit (3.8%), the effect of permanent adjustments (2.2%), and other foreign related adjustments
(0.8%) . The provision for income tax for the three months ended June 30, 2010 was $2.6 million on profit before tax of
$7.1 million. The difference between the effective tax rate of 37% for the three months ended June 30, 2010 and the
U.S. federal tax rate primarily relates to the provision for state taxes, net of federal tax benefit.
32
As a result of the foregoing, net loss for the three months ended June 30, 2011 was $4.0
million or ($0.18) per diluted share, compared to net income of $4.5 million, or $0.20 per diluted
share, for the three months ended June 30, 2010.
RESULTS OF OPERATIONSSIX MONTHS ENDED JUNE 30, 2011 AND 2010
Net sales for the six months ended June 30, 2011 decreased 7.2% to $120.1 million, compared to
$129.4 million for the six months ended June 30, 2010. This decrease was primarily the result of
lower sales volume at LaJobi (down approximately 17.6%), and Kids Line (down approximately 4.7%),
partially offset by sales volume growth at CoCaLo (up approximately 12.6%) and Sassy (up
approximately 6.7%).
Gross profit was $30.6 million, or 25.5% of net sales, for the six months ended June 30, 2011,
as compared to $39.4 million, or 30.4% of net sales, for the six months ended June 30, 2010. Gross
profit decreased primarily as a result of: (i) a $2.2 million accrual for anticipated customs duty
payment requirements resulting from the Customs Review; (ii) an accrual aggregating $0.7 million
for remediation activities to bring certain LaJobi cribs into compliance with new federal crib
safety standards that went into effect on June 28, 2011; (iii) additional inventory reserves
related to certain underperforming product lines (approximately $1.2 million primarily related to a
discontinued product program at Kids Line); (iv) $0.3 million in increased warehouse expense as a result of
higher inventory levels; and (v) on an absolute basis, lower net sales, all of which was partially
offset by a reduction in customer allowances (which was
partially due to a lower net sales base).
Selling, general and administrative expense was $30.2 million, or 25.1% of net sales, for the
six months ended June 30, 2011 compared to $24.8 million, or 19.2% of net sales, for the six months
ended June 30, 2010. Selling, general and administrative expense increased as a percentage of
sales primarily as a result of: (i) costs incurred in the aggregate amount of approximately $3.1
million in connection with the LaJobi Matters; (ii) the $1.1 million accrual for a contingent
liability in connection with the TRC Lease; and (iii) a lower sales base. In absolute terms, the
increase in SG&A costs was primarily a function of: (i) costs related to the LaJobi Matters described above;
(ii) the TRC Lease accrual described above; and (iii) increased warehouse, outbound handling and
outbound shipping costs of ($0.5 million as a result of increased inventory).
TRC valuation reserve adjustment of $2.0 million resulted from the TRC bankruptcy. As a result
of prior ongoing discussions with TRC with respect to the potential restructuring of the
consideration received by KID for the sale of its former gift business to TRC, KID had been
accruing, but not paying (since December 2009), amounts owed to TRC and certain of its subsidiaries
for the sublease of office and warehouse space (and related services) under a transition services
agreement (See Note 12 of the Notes to Unaudited Consolidated Financial Statements). The
Settlement (discussed in Recent Developments above) includes, among other things, a set-off
against the Seller Note of all amounts owed by the Company to TRC and its subsidiaries, including
the sublease and related amounts discussed above. As a result, such amounts were set-off and were taken into income for the six month period ended June 30, 2011 by reducing the 2009 Valuation Allowance.
Other expense was $2.2 million for the six months ended June 30, 2011 as compared to $1.8
million for the six months ended June 30, 2010. This increase of approximately $0.4 million was
primarily due to: (i) a favorable change of $0.7 million in the fair market value of an interest
rate swap agreement in the first six months of 2010, which was not a factor in the first six months
of 2011; (ii) fees for the March 2011 Amendment ($0.1 million): and (iii) an additional $0.3
million of interest recorded in the first six months of 2011 associated with anticipated customs
duty payment requirements in connection with the LaJobi Matters and the Customs Review, all
of which was offset by a reduction ($1.1 million) in interest expense due to lower borrowings and lower borrowing
costs in such period compared to the same period in 2010.
Income before income tax provision was $0.3 million for the six months ended June 30, 2011, as
compared to income of $12.8 million for the six months ended June 30, 2010, primarily as a result
of the items described above.
The income tax provision for the six months ended June 30, 2011 was $4.4 million on income before income tax
provision of $0.3 million. The difference between the effective tax rate for the six months ended June 30, 2011 and
the U.S. federal tax rate of 35% primarily relates to a change in valuation allowance against deferred tax assets
associated with the sale of the Gift business in light of the TRC bankruptcy filing (discrete item of $3.6 million),
an adjustment to the state deferred tax asset related to the enactment of a single sales factor in New Jersey (discrete
item of $0.6 million), and an increase for unrecognized tax benefits (discrete item of $0.1 million). The difference
between the U.S. federal tax rate of 35% and the estimated effective tax rate for the year excluding discrete items of
41.8% primarily relates to a provision for state tax, net of federal benefit (3.8%), the effect of permanent
adjustments (2.2%), and other foreign related adjustments (0.8%). The provision for income tax for the six months
ended June 30, 2010 was $4.8 million on profit before tax of $12.8 million. The difference between the effective tax
rate of 38% for the six months ended June 30, 2010 and the U.S. federal tax rate primarily relates to the provision for
state taxes, net of federal tax benefit
As a result of the foregoing, net loss for the six months ended June 30, 2011 was $4.2
million, or ($0.19) per diluted share, compared to net income of $7.9 million, or $0.36 per diluted
share, for the six months ended June 30, 2010.
33
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, earnout payments (if any)
or other unanticipated expenses (including additional anti-dumping duty or any other customs duty
assessments and related interest and/or penalties in excess of current accruals) may require
additional debt or equity financing. As is described in Recent Developments above, and
Liquidity and Capital Resources below under the section captioned Debt Financings, however, as
of August 8, 2011, the Company refinanced its senior secured debt to provide for an aggregate
$175.0 million revolving credit facility, with subject to an additional $35.0 million increase in
the aggregate commitment amount under specified circumstances. The Companys previous credit
facility provided for a $50.0 million revolver based on eligible receivables and inventory, and an
$80.0 million term loan. In addition to increased borrowing capacity, anticipated benefits from
the refinancing also include the elimination of borrowing base limitations, reduced debt service
requirements (as the Term Loan was paid in full), lower minimum and maximum interest rate margins,
an extended maturity date, and a generally less restrictive payment and cash utilization structure.
We anticipate that cash flow from operations and anticipated availability under our New
Credit Agreement (defined below) will be sufficient to fund any anti-dumping duty or any other
customs duty payment requirements, including interest and potential penalties thereon, and
potential LaJobi Earnout Consideration and related finders fee, if any, and will be permitted
under the terms of the refinanced credit agreement and related documentation, although there can be
no assurance that this will be the case.
Historically, the proceeds of our bank facility have been used to fund acquisitions, and cash
flows from operations were 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 were necessitated by our strategy of paying down debt), we typically
did not actively utilize our revolving credit facility to fund operations. As a result of the New
Credit Agreement, our term loan was paid in full, and outstanding amounts under our revolver were
reallocated among the refinancing lenders. The Company anticipates that cash flows from operations
will continue to be used to pay down our new revolving credit facility and associated interest on
outstanding amounts. Availability under the refinanced revolver is intended to continue to be used
to fund short-term working capital requirements, if needed, and future acquisitions or
unanticipated expenses, if any.
As of June 30, 2011, the Company had cash and cash equivalents of $1.7 million, compared to
$1.1 million at December 31, 2010. Cash and cash equivalents increased by $0.6 million during the
six months ending June 30, 2011 compared to the balance at December 31, 2010, primarily reflecting
fluctuations in debt repayment. As of June 30, 2011 and December 31, 2010, working capital was
$72.1 million and $43.2 million, respectively. The increase in working capital for the period
ended June 30, 2011 primarily reflects the reclassification of short-term debt to long-term as a
result of the execution of the New Credit Agreement and reclassification of the New Revolver
thereunder as long-term debt, as well as the fluctuations of accounts receivable and inventory
discussed in the following paragraph.
Net cash provided by operating activities was $7.8 million during the six months ended June
30, 2011, compared to net cash provided by operating activities of $17.7 million during the six
months ended June 30, 2010. Cash provided by operating activities reflected the net loss of $4.2
million in the first six months of 2011, as compared to net income of $7.9 million in the first six
months of 2010. Cash provided by operations for the six months ended June 30, 2011 also includes a
$4.7 million decrease in accounts payable as a result of timing of payments and accrued expenses,
an increase in inventory of $5.9 million and a net decrease of $10.7 million in accounts receivable
both primarily resulting from lower sales for the 2011 six month period.
Net cash used in investing activities was $0.6 million for each of the six month periods ended
June 30, 2011 and 2010. The 2011 cash was primarily used for tooling, ERP system and leasehold
improvements, and the 2010 cash was primarily used for ERP system, tooling and office equipment.
Net cash used in financing activities was $6.5 million for the six months ended June 30, 2011,
as compared to net cash used in financing activities of $15.9 million for the six months ended June
30, 2010. The cash used during the six months ended June 30, 2011 primarily reflects borrowing for
working capital needs, and the cash used for the six months ended June 30, 2010 primarily reflects
the repayment of debt under the Existing Credit Agreement.
34
Earnouts with Respect to Acquisitions
A portion of the consideration of our April 2008 acquisitions of each of LaJobi and CoCaLo
included contingent earnout consideration based upon the achievement of certain performance
milestones. With respect to LaJobi, if the EBITDA of the Business, as defined in the agreement
governing the purchase (the LaJobi Earnout EBITDA) had grown at a compound annual growth rate
(CAGR) of not less than 4% during the three years ended December 31, 2010 (the Measurement
Date), determined in accordance with the agreement governing the purchase, LaJobi would pay to the
relevant sellers 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 could have ranged between $0 and a maximum of $15.0 million. In
addition, we agreed to pay 1% of the Agreed Enterprise Value to a financial institution (which had
been previously paid a finders fee in connection with the LaJobi purchase), payable in the same
manner and at the same time that any LaJobi Earnout Consideration is paid.
As a result of the accrual recorded in the fourth quarter and year ended December 31, 2010 for
anticipated duty (and interest thereon) owed by LaJobi to U.S. Customs and the facts and
circumstances discovered in the Companys preparation for the Focused Assessment and in its related
investigation into LaJobis import practices described above (including misconduct on the part of
certain employees at LaJobi), the Company concluded that no LaJobi Earnout Consideration (and
therefore no finders fee) was payable. Accordingly, the Company did not record any amounts related
thereto in the Companys financial statements for the fourth quarter and year ended December 31,
2010. The Company previously disclosed a potential earnout payment of approximately $12 to $15
million in the aggregate relating to its acquisitions of LaJobi and CoCaLo, substantially all of
which was estimated to relate to LaJobi.
On July 25, 2011, the Company received a letter from counsel to Lawrence Bivona demanding
payment of the LaJobi Earnout Consideration to Mr. Bivona in the amount of $15 million. In
addition, on July 25, 2011, the Company received a letter from counsel to Mr. Bivona alleging that
Mr. Bivonas termination by LaJobi for cause, effective March 14, 2011, violated his employment
agreement and demanding payment to Mr. Bivona of amounts purportedly due under such employment
agreement. The Company does not intend to pay the LaJobi Earnout Consideration to Mr. Bivona and
believes that Mr. Bivona was properly terminated for cause pursuant to his employment agreement,
and the Company has so advised counsel for Mr. Bivona. The Company intends to vigorously defend
any related action that Mr. Bivona may bring. There can be no assurance that the Company will
prevail in any such dispute, although the Company believes that, in any event, it would have
additional claims that it could assert against the LaJobi seller and Mr. Bivona. The Company
anticipates that cash flow from operations and anticipated availability under the New Credit
Agreement will be sufficient to fund any duty, interest and potential penalties thereon, and any
potential LaJobi Earnout Consideration and related finders fee, and will be permitted
under the terms of the New Credit Agreement and related documentation, but there can be no
assurance that this will be the case.
With respect to CoCaLo, we were obligated to pay to the relevant 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 to 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 to 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. As the relevant performance
targets were not satisfied, no CoCaLo Earnout Consideration was payable.
Debt Financings
The Existing Credit Agreement (as defined below) was amended and restated as of August 8,
2011. See New Credit Agreement below for a description of the material terms of such amendment
and restatement.
Consolidated long-term debt as a result of the reclassification described below at June 30, 2011
and December 31, 2010 was $66.4 million and
$54.0 million, respectively. At June 30, 2011 amended and
restated credit facility revolving loan availability was
$23.7 million pursuant to the terms of the New Credit Agreement. At December 31, 2010, revolving loan availability
was $28.3 million. At December 31, 2010, there was approximately
$18.6 million borrowed under the Revolving Loan (defined below) which is classified a short-term debt as
of December 31, 2010. Accounting Standards Codification 470.10.45.14 allows the reclassification
of short term debt (including the Companys revolver) upon the refinancing of short-term debt with
long-term debt, which was effected by the New Credit Agreement. As a
result, the current portion of the Term Loan, which was repaid in full in connection with such
amendment and restatement, and all amounts outstanding under the Revolving Loan at June 30, 2011,
were reclassified as Long-Term Revolving Loan as of such date.
35
As
of June 30, 2011, prior to the New Credit Agreement, the applicable interest rate margins were 3.25% for LIBOR Loans and 2.25%
for Base Rate Loans. The weighted average interest rates for the outstanding loans as of June 30,
2011, was as follows:
At June 30, 2011 | ||||||||
LIBOR Loans | Base Rate Loans | |||||||
Existing Revolving |
3.44 | % | 5.50 | % |
As of the Amended and Restated Credit Agreement on August 8, 2011,
the applicable interest rate margin were 2.75% for LIBOR Loans and
1.75% for Base Rate Loans.
Existing and Refinanced Credit Agreement Summaries
KID, specified domestic subsidiaries consisting of Kids Line, Sassy, LaJobi, CoCaLo, and I&J
Holdco, Inc. (such entities collectively with KID and such other future created or acquired
domestic subsidiaries that are designated as borrowers from time to time, the Borrowers), and the
subsidiaries of the Borrowers identified as
guarantors therein (the Guarantors, and together with the Borrowers, the Loan Parties),
executed a Second Amended and Restated Credit Agreement (the New Credit Agreement) as of August
8, 2011, with certain financial institutions (the Lenders), including Bank of America, N.A., as
Administrative Agent, Swing Line Lender and L/C Issuer, and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (ML), as Sole Lead Arranger and Book Manager. The Licensor will become a Loan Party
when permitted under its organizational documents (upon termination of the License Agreement). The
obligations of the Borrowers under the New Credit Agreement are joint and several. In addition to
increased borrowing capacity, anticipated benefits of the New Credit Agreement include higher
aggregate commitments, the elimination of borrowing base limitations, reduced debt service
requirements (as the Term Loan was paid in full), lower minimum and maximum interest rate margins,
an extended maturity date, and a generally less restrictive payment and cash utilization, all
as described below.
The New Credit Agreement amends and restates the Borrowers existing Amended and Restated
Credit Agreement with the Administrative Agent, as successor by merger to LaSalle Bank National
Association, and the other lenders party thereto, dated April 2, 2008, as amended by First
Amendment dated as of August 13, 2008, Second Amendment dated as of March 20, 2009, and Third
Amendment dated as of March 30, 2011 (the Existing Credit Agreement), which provided for a $50.0
million revolving credit facility (the Existing Revolver) based on eligible receivables and
inventory, with a $5.0 million sub-facility for letters of credit, and an $80.0 million term loan
facility (the Term Loan), which was scheduled to mature on April 1, 2013. The New Credit
Agreement represents a refinancing of the Borrowers senior secured debt under the Existing Credit
Agreement.
As the Existing Credit Agreement was in effect during the entire quarter ending June 30, 2011,
we have included a discussion of the terms of the Existing Credit Agreement below, followed by a
discussion of the terms of the New Credit Agreement, which became effective as of August 8, 2011.
A. Existing Credit Agreement
The Existing Credit Agreement provided for: (a) the Existing Revolver ($50.0 million), with a
subfacility for letters of credit in an amount not to exceed $5.0 million, and (b) the Term Loan
($80.0 million). The total borrowing capacity was based on a borrowing base, which was defined as
85% of eligible receivables plus the lesser of (x) $25.0 million and (y) 55% of eligible inventory.
The scheduled maturity date of the facility was April 1, 2013.
Loans under the Existing Credit Agreement bore interest, at the Borrowers option, at a base
rate or at LIBOR, plus applicable margins based on the most recent quarter-end Total Debt to
Covenant EBITDA Ratio. Applicable margins varied between 2.0% and 4.25% on LIBOR borrowings and
1.0% and 3.25% on base rate borrowings (base rate borrowings included a floor of 30 day LIBOR plus
1%). At June 30, 2011, the applicable margins were 2.75% for LIBOR borrowings and 1.75% for base
rate borrowings. The principal of the Term Loan was required to be repaid in quarterly installments
of $3.25 million through December 31, 2012, and a final payment of $28.0 million due on April 1,
2013. The Term Loan was also required to be prepaid upon the occurrence, and with the proceeds, of
certain transactions, including most asset sales or debt or equity issuances, and extraordinary
receipts. The Borrowers were also required to pay 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 Existing Revolver, as well as other
customary fees as are set forth in the Existing Credit Agreement.
36
Under the terms of the Existing Credit Agreement, the Company was required to comply with the
following financial covenants: (a) a quarterly minimum Fixed Charge Coverage Ratio of 1.35:1.00;
(b) a quarterly maximum Total Debt to Covenant EBITDA Ratio of 2.75:1.00; and (c) an annual capital
expenditure limitation.
Due to the facts and circumstances discovered in connection with the Companys internal
investigation of Lajobis import, business and staffing practices in Asia (including misconduct by
various LaJobi employees resulting in the underpayment of specified import duties), the
approximately $6,860,000 charge we recorded for anticipated import duties and interest related
thereto, and additional amounts and penalties that may be required by U.S. Customs, we determined
that various events of default, and potential events of default under the Existing Credit Agreement
(and related loan documents) occurred as a result of breaches and potential breaches of various
representations, warranties and covenants in the Existing Credit Agreement, including, but not
limited to, an unmatured event of default with respect to a breach of the Fixed Charge Coverage
Ratio covenant for the quarter ended December 31, 2010 (as well as projected breaches of the Fixed
Charge Coverage Ratio and Total Debt to
Covenant EBITDA Ratio for certain future periods). In connection therewith, the Existing
Credit Agreement was amended on March 30, 2011 (the March 2011 Amendment), to permanently waive,
among other things, specified existing events of default resulting from such LaJobi events and
related breaches and potential breaches (and future events of default as a result of the accrual or
payment of specified Duty Amounts (as defined below)), and to amend the definition of Covenant
EBITDA for all purposes under the Existing Credit Agreement and related loan documents (including
for the determination of the applicable interest rate margins and compliance with financial
covenants) for the December 31, 2010 reporting period and all periods thereafter. The Borrowers
paid fees of approximately $131,000 during the first quarter of 2011 in connection with the
execution of the March 2011 Amendment. As a result of the March 2011 Amendment, the Company was
required to be in compliance with the financial covenants described above at the time of any
accrual in excess of $1.0 million or proposed payment of any Duty Amounts. The fees for the March
2011 Amendment were recorded as expense for the three months ended March 31, 2011.
Covenant EBITDA, for purposes of the Existing Credit Agreement, was a non-GAAP financial
measure used to determine relevant interest rate margins and the Companys compliance with the
financial covenants set forth above, as well as the determination of whether certain dividends and
repurchases would have been permitted if other specified prerequisites were met. Covenant EBITDA
under the Existing Credit Agreement was 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 Existing Credit Agreement, and non-cash transaction losses (gains) due
solely to fluctuations in currency values. As a result of the March 2011 Amendment, Covenant EBITDA
was further adjusted (up to an aggregate maximum of $14.855 million for all periods, less LaJobi
Earnout Consideration paid, if any, other than in accordance with the Existing Credit Agreement
and/or to the extent not deducted in determining consolidated net income) for: (i) all customs
duties, interest, penalties and other related amounts (Duty Amounts) owed by LaJobi to U.S.
Customs to the extent they related to the nonpayment or incorrect payment by LaJobi of import
duties to U.S. Customs on certain wooden furniture imported by LaJobi from vendors in China
resulting in a violation prior to March 30, 2011 of anti-dumping regulations, the related
misconduct on the part of certain LaJobi employees, and LaJobis business and staffing practices in
Asia prior to March 30, 2011 relating thereto (Duty Events); (ii) fees and expenses incurred in
connection with the internal and U.S. Customs investigation of the Duty Amounts and Duty Events
(the Investigations); and (iii) LaJobi Earnout Consideration, if any, paid in accordance with the
terms of the Existing Credit Agreement. For purposes of the Fixed Charge Coverage Ratio, Covenant
EBITDA was further adjusted for unfinanced capital expenditures; specified cash taxes and
distributions pertaining thereto; and specified cash dividends. The Fixed Charge Coverage Ratio was
the ratio of Covenant EBITDA to an amount generally equal to, with respect to the Company, the sum
for the applicable testing period of all scheduled interest and principal payments of debt,
including the principal component of any capital lease, paid or payable in cash. Total Debt, as
used in the Existing Credit Agreement for purposes of the determination of the Total Debt to
Covenant EBITDA Ratio, generally meant, with respect to the Company, the outstanding principal
amount of all debt (including debt of capital leases plus the undrawn face amount of all letters of
credit).
The Existing Credit Agreement also contained customary affirmative and negative covenants.
Among other restrictions, the Company was restricted in its ability to purchase or redeem stock,
incur additional debt, make acquisitions above certain amounts and pay any Earnout Consideration
(LaJobi or CoCaLo) or any amounts due with respect to a promissory note to CoCaLo as part of such
acquisition (the CoCaLo Note), unless in each case certain conditions were satisfied. With
respect to the payment of any LaJobi Earnout Consideration, as a result of the March 2011
Amendment, such conditions included that excess revolving loan availability equal or exceed the
greater of (A) $18,000,000 less the amount of any Duty Amounts previously paid by LaJobi to U.S.
Customs and (B) $9,000,000, until such time that the focused assessment of U.S. Customs has been
deemed concluded and all Duty Amounts required thereby have been remitted by LaJobi (the Duty
Conclusion Date), such that after the Duty Conclusion Date, this condition would have required
only that excess revolving loan availability equal or exceed $9,000,000 (previously, such condition
with respect to the payment of any Earnout Consideration (LaJobi or CoCaLo) was limited to excess
revolving loan availability being equal to or exceeding $9,000,000, and such requirement with
respect to the payment of any CoCaLo Earnout Consideration remained unchanged). See Note 10 for a
discussion of the LaJobi Earnout Consideration (and related finders fee) in light of the Duty
Events and a demand letter from Mr. Bivonas counsel in connection therewith. No CoCaLo Earnout
Consideration was earned and the final installment of the CoCaLo Note was paid on April 2, 2011.
The Existing Credit Agreement also
contained specified events of default related to the CoCaLo Earnout Consideration and LaJobi
Earnout Consideration. In addition, KID was not permitted to pay a dividend to its shareholders
unless the Earnout Consideration (LaJobi or CoCaLo), if any, had been paid, no default existed or
would result therefrom (including compliance with the financial covenants), availability under the
Existing Revolver was at least $4.0 million, and the Total Debt to Covenant EBITDA Ratio for the
two most recently completed fiscal quarters was less than 2.00:1.00.
37
Upon the occurrence of an event of default under the Existing 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 Existing Credit Agreement to be immediately due and
payable. In addition, an event of default under the Existing Credit Agreement could have resulted
in a cross-default under certain license agreements that we maintain. As a result of the March 2011
Amendment, among other things, specified existing events of default related to the Duty Events (and
specified future events of default relating to the payment of any Duty Amounts) were waived, and
the Borrowers were deemed to be in compliance with all applicable financial covenants in the
Existing Credit Agreement as of December 31, 2010 (see discussion above). The Borrowers were in
compliance with all applicable financial covenants as of June 30, 2011.
The Borrowers were required to maintain in effect Hedge Agreements to 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, on May 2, 2008, the
Borrowers entered into an interest rate swap agreement with a notional amount of $70 million which
expired on April 30, 2010. The Borrowers entered into a new interest rate swap agreement with a
notional amount of $31.9 million on April 30, 2010, which expired December 21, 2010, and was
replaced by a new interest rate swap agreement on such date with a notional amount of $28.6
million. In connection therewith, an unrealized net loss of $56,000 for the Companys existing
interest rate swap agreement (with a notional amount of $25.4 million) at June 30, 2011 was
recorded as a component of comprehensive (loss)/ income, and is expected to be reclassified into
earnings within the next twelve months (see Note 7 of Notes to Unaudited Consolidated Financial
Statements above).
The Existing Credit Agreement was secured by substantially all of the Companys domestic
assets, including a pledge of the capital stock of each Borrower and Licensor, and a portion of
KIDs equity interests in its active foreign subsidiaries, and was also guaranteed by KID.
Financing costs associated with the Existing Revolver and Term Loan were deferred and
amortized over their contractual term. The fees for the March 2011 Amendment ($131,000), were
recorded as expense in the consolidated statements of operations for the three months ended March
31, 2011.
B. New Credit Agreement
The New Credit Agreement provides for an aggregate $175.0 million revolving credit facility
(the New Revolver), with a sub-facility for letters of credit in an amount not to exceed $25.0
million, and a sub-facility for swing-line loans in an amount not to exceed $5.0 million. Subject
to conditions to lending set forth in the New Credit Agreement, loans may be made up to the full
amount of the New Revolver (without borrowing base limitations), swing-line loans may be made up to
the full amount of the sublimit for swing-line loans, and letters of credit may be issued up to the
sublimit for letters of credit. KID also has the right (without the consent of any Lender or the
Administrative Agent) to increase the amount of the New Revolver by an additional aggregate amount
not to exceed $35.0 million, provided, among other things, that (i) no event of default or
unmatured event of default shall have occurred and be continuing, and (ii) the Borrowers receive
commitments for such increase. KID may offer such increase to existing Lenders or certain third
party financial institutions as described in the New Credit Agreement, however, no lender is
obligated to increase its commitment.
Upon the execution of the New Credit Agreement, the Borrowers drew down $47.5 million under
the New Revolver, and utilized the proceeds to repay the Term Loan in full. Outstanding amounts
under the Existing Revolver (in the approximate amount of $29.4 million) were reallocated among the
continuing Lenders in accordance with their respective commitments under the New Credit Agreement.
Outstanding letters of credit were deemed to have been issued under the New Credit Agreement.
The aggregate amounts outstanding under the New Credit Agreement (other than letters of
credit, which may generally remain outstanding until August 1, 2017) are due and payable on August
8, 2016 (subject to customary early termination provisions).
38
The New Revolver bears interest, at the Borrowers option, at a specified base rate (the
higher of (x) the Administrative Agents prime rate and (y) the Federal Funds rate plus
0.50%, or a specified
Eurodollar rate based on specified British Bankers Association LIBOR, plus (in each case)
applicable margins. Applicable margins range from 1.75% to 2.75% on Eurodollar rate loans and
0.75% to 1.75% on base rate loans, based on the Companys Consolidated Leverage Ratio (as defined
below) for the most recently ended fiscal quarter. At least until receipt by the Administrative
Agent and the Lenders of the financial statements and compliance certificates with respect to the
quarter ending September 30, 2011, the applicable margins will be 2.75% for Eurodollar loans and
1.75% for base rate loans. Swing-line loans bear interest at the base rate plus the applicable
margin for base rate loans. The Borrowers may select interest periods of one, two, three or six
months for Eurodollar loans, subject to availability. Interest on base rate loans is payable
quarterly, and at maturity. Interest on Eurodollar loans is payable at the end of the selected
interest period (provided, that if the selected interest period is in excess of three months,
interest is payable on the three-month anniversary of the first day of such interest period), and
at maturity. During the continuance of any default, the applicable margin shall increase by 2%
(subject, in all cases other than a default in the payment of principal, to the written consent of
Lenders holding a majority of the commitments (the Required Lenders) and prior written notice to
KID).
The Borrowers may prepay the New Revolver (and swing-line loans) at any time and from time to
time without premium or penalty, and without a corresponding commitment reduction (subject to
reimbursement of the Lenders breakage and redeployment costs in the case of Eurodollar rate
loans). The unutilized portion of the New Revolver may be reduced or terminated by the Borrowers
at any time and from time to time without premium or penalty.
Under the terms of the New Credit Agreement, the Company is required to comply with the
following financial covenants (the Financial Covenants): (a) a quarterly minimum Consolidated
Fixed Charge Coverage Ratio of 1.50:1.00; and (b) a quarterly maximum Consolidated Leverage Ratio
of 3.25:1.00 (stepping down to 3.00:1.00 for the quarter ending June 30, 2013, provided, that in
the event a permitted acquisition is consummated prior to August 8, 2013, such maximum ratio shall
remain 3.25:1.00 until the later of June 30, 2013 and the date that is 18 months after such
consummation).
The Consolidated Fixed Charge Coverage Ratio is the ratio of: (a) Covenant EBITDA (as
described below) for the most recently completed four quarters minus the sum of (i) all
unfinanced capital expenditures incurred during such period; (ii) all cash taxes paid during such
period; and (iii) all cash dividends paid by KID during such period, to (b) an amount generally
equal to, with respect to the Company, the sum for such period of all scheduled interest and
principal payments of debt, including the principal component of any capital lease, paid or payable
in cash.
Covenant EBITDA for purposes of the New Credit Agreement is a non-GAAP financial measure used
to determine relevant interest rate margins and the Borrowers compliance with the Financial
Covenants, as well as the determination of whether certain repurchases of equity securities,
acquisitions, payments of specified Duty Amounts and other specified customs duty under-payments,
and payment of LaJobi Earnout Consideration, if any, can be made if other specified prerequisites
are met, and the determination of the amount of specified fees. Covenant EBITDA is defined
generally as the consolidated net income of the Company (excluding extraordinary after-tax or
non-recurring gains or losses, non-cash gains or losses from dispositions other than the write-down
of current assets, non-cash restructuring charges, tax refunds, and net operating losses or other
net tax benefits and any after-tax gains and losses from discontinued operations), as adjusted for
interest expense; income tax expense; depreciation; amortization; other non-cash charges (gains);
if expensed, reasonable costs incurred in connection with the execution of the New Credit Agreement
and related documentation; and non-cash transaction losses (gains) due solely to fluctuations in
currency values. Covenant EBITDA is further adjusted (up to an aggregate maximum of $14.855 million
for all periods, less LaJobi Earnout Consideration, if any, paid other than in accordance with the
New Credit Agreement and/or to the extent not deducted in determining consolidated net income) for:
(i) all Duty Amounts to the extent they relate to the Duty Events; (ii) fees and expenses incurred
in connection with the
Investigations; and (iii) LaJobi Earnout Consideration, if any, paid in accordance with the
terms of the New Credit Agreement.
The Consolidated Leverage Ratio is the ratio of the indebtedness of the Company to Covenant
EBITDA for the most recently completed four quarters. Indebtedness, as used in the determination
of the maximum Consolidated Leverage Ratio, generally means the outstanding principal amount of all
debt (including obligations under capital leases plus the face amount of all letters of credit).
The New Credit Agreement contains customary representations and warranties, as well as various
affirmative and negative covenants in addition to the Financial Covenants, including, without
limitation, financial reporting (including annual delivery of projections) requirements, notice
requirements with respect to specified events and required compliance certificates. In addition,
among other restrictions, the Loan Parties (and their subsidiaries other than the Licensor until
such time as it becomes a Loan Party) are prohibited from consummating a merger or other
fundamental change, paying dividends and making distributions, purchasing or redeeming stock,
incurring additional debt, making acquisitions, disposing of assets and other transactions outside
of the ordinary course of business, making specified payments and investments, engaging in
transactions with affiliates, paying Duty Amounts and other specified customs duty underpayments
(see Recent Developments, Customs Compliance Assessment, and Note 10 of the Notes to Unaudited
Consolidated Financial Statements under paragraph (b)), or paying any LaJobi Earnout Consideration,
subject in each case to specified exceptions, some of which are discussed below. The activities of
the Licensor are also limited until it becomes subject to the restrictions set forth above as a
Loan Party.
39
At the time of any accrual in excess of $1.0 million, or proposed payment, of any Duty Amounts
or other specified customs duty underpayments (see Recent Developments, Customs Compliance
Assessment, and Note 10 of the Notes to Unaudited Consolidated Financial Statements under
paragraph (b)): (i) the Consolidated Fixed Charge Coverage Ratio, calculated on a pro forma basis
as of the last day of the most recently ended quarter with respect to the four most recently ended
quarters ending on such date, as if such accrual or payment occurred during such quarter, must be
at least 1:50:1.0; or (ii) the Consolidated Leverage Ratio, calculated on a pro forma basis as of
the last day of the most recently ended quarter with respect to the four most recently ended
quarters ending on such date, as if such accrual or payment occurred during such quarter, must be
equal to or less than 3.25:1:0.
With respect to the payment by KID of dividends, among other things, so long as no event of
default or unmatured event of default then exists or would result therefrom, and no violation of
the Financial Covenants then exists or would result therefrom, KID may pay a regular quarterly
dividend, provided, however, that prior to the Duty Conclusion Date, such payments, when aggregated
with permitted repurchases of KIDs equity securities as described below, shall be limited to an
aggregate amount not to exceed $5.0 million.
With respect to the repurchase by KID of its equity securities, among other things, so long as
no event of default or unmatured event of default then exists or would result therefrom, no
violation of the Financial Covenants then exists or would, on a pro forma basis, result therefrom,
and the Consolidated Leverage Ratio, on a pro forma basis, is at least 0.25x less than the maximum
then permitted, KID may repurchase or redeem its equity securities, provided, however, that prior
to the Duty Conclusion Date, such payments, when aggregated with permitted quarterly dividends as
described above, shall be limited to an aggregate amount not to exceed $5.0 million.
With respect to acquisitions, specified non-hostile acquisitions will be permitted (without a
ceiling on the purchase price therefor), provided that, among other things, immediately before and
after giving effect to such acquisition, no event of default or unmatured event of default exists,
the Loan Parties are in pro forma compliance with the Financial Covenants, the pro forma
Consolidated Leverage Ratio is at least 0.25x less than the maximum level then permitted, and
minimum availability under the New Revolver is at least $15.0 million.
Generally with respect to the payment of LaJobi Earnout Consideration, if any, both before and
immediately after giving effect to any such payment, (i) no event of default or unmatured event of
default may then exist or result therefrom, (ii) no violation of the Financial Covenants or
covenants with respect to Duty Amount accruals or payments may then exist or would, on a pro forma
basis, result therefrom, and (iii) the Consolidated Leverage Ratio (calculated on a pro forma
basis) is at least, if the Duty Conclusion Date has not yet occurred, 0.25 to 1.0 less than the
maximum then permitted.
Under the New Credit Agreement, KID may sell the membership interests or the assets of the
Licensor for fair market value without the consent of the Administrative Agent or the Lenders, so
long as all net cash proceeds from any such disposition are applied to the prepayment of
outstanding indebtedness under the New Credit Agreement (without a corresponding commitment
reduction).
The New Credit Agreement contains customary events of default (including any failure to remain
in compliance with the Financial Covenants), as well as specified defaults with respect to the
LaJobi Earnout Consideration. If an event of default occurs and is continuing (in addition to
default interest as described above, and other remedies available to the Lenders), with the consent
of the Required Lenders, the Administrative Agent is entitled to, and at the request of such
Lenders, the Administrative Agent is required to, declare commitments under the New Credit
Agreement to be terminated, declare outstanding obligations thereunder to be due and payable,
and/or demand cash collateralization of letters of credit (provided that upon events of bankruptcy,
the commitments will be immediately due and payable, and the Borrowers will be required to cash
collateralize letters of credit). In addition, an event of default under the New Credit Agreement
could result in a cross-default under certain license agreements that we maintain.
The New Credit Agreement also contains customary conditions to lending.
Although there were no Guarantors as of the date of execution of the New Credit Agreement,
Guarantors in the future will include domestic subsidiaries that do not become Borrowers in
accordance with the terms of the New Credit Agreement, and the Borrowers with respect to specified
swap contracts and treasury management agreements. Guarantors will jointly and severally guarantee
the payment of all obligations of the Borrowers under the New Credit Agreement.
In order to secure the obligations of the Loan Parties under the New Credit Agreement, each
Loan Party has pledged 100% of the equity interests of its domestic subsidiaries, including a
pledge of the capital stock of each Borrower (other than KID) and the Licensor, and 65% of the
equity interests of specified foreign subsidiaries, to the Administrative Agent, and has granted
security interests to the Administrative Agent in substantially all of its personal property (other
than the assets of the Licensor until it becomes a Loan Party), all pursuant to the terms of a
Second Amended and Restated Security and Pledge Agreement dated as of August 8, 2011 (the New
Security Agreement), which amends and restates the Amended and Restated Guaranty and Collateral
Agreement dated as of April 2, 2008, as amended, among the Borrowers in favor of the Administrative
Agent (the Existing Security Agreement). As additional security for Sassy, Inc.s obligations
under the New Credit Agreement, Sassy, Inc. has continued its grant of a mortgage for the benefit
of the Administrative Agent and the continuing Lenders on the real property located at 2305 Breton
Industrial Park Drive, S.E., Kentwood, Michigan.
40
The Borrowers paid an arrangement fee to ML in an aggregate amount of approximately $656,000
and an up-front fee to the Lenders in an aggregate amount of approximately $665,000 in connection
with the execution of the New Credit Agreement and related documentation. The Borrowers are also
required to pay a quarterly commitment fee ranging from 0.30% to 0.45% (based on the Consolidated
Leverage Ratio) on the daily unused portions of the New Revolver (outstanding amounts under letters
of credit are considered utilization for this purposes; outstanding swing-line loans are not so
considered); letter of credit fees ranging from 1.75% to 2.75% (based on the Consolidated Leverage
Ratio) on the maximum daily amount available to be drawn, plus fronting fees and other customary
fees as are set forth in the New Credit Agreement.
Financing costs, including the arrangement fee and up-front fee, associated with the New
Credit Agreement will be deferred and amortized over the contractual term of the New Credit
Agreement. A portion of the deferred financing costs associated with the Existing Credit Agreement
are expected to be written-off during the three months ending September 30, 2011.
As described above, effective immediately upon the execution of the New Credit Agreement and
the New Security Agreement by the respective parties thereto, the terms and conditions of the
Existing Credit Agreement and Existing Security Agreement were amended as set forth in, and
restated in their entirety and superseded by, the New Credit Agreement and the New Security
Agreement, respectively. In addition, as the obligations of the Guarantors are set forth in the
New Credit Agreement and the New Security Agreement, and equity pledges are included in the
New Security Agreement, the Amended and Restated Pledge Agreement dated as of April 2, 2008,
as amended, by the Borrowers for the benefit of the Lenders was terminated and superseded by the
New Credit Agreement and the New Security Agreement.
Other Events and Circumstances Pertaining to Liquidity
A discussion of, among other things: (i) the Focused Assessment of KIDs LaJobi subsidiary,
charges recorded in connection therewith, and an informal SEC investigation pertaining thereto;
(ii) the Customs Review, a related accrual and the Customs Investigation; (iii) a putative class action filed against KID and
certain of its officers and directors in March of 2011; (iv) a putative derivative shareholder
litigation instituted on May 20, 2011; (v) the voluntary bankruptcy petition filed by TRC and the
Settlement entered into in connection therewith; and (vi) a contingent liability associated with the TRC Lease and related complaint filed
against KID by the landlord (and charge recorded in connection therewith), can be found in either
the section captioned Recent Developments above or Note 10 of Notes to Unaudited Consolidated
Financial Statements. (Also see Earnouts with Respect to Acquisitions for a discussion of the
LaJobi Earnout Consideration in light of the Focused Assessment and related Investigations, and a
demand letter from Mr. Bivonas counsel in connection therewith).
In addition to the matters referred to above and discussed in the section entitled Recent
Developments above, and in Note 10 of the Notes to Unaudited Consolidated Financial Statements, we
are from time to time party to various copyright, patent and trademark infringement, unfair
competition, breach of contract, customs, employment and other legal actions incidental to the
Companys business, as plaintiff or defendant. In the opinion of management, the amount of ultimate
liability with respect to any such actions that are currently pending will not, individually or in
the aggregate, materially adversely affect the Companys consolidated results of operations,
financial condition or cash flows. In addition, KID may remain obligated with respect to certain
contracts and other obligations that were not novated in connection with their transfer. To date,
no payments have been made by KID in connection with such contracts, nor is KID aware of any
remaining potential obligations (other than the TRC Lease described elsewhere herein), but there can be
no assurance that payments will not be required of KID in the future with respect thereto.
We commenced the implementation in 2010 of a new consolidated information technology system
for our operations, which we believe will provide greater efficiencies, and greater reporting
capabilities than those provided by the current systems in place across our individual infant and
juvenile companies. In connection with such implementation, we anticipate incurring aggregate costs
of approximately $3.6 million, of which $1.5 million has been incurred as of June 30, 2011. We
anticipate the balance of the costs to be incurred during the remainder of 2011 and 2012. Such
costs have been financed to date with borrowings under the Existing Revolver, and are intended to
be financed in the future with borrowings under our New Revolver. Our business may be subject to
transitional difficulties as we replace the current systems. These difficulties may include
disruption of our operations, loss of data, and the diversion of our management and key employees
attention away from other business matters. The difficulties associated with any such
implementation, and our failure to realize the anticipated benefits from the implementation, could
harm our business, results of operations and cash flows.
41
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. The New 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 (subject to exceptions specified therein). These covenants
could restrict our ability to pursue opportunities to expand our business operations. We are
required to make pre-payments of our debt upon the occurrence of certain transactions, including a
sale of the assets of membership interests in the Licensor.
We have entered into certain transactions with certain parties who are or were considered
related parties, and these transactions are disclosed in Note 12 of Notes to Unaudited Consolidated
Financial Statements.
Contractual Obligations
The following table summarizes the Companys significant known contractual obligations as of
June 30, 2011 and the future periods in which such obligations are expected to be settled in cash
(in thousands):
Total | 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | ||||||||||||||||||||||
Operating Lease Obligations |
$ | 14,906 | $ | 1,391 | $ | 3,060 | $ | 3,165 | $ | 1,916 | $ | 1,982 | $ | 3,392 | ||||||||||||||
Purchase Obligations (1) |
38,678 | 38,678 | | | | | | |||||||||||||||||||||
Debt
Repayment Obligations (3) |
| | | | | | | |||||||||||||||||||||
Interest on
Debt Repayment Obligations (4) |
| | | | | | | |||||||||||||||||||||
Royalty
Obligations |
11,853 | 2,452 | 5,541 | 2,661 | 1,199 | | | |||||||||||||||||||||
Total Contractual Obligations (2)(5) |
$ | 65,437 | $ | 42,521 | $ | 8,601 | $ | 5,826 | $ | 3,115 | $ | 1,982 | $ | 3,392 | ||||||||||||||
(1) | The Companys purchase obligations consist primarily of purchase orders for inventory. |
|
(2) | Does not include contingent obligations under the TRC Lease (or contingent obligations under
off-balance sheet arrangements or otherwise), 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 and Note 10 to the Notes to Unaudited Consolidated Financial Statements. In
connection with the acquisitions of LaJobi and CoCaLo, the Company has concluded that no CoCaLo
Earnout Consideration and no LaJobi Earnout Consideration (or related finders fee) was earned or
will become payable, therefore no amounts with respect thereto are included in the table above.
(See Earnouts with respect to Acquisitions above). |
|
(3) | Pursuant to the New Credit
Agreement, the Term Loan and required amortization thereon, has been
eliminated. |
|
(4) | Required interest under the
New Credit Agreement is based on the outstanding debt and the applicable
interest spread and cannot be calculated. The 2011 interest on payment for this
Revolving Loan using an assumed 3.0% interest rate was $1.0 million. Such
amounts are estimates only and actual interest payments could differ
materially. The New Revolver is scheduled to mature in August 2016, at
which time any amounts outstanding are due and payable. |
|
(5) | Excludes, as of June 30,
2011, approximately $66.4 million outstanding under the New Revolver under
the New Credit Agreement, all of which is classified as long-term debt and
matures in 2016. See “Debt Financings” for a description of the New
Credit Agreement, executed as of August 8, 2011, including amount and
dates of repayment obligations and provisions that create, increase and/or
accelerate obligations thereunder. |
Of the total income tax payable for uncertain tax positions of $727,000, we have classified
$690,000 as current as of June 30, 2011, as such amount is expected to be resolved within one year.
The remaining amount has been classified as a long-term liability and is not included in the above
table as the timing of its potential settlement is not reasonably estimable.
42
Off Balance Sheet Arrangements
As of June 30, 2011, there have been no material changes in the information provided under the
caption Off Balance Sheet Arrangements of Item 7 of the 2010 10-K, except as set forth in the
last two paragraphs of the background section of TRC Matters under Recent Developments above.
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 2010 10-K.
See Note 2 of Notes to Consolidated Financial Statements of the 2010 10-K for a summary of the
significant accounting policies used in the preparation of the Companys consolidated financial
statements. Also see Note 2 of Notes to Unaudited Consolidated Financial Statements herein.
Recently Issued Accounting Standards
See Note 11 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 Part I,
Item 1A, Risk Factors, of the 2010 10-K as supplemented by Part II, Item 1A, Risk Factors, of each
of the Q1 10-Q and this Quarterly Report on Form 10-Q. We undertake no obligation to publicly
update any forward-looking statement, whether as a result of new information, future events or
otherwise.
43
PART II OTHER INFORMATION |
ITEM 6. EXHIBITS
Exhibits to this Quarterly Report on Form 10-Q.
10.46
|
Second Amended and Restated Credit Agreement, dated as of August 8, 2011, among Kid Brands, Inc., Kids Line, LLC, Sassy, Inc., LaJobi, Inc., I & J Holdco, Inc. and CoCaLo, Inc., as the Borrowers, the subsidiaries of the Borrowers identified therein as the Guarantors, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the other Lenders party thereto, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Sole Lead Arranger and Book Manager, incorporated herein by reference to the Companys Current Report on Form 8-K filed on August 10, 2011. | |
10.47
|
Second Amended and Restated Security and Pledge Agreement dated as of August 8, 2011, executed by the Borrowers and the Guarantors in favor of the Administrative Agent, incorporated herein by reference to the Companys Current Report on Form 8-K filed on August 10, 2011. | |
10.48
|
Employment Agreement, dated May 26, 2011, between Kid Brands, Inc. on behalf of Sassy, Inc. and Dean Robinson, incorporated herein by reference to the Original Filing* | |
31.1
|
Certification of CEO required by Section 302 of the Sarbanes Oxley Act of 2002, incorporated herein by reference to the Original Filing. | |
31.2
|
Certification of CFO required by Section 302 of the Sarbanes Oxley Act of 2002, incorporated herein by reference to the Original Filing. | |
31.3
|
Certification of CEO required by Section 302 of the Sarbanes Oxley Act of 2002. | |
31.4
|
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, incorporated herein by reference to the Original Filing. | |
32.2
|
Certification of CFO required by Section 906 of the Sarbanes Oxley Act of 2002, incorporated herein by reference to the Original Filing. | |
32.3
|
Certification of CEO required by Section 906 of the Sarbanes Oxley Act of 2002. | |
32.4
|
Certification of CFO required by Section 906 of the Sarbanes Oxley Act of 2002. |
*Management Contract
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) |
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Date: August 16, 2011 | By | /s/ Guy A. Paglinco | ||
Guy A. Paglinco | ||||
Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
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EXHIBIT INDEX
31.3
|
Certification of CEO required by Section 302 of the Sarbanes Oxley Act of 2002. | |
31.4
|
Certification of CFO required by Section 302 of the Sarbanes Oxley Act of 2002. | |
32.3
|
Certification of CEO required by Section 906 of the Sarbanes Oxley Act of 2002. | |
32.4
|
Certification of CFO required by Section 906 of the Sarbanes Oxley Act of 2002. |