SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
|
(Mark
One) |
|
|
x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
| |
For
the quarterly period ended March 31, 2005 |
| |
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: 0-22635
|
RC2
Corporation |
|
(Exact
Name of Registrant as Specified in Its
Charter) |
|
Delaware |
|
36-4088307 |
|
(State
or other jurisdiction of
incorporation
or organization) |
|
(IRS
Employer Identification No.) |
|
1111
West 22nd
Street, Suite 320, Oak Brook, Illinois, 60523 |
|
(Address
of principal executive offices) |
Registrant's
telephone number, including area code: 630-573-7200
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X
No
_____
Indicate
by check mark whether the Registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2).
On May 2,
2005, there were outstanding 20,560,400 shares of the Registrant's $0.01 par
value common stock.
RC2
CORPORATION
FORM
10-Q
MARCH 31,
2005
INDEX
PART I -
FINANCIAL INFORMATION
| |
|
Page |
|
Item
1. |
|
3 |
| |
|
4 |
| |
|
5 |
| |
|
6 |
|
Item
2. |
|
|
|
Item
3. |
|
22 |
|
Item
4. |
|
23 |
PART II -
OTHER INFORMATION
|
Item
1. |
|
24 |
|
Item
2. |
|
24 |
|
Item
3. |
|
24 |
|
Item
4. |
|
24 |
|
Item
5. |
|
24 |
|
Item
6. |
|
24 |
| |
|
26 |
PART
I. FINANCIAL
INFORMATION
Item
1. Financial Statements
RC2
Corporation and Subsidiaries
(In
thousands)
| |
|
March
31,
2005 |
|
December
31,
2004 |
|
| |
|
(Unaudited) |
|
(Unaudited) |
|
Assets |
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
15,366 |
|
$ |
20,123 |
|
|
Accounts
receivable, net |
|
|
78,610 |
|
|
93,616 |
|
|
Inventory |
|
|
57,903 |
|
|
55,023 |
|
|
Assets
held for sale |
|
|
4,157 |
|
|
4,186 |
|
|
Other
current assets |
|
|
19,703 |
|
|
21,432 |
|
|
Total
current assets |
|
|
175,739 |
|
|
194,380 |
|
|
Property
and equipment, net |
|
|
48,273 |
|
|
48,857 |
|
|
Goodwill |
|
|
280,865 |
|
|
282,367 |
|
|
Intangible
assets, net |
|
|
58,027 |
|
|
58,243 |
|
|
Other
non-current assets |
|
|
1,898 |
|
|
1,901 |
|
|
Total
assets |
|
$ |
564,802 |
|
$ |
585,748 |
|
| |
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity |
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses |
|
$ |
57,192 |
|
$ |
64,040 |
|
|
Current
maturities of term loan |
|
|
18,125 |
|
|
16,562 |
|
|
Other
current liabilities |
|
|
889 |
|
|
847 |
|
|
Total
current liabilities |
|
|
76,206 |
|
|
81,449 |
|
|
Revolving
line of credit |
|
|
32,000 |
|
|
50,000 |
|
|
Non-current
portion of term loan |
|
|
59,375 |
|
|
64,688 |
|
|
Other
long-term liabilities |
|
|
42,444 |
|
|
42,849 |
|
|
Total
liabilities |
|
|
210,025 |
|
|
238,986 |
|
|
Stockholders’
equity |
|
|
354,777 |
|
|
346,762 |
|
|
Total
liabilities and stockholders' equity |
|
$ |
564,802 |
|
$ |
585,748 |
|
See
accompanying notes to condensed consolidated financial statements.
RC2
Corporation and Subsidiaries
(In
thousands, except per share data)
| |
|
For
the three months ended
March
31, |
|
| |
|
2005 |
|
2004 |
|
| |
|
(Unaudited) |
|
(Unaudited) |
|
|
Net
sales |
|
$ |
96,489 |
|
$ |
61,300 |
|
|
Cost
of sales |
|
|
47,367 |
|
|
30,291 |
|
|
Gross
profit |
|
|
49,122 |
|
|
31,009 |
|
|
Selling,
general and administrative expenses |
|
|
35,561 |
|
|
25,582 |
|
|
Amortization
of intangible assets |
|
|
94 |
|
|
---
|
|
|
Operating
income |
|
|
13,467 |
|
|
5,427 |
|
|
Interest
expense, net |
|
|
1,321 |
|
|
786 |
|
|
Other
(income) expense |
|
|
(85 |
) |
|
42 |
|
|
Income
before income taxes |
|
|
12,231 |
|
|
4,599 |
|
|
Income
tax expense |
|
|
4,403 |
|
|
1,657 |
|
|
Net
income |
|
$ |
7,828 |
|
$ |
2,942 |
|
|
Net
income per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.38 |
|
$ |
0.17 |
|
|
Diluted |
|
$ |
0.37 |
|
$ |
0.16 |
|
|
Weighted
average shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
20,496 |
|
|
17,420 |
|
|
Diluted |
|
|
21,433 |
|
|
18,501 |
|
See
accompanying notes to condensed consolidated financial statements.
RC2
Corporation and Subsidiaries
(In
thousands)
| |
|
For
the three months ended
March
31, |
|
| |
|
2005 |
|
2004 |
|
| |
|
(Unaudited) |
|
(Unaudited) |
|
|
Cash
flows from operating activities |
|
|
|
|
|
|
Net
income |
|
$ |
7,828 |
|
$ |
2,942 |
|
|
Depreciation
and amortization |
|
|
3,536 |
|
|
2,965 |
|
|
Amortization
of deferred financing costs |
|
|
121 |
|
|
74 |
|
|
(Gain)
loss on sale of assets |
|
|
(12 |
) |
|
47 |
|
|
Changes
in operating assets and liabilities |
|
|
8,197 |
|
|
18,797 |
|
|
Net
cash provided by operating activities |
|
|
19,670 |
|
|
24,825 |
|
| |
|
|
|
|
|
|
|
|
Cash
flows from investing activities |
|
|
|
|
|
|
|
|
Purchase
of property and equipment |
|
|
(3,300 |
) |
|
(2,330 |
) |
|
Purchase
of TFY, net of cash acquired |
|
|
33 |
|
|
--- |
|
|
Proceeds
from disposal of property and equipment |
|
|
423 |
|
|
32 |
|
|
(Increase)
decrease in other non-current assets |
|
|
(109 |
) |
|
17 |
|
|
Net
cash used in investing activities |
|
|
(2,953 |
) |
|
(2,281 |
) |
| |
|
|
|
|
|
|
|
|
Cash
flows from financing activities |
|
|
|
|
|
|
|
|
Payments
to bank on credit facility |
|
|
(21,750 |
) |
|
(27,000 |
) |
|
Issuance
of common stock upon option exercise |
|
|
453 |
|
|
500 |
|
|
Issuance
of common stock for ESPP |
|
|
36 |
|
|
29 |
|
|
Net
cash used in financing activities |
|
|
(21,261 |
) |
|
(26,471 |
) |
|
Effect
of exchange rate changes on cash |
|
|
(213 |
) |
|
69 |
|
|
Net
decrease in cash and cash equivalents |
|
|
(4,757 |
) |
|
(3,858 |
) |
|
Cash
and cash equivalents, beginning of year |
|
|
20,123 |
|
|
16,548 |
|
|
Decrease
in restricted cash |
|
|
--- |
|
|
20 |
|
|
Cash
and cash equivalents, end of period |
|
$ |
15,366 |
|
$ |
12,710 |
|
|
Supplemental
information: |
|
|
|
|
|
|
|
|
Cash
flows during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
1,345 |
|
$ |
812 |
|
|
Income
taxes |
|
$ |
1,113 |
|
$ |
2,082 |
|
|
Income
tax refunds received |
|
$ |
463 |
|
$ |
84 |
|
See
accompanying notes to condensed consolidated financial
statements.
RC2
Corporation and Subsidiaries
Note
1 - Basis of Presentation
The
condensed consolidated financial statements include the accounts of RC2
Corporation and its subsidiaries (the Company or RC2). All intercompany
transactions and balances have been eliminated.
The
accompanying condensed consolidated financial statements have been prepared by
management and, in the opinion of management, contain all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
financial position of the Company as of March 31, 2005 and December 31, 2004,
the results of its operations for the three-month periods ended March 31, 2005
and 2004, and its cash flows for the three-month periods ended March 31, 2005
and 2004.
Certain
information and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and related notes included in the Company's Form 10-K for
the year ended December 31, 2004.
Due to
the seasonality of our business, the results of operations for the three-month
period ended March 31, 2005 are not necessarily indicative of the operating
results for the full year.
Note
2 - Business Combinations
RC2
Corporation and The First Years Inc.
On
September 15, 2004, the Company acquired The First Years Inc. (TFY) for
approximately $156.1 million in cash (excluding transaction expenses). TFY,
based in Avon, Massachusetts, is an international developer and marketer of
infant and toddler care and play products sold under The First Years® brand name
and under various licenses, including Disney’s Winnie the Pooh. TFY’s products
are sold at toy, mass merchandising, drug and grocery chains, and at specialty
retailers. This transaction has been accounted for under the purchase method of
accounting and, accordingly, the operating results of TFY have been included in
our condensed consolidated statements of earnings since the effective date of
acquisition. The purchase was funded with the Company’s new credit facility (See
Note 7 - “Debt”). The excess of the aggregate purchase price over the fair
market value of net assets acquired of approximately $97.1 million and $97.6
million has been recorded as goodwill in the accompanying condensed consolidated
balance sheets at March 31, 2005 and December 31, 2004,
respectively.
The
purchase price was allocated to the net assets of TFY based on their estimated
relative fair values on September 15, 2004 as follows:
(In
thousands)
|
Total
purchase price, including expenses, net of cash acquired |
|
|
|
|
$ |
154,535 |
|
|
Less: |
|
|
|
|
|
|
|
|
Current
assets |
|
$ |
46,844 |
|
|
|
|
|
Property,
plant and equipment |
|
|
10,026 |
|
|
|
|
|
Intangible
assets |
|
|
18,250 |
|
|
|
|
|
Other
long-term assets |
|
|
175 |
|
|
|
|
|
Liabilities |
|
|
(17,828 |
) |
|
(57,467 |
) |
|
Excess
of purchase price over net assets acquired |
|
|
|
|
$ |
97,068 |
|
The
allocation of purchase price is subject to final determination based on
valuations and other determinations that will be completed as soon as practical
but no later than by the end of the third quarter of 2005 including performing
valuations to finalize the fair value of any acquired identifiable intangible
assets. To the extent such assets are amortizable, amortization expense will be
increased.
See table
following the discussion of Playing Mantis, Inc. for pro forma combined
results.
RC2
Corporation and Playing Mantis, Inc.
On June
7, 2004, the Company acquired substantially all the assets of Playing Mantis,
Inc. (Playing Mantis) with an effective date of June 1, 2004. Closing
consideration consisted of $17.0 million of cash (excluding transaction
expenses) and 91,388 shares of the Company’s common stock. Additional cash
consideration of up to $4.0 million may be earned in the transaction by Playing
Mantis of which $2.0 million was based on achieving net sales and margin targets
for 2004 and the remaining $2.0 million is based on achieving net sales targets
for 2005. The contingent consideration for 2004 was not payable because the net
sales and margin targets were not met in 2004. Playing Mantis, based in
Mishawaka, Indiana prior to the acquisition, designs and markets collectible
vehicle replicas under the Johnny Lightning® and Polar Lights® brands and
collectible figures under the Memory Lane™ brand. Playing Mantis’ products are
primarily sold at mass merchandising, hobby, craft, drug and grocery chains.
This transaction has been accounted for under the purchase method of accounting
and, accordingly, the operating results of Playing Mantis have been included in
our condensed consolidated statements of earnings since the effective date of
the acquisition. The excess of the aggregate purchase price over the fair market
value of net assets acquired of approximately $13.5 million and $14.1 million
has been recorded as goodwill in the accompanying condensed consolidated balance
sheets at March 31, 2005 and December 31, 2004, respectively.
The
purchase price was allocated to the net assets of Playing Mantis based on their
estimated relative fair values on June 1, 2004 as follows:
(In
thousands)
|
Total
purchase price, including expenses, net of cash acquired |
|
|
|
|
$ |
20,106 |
|
|
Less: |
|
|
|
|
|
|
|
|
Current
assets |
|
$ |
5,205 |
|
|
|
|
|
Property,
plant and equipment |
|
|
4,966 |
|
|
|
|
|
Liabilities |
|
|
(3,549 |
) |
|
(6,622 |
) |
|
Excess
of purchase price over net assets acquired |
|
|
|
|
$ |
13,484 |
|
The
allocation of the purchase price is subject to final determination based on
valuations and other determinations that will be completed as soon as practical
but no later than by the end of the second quarter of 2005 including performing
valuations to determine the fair value of any acquired identifiable assets. To
the extent such assets are amortizable, amortization expense will be
increased.
The
following table presents the unaudited pro forma combined results of operations
for the three months ended March 31, 2004 and assumes that the TFY and Playing
Mantis acquisitions occurred as of January 1, 2004.
(In
thousands, except per share data)
| |
|
2004 |
|
| |
|
(Unaudited) |
|
| |
|
|
|
|
Net
sales |
|
$ |
102,390 |
|
| |
|
|
|
|
|
Net
income |
|
$ |
4,015 |
|
|
Net
income per share: |
|
|
|
|
|
Basic |
|
$ |
0.23 |
|
|
Diluted |
|
$ |
0.22 |
|
Pro forma
data does not purport to be indicative of the results that would have been
obtained had these acquisitions actually occurred at January 1, 2004 and is not
intended to be a projection of future results.
RC2
Corporation and Learning Curve International, Inc.
On March
4, 2003, with an effective date of February 28, 2003, the Company acquired
Learning Curve International, Inc. (Learning Curve) and certain of its
affiliates (collectively, LCI) through the merger of a wholly owned subsidiary
of RC2 with and into Learning Curve for approximately $104.4 million in cash
(excluding transaction expenses) and 666,666 shares of the Company's common
stock, including $12 million in escrow to secure Learning Curve’s
indemnification obligations under the merger agreement. LCI develops and markets
a variety of high-quality, award-winning children’s and infant toys for every
stage of childhood from birth through age eight. This transaction has been
accounted for under the purchase method of accounting and, accordingly, the
operating results of LCI have been included in our condensed consolidated
statements of earnings since the effective date of the acquisition. The purchase
was funded with a credit facility (See Note 7 - “Debt”).
The
escrow account to secure Learning Curve’s indemnification obligations under the
merger agreement was approximately $2.8 million at March 31, 2005. In the merger
agreement, Learning Curve agreed to indemnify the Company for losses relating to
breaches of Learning Curve’s representations, warranties and covenants in the
merger agreement and for specified liabilities relating to Learning Curve’s
historical business. The Company may make indemnification claims against the
escrow account until the later of March 31, 2005 or the 10th day
following resolution of any tax audit or similar proceeding subject to potential
indemnification under the merger agreement. Learning Curve is currently subject
to a tax audit which is subject to potential indemnification under the merger
agreement, and as a result, the escrow account will not close before the
10th day
following the resolution of this tax audit. In February 2005, the Company
notified the representatives of the former Learning Curve shareholders of the
tax audit and an additional indemnification claim, and in April 2005, the
Company notified the representatives of the former Learning Curve shareholders
of another indemnification claim.
Note
3—Accounting for Stock-Based Compensation
The
Company accounts for stock-based compensation arrangements with employees in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation
expense is based on the difference, if any, on the measurement date, between the
estimated fair value of the Company's stock and the exercise price of options to
purchase that stock. The compensation expense is amortized on a straight-line
basis over the vesting period of the options. To date, no compensation expense
has been recorded related to stock-based compensation agreements with
employees.
If
compensation costs for stock options issued, including options issued for shares
under the employee stock purchase plan (ESPP), had been determined based on the
fair value at their grant date consistent with SFAS No. 123, the Company's net
income and net income per share would have been reduced to the following pro
forma amounts:
| |
|
For
the three months ended
March
31, |
|
| |
|
2005 |
|
2004 |
|
|
(In
thousands, except per share data) |
|
(Unaudited) |
|
(Unaudited) |
|
| |
|
|
|
|
|
|
Net
income as reported |
|
$ |
7,828 |
|
$ |
2,942 |
|
|
Deduct:
total stock-based employee compensation
expense
determined under fair value-based
method
for all awards, net of related tax effects |
|
|
(441 |
) |
|
(286 |
) |
| |
|
|
|
|
|
|
|
|
Pro
forma net income |
|
$ |
7,387 |
|
$ |
2,656 |
|
|
Basic
net income per share |
|
|
|
|
|
|
|
|
As
reported |
|
$ |
0.38 |
|
$ |
0.17 |
|
|
Pro
forma |
|
$ |
0.36 |
|
$ |
0.15 |
|
|
Diluted
net income per share |
|
|
|
|
|
|
|
|
As
reported |
|
$ |
0.37 |
|
$ |
0.16 |
|
|
Pro
forma |
|
$ |
0.34 |
|
$ |
0.14 |
|
The fair
value of each stock option, excluding options issued for shares under the ESPP,
is estimated on the date of grant based on the Black-Scholes option pricing
model that assumes, among other things, no dividend yield, risk-free rates of
return from 3.53% to 5.74%, volatility factors of 54.50% to 87.76% and expected
life of 7 to 10 years. The weighted average fair value of options granted under
the Company’s stock option plan during the first three months of 2005 and 2004
was $18.64 and $18.38, respectively.
The fair
value of each option issued under the ESPP was estimated using the Black-Scholes
model with the following assumptions: risk-free rates of return from 0.93% to
2.32%, volatility factors of 32.84% to 79.16% and expected life of three months.
The weighted average fair value of those purchase rights granted during the
first three months of 2005 and 2004 was $6.69 and $6.15,
respectively.
During
the first quarter of 2005, the Company evaluated the method that had
historically been used to calculate the volatility factors used in valuing stock
options issued, both under the stock option plan and the ESPP. The Company had
been using historical Company results to compute the volatility used in valuing
the stock options issued. As the Company’s business has changed significantly as
a result of the acquisitions completed, the historical stock price movements are
not a good indicator of expected future results. Therefore, the Company has
changed the method used to calculate the volatility factor for those options
issued under the stock option plan to correspond with the average volatility
factor of those companies included in a recent peer group study. The Company
also changed the method used to calculate the volatility factor for those
options issued under the ESPP to that of the volatility during the most recent
three month period, as it more accurately projects the expected volatility over
the three month ESPP period being valued.
The pro
forma disclosure is not likely to be indicative of pro forma results that may be
expected in future years because of the fact that options vest over several
years. Compensation expense is recognized as the options vest and additional
awards may be granted.
Note
4 - Business Segments
The
Company is a leading designer, producer and marketer of innovative, high-quality
toys, collectibles, hobby and infant care products targeted to consumers of all
ages, as measured by sales and brand recognition. The Company historically had
reported its results by geographic area in accordance with the enterprise wide
disclosure requirements of SFAS No. 131, “Disclosure About Segments of an
Enterprise and Related Information.”
During
the third quarter of 2004, in conjunction with the acquisition of TFY, the
Company determined its reportable segments to be North America and
International. The North America segment includes the United States, Canada and
Mexico. The International segment includes non-North America
markets.
Segment
performance is measured at the operating income level. Segment assets are
comprised of all assets, net of applicable reserves and allowances.
Results
are not necessarily those that would be achieved if each segment were an
unaffiliated business enterprise. Information by segment and a reconciliation to
reported amounts for the three months ended March 31, 2005 and 2004 are as
follows:
| |
|
Three
Months Ended
March
31, |
|
|
(In
thousands) |
|
2005 |
|
2004 |
|
|
Net
sales: |
|
|
|
|
|
|
|
|
North
America |
|
$ |
84,175 |
|
$ |
51,799 |
|
|
International |
|
|
12,698 |
|
|
9,684 |
|
|
Sales
and transfers between segments |
|
|
(384 |
) |
|
(183 |
) |
|
Combined
total |
|
$ |
96,489 |
|
$ |
61,300 |
|
| |
|
|
|
|
|
|
|
|
Operating
income: |
|
|
|
|
|
|
|
|
North
America |
|
$ |
11,633 |
|
$ |
4,025 |
|
|
International |
|
|
1,834 |
|
|
1,402 |
|
|
Combined
total |
|
$ |
13,467 |
|
$ |
5,427 |
|
|
(In
thousands) |
|
March
31,
2005 |
|
December
31,
2004 |
|
|
Total
assets: |
|
|
|
|
|
|
North
America |
|
$ |
502,914 |
|
$ |
525,526 |
|
|
International |
|
|
61,888 |
|
|
60,222 |
|
|
Combined
total |
|
$ |
564,802 |
|
$ |
585,748 |
|
Under the
enterprise-wide disclosure requirements of SFAS No. 131, the Company reports net
sales by each group of product categories and by distribution channel. With the
acquisitions of Playing Mantis and TFY in 2004, the Company revised its product
categories to reflect the Company’s three product platforms: collectible
products, children’s toys and infant products. The presentation is consistent
with how the Company views its business. The following table presents
consolidated net sales by product category and by distribution channel for the
three months ended March 31, 2005 and 2004:
|
(In
thousands) |
|
2005 |
|
2004 |
|
|
Collectible
products |
|
$ |
24,712 |
|
$ |
25,876 |
|
|
Children’s
toys |
|
|
33,980 |
|
|
30,465 |
|
|
Infant
products |
|
|
37,797 |
|
|
4,959 |
|
|
Net
sales |
|
$ |
96,489 |
|
$ |
61,300 |
|
| |
|
|
|
|
|
|
|
|
Chain
retailers |
|
$ |
60,145 |
|
$ |
27,746 |
|
|
Specialty
and hobby wholesalers
and
retailers |
|
|
26,719 |
|
|
24,490 |
|
|
OEM
dealers |
|
|
6,372 |
|
|
4,156 |
|
|
Corporate
promotional |
|
|
2,547 |
|
|
3,163 |
|
|
Direct
to consumers |
|
|
706 |
|
|
1,745 |
|
|
Net
sales |
|
$ |
96,489 |
|
$ |
61,300 |
|
Note
5 - Comprehensive Income
The
Company reports comprehensive income in accordance with SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires companies to report all changes in
equity during a period, except those resulting from investment by owners and
distributions to owners, in a financial statement for the period in which they
are recognized. Comprehensive income for the three-month periods ended
March 31, 2005 and 2004 is calculated as follows:
|
(In
thousands) |
|
2005 |
|
2004 |
|
|
Net
income |
|
$ |
7,828 |
|
$ |
2,942 |
|
|
Other
comprehensive (loss) income - foreign currency |
|
|
|
|
|
|
|
|
translation
adjustments |
|
|
(1,091 |
) |
|
664 |
|
|
Comprehensive
income |
|
$ |
6,737 |
|
$ |
3,606 |
|
Note
6 - Common Stock
Authorized
and outstanding shares and the par value of the Company's voting common stock
are as follows:
| |
Authorized |
Par |
Shares
Outstanding at |
Shares
Outstanding at |
| |
Shares |
Value |
March
31, 2005 |
December
31, 2004 |
|
Voting
Common Stock |
28,000,000 |
$0.01 |
20,549,744 |
20,462,659 |
At
December 31, 2004, the Company held 1,832,174 shares of its common stock in
treasury. In January of 2005 and 2004, the Company sold 1,227 shares and 1,634
shares, respectively, out of treasury to Company employees under the ESPP for
$36,000 and $29,192, respectively.
In August
2004, the Company completed a public offering of 2,655,000 shares of common
stock and certain selling stockholders sold 220,000 shares of common stock at a
price of $31.00 per share. The Company received proceeds of $77.8 million from
the offering, net of underwriting discount, and used $74.0 million of the
proceeds to repay outstanding debt. Additionally, the Company incurred $0.3
million of costs associated with the offering and these costs have been
reflected as a reduction of stockholders’ equity on the Company’s condensed
consolidated balance sheets at March 31, 2005 and December 31,
2004.
As
discussed in Note 2, the Company issued 91,388 shares of the Company’s common
stock in June 2004 in connection with its acquisition of Playing Mantis.
Note
7 - Debt
Upon the
closing of the acquisition of TFY on September 15, 2004, the Company entered
into a new credit facility to replace its March 4, 2003 credit facility (see
below). This credit facility is comprised of an $85.0 million term loan and a
$100.0 million revolving line of credit, both of which mature on September 14,
2008 with scheduled quarterly principal payments ranging from $3.8 million to
$6.9 million commencing on December 31, 2004 and continuing thereafter with a
final balloon payment upon maturity. Forty million dollars of the term loan has
an interest rate of 3.45% through the first three years of the agreement. The
remaining term loan and revolving loan bear interest, at the Company’s option,
at a base rate or at a LIBOR rate plus applicable margin. The applicable margin
is based on the Company’s ratio of consolidated debt to consolidated EBITDA
(earnings before interest, taxes, depreciation and amortization) and varies
between 1.00% and 1.75%. At March 31, 2005, the margin in effect was 1.50% for
LIBOR loans. The Company is also required to pay a commitment fee of 0.30% to
0.45% per annum on the average daily unused portion of the revolving loan. Under
the terms of this credit facility, the Company is required to comply with
certain financial and non-financial covenants. Among other restrictions, the
Company is restricted in its ability to pay dividends, incur additional debt and
make acquisitions above certain amounts. The key financial covenants include
minimum EBITDA and interest coverage and leverage ratios. The credit facility is
secured by working capital assets and certain intangible assets. On March 31,
2005, the Company had $109.5 million outstanding on this credit facility and was
in compliance with all covenants.
In
conjunction with the new credit facility, the Company expensed approximately
$0.5 million of deferred financing fees related to the Company’s March 2003
credit facility in interest expense during the third quarter of 2004. In
addition, the Company incurred approximately $1.9 million in financing fees on
the new credit facility which is included in other non-current assets in the
accompanying condensed consolidated balance sheets at March 31, 2005 and
December 31, 2004 and is being charged to interest expense through September
2008.
In August
2004, the Company completed a public offering of 2,655,000 shares of common
stock and certain selling stockholders sold 220,000 shares of common stock at a
price of $31.00 per share. The Company received proceeds of $77.8 million from
the offering, net of underwriting discount, and used $74.0 million of the
proceeds to repay outstanding debt.
Upon the
closing of the acquisition of LCI on March 4, 2003, with an effective date of
February 28, 2003, the Company entered into a credit facility to replace its
previous credit facility. This credit facility was comprised of a $60.0 million
term loan and an $80.0 million revolving loan, both of which were to mature on
April 30, 2006. Thirty million dollars of the term loan had an interest rate of
2.61% plus applicable margin through the maturity of the agreement. The
remaining term loan and revolving loan bore interest, at the Company's option,
at a base rate or at a LIBOR rate plus applicable margin. The applicable margin
was based on the Company's ratio of consolidated debt to consolidated EBITDA and
varied between 0.75% and 1.75%. The facility was replaced with the September
2004 credit facility discussed above.
Note
8 - Net Income Per Share
The
Company computes net income per share in accordance with SFAS No. 128, "Earnings
Per Share." Under the provisions of SFAS No. 128, basic net income per share is
computed by dividing net income for the period by the weighted average number of
common shares outstanding during the period. Diluted net income per share is
computed by dividing net income for the period by the weighted average number of
common and common equivalent shares outstanding during the period. Options to
purchase 291,010 shares of common stock at prices between $31.27 and $34.65 per
share were outstanding during the three months ended March 31, 2005, but were
not included in the computation of diluted earnings per share because the
options’ exercise price was greater than the average market price of common
shares.
Note
9 - Legal Proceedings
The
Company has certain contingent liabilities resulting from litigation and claims
incident to the ordinary course of business. Management believes that the
probable resolution of such contingencies will not materially affect the
financial position or the results of the Company's operations.
Note
10 - Use of Estimates
The
preparation of the financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Note
11 - Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year
presentation.
Note
12 - Related Party Transactions
The
Company purchased some of its product during the first quarter of 2005 and 2004
from a company in which a relative of one of the Company’s
stockholders/directors has ownership interests. Additionally, during the first
quarter of 2005, the Company began purchasing product from a second company in
which the same relative of one of the Company’s stockholders/directors has a
partial ownership interest. The Company purchased approximately $0.9 million of
product from the second company during the first quarter of 2005.
Note
13 - Commitments and Contingencies
The
Company leases office and warehouse/distribution space under various
non-cancelable operating lease agreements, which expire through November 30,
2019.
The
Company markets a significant portion of its products with licenses from other
parties. These licenses are generally limited in scope and duration and
authorize the sale of specific licensed products on a nonexclusive basis. The
Company has over 700 licenses with various vehicle and equipment manufacturers,
race team owners, drivers, sponsors, agents and entertainment and media
companies, generally for terms of one to three years. Many of the licenses
include minimum guaranteed royalty payments that the Company must pay whether or
not it meets specified sales targets. The Company believes it either achieved
its minimum guarantees or has accrued for the costs related to these guarantees
for the three months ended March 31, 2005 and 2004.
In
conjunction with the acquisition of TFY during the third quarter of 2004, the
Company acquired purchase commitments with certain vendors relating to product
and product components which are kept on hand to shorten lead times. In the
event the product is discontinued, the Company would be required to reimburse
the vendor for the cost of the products and product components on hand. At March
31, 2005, the total commitment to these vendors was approximately $1.3
million.
Note
14 - Insurance Recovery
During
the first quarter of 2004, the Company received an insurance recovery of
approximately $232,000 relating to the lost margin on product destroyed during a
fire at the Company’s third-party warehouse in the United Kingdom in October
2003. This insurance recovery is included in the Company’s cost of sales for the
three months ended March 31, 2004.
Note
15 - Employee Benefit Plans
The
Company maintains a funded noncontributory defined benefit pension plan that
covers a select group of the Company’s workforce. The plan provides defined
retirement benefits based on the employees’ years of service.
The
components of net periodic benefit cost for the three months ended March 31,
2005 and 2004 are as follows:
|
(In
thousands) |
|
2005 |
|
2004 |
|
|
Service
cost |
|
$ |
27 |
|
$ |
28 |
|
|
Interest
cost |
|
|
192 |
|
|
172 |
|
|
Expected
return on plan assets |
|
|
(245 |
) |
|
(216 |
) |
|
Amortization
of prior service costs |
|
|
5 |
|
|
5 |
|
|
Amortization
of net loss |
|
|
93 |
|
|
45 |
|
|
Net
periodic benefit cost |
|
$ |
72 |
|
$ |
34 |
|
The
Company contributed $209,238 to the pension benefit plan during the three months
ended March 31, 2005. The Company expects to make additional contributions
during the fiscal 2005 year of approximately $1.0 million.
Note
16 - Assets Held for Sale
Assets
held for sale in the amount of $4.2 million primarily represents the land and
building located in Avon, Massachusetts. The warehouse was relocated in the
first quarter of 2005 and the office will be relocated in the second quarter of
2005.
Condition
and Results of Operations
The
following is a discussion and analysis of the Company's financial condition,
results of operations, liquidity and capital resources. The discussion and
analysis should be read in conjunction with the Company's unaudited condensed
consolidated financial statements and notes thereto included elsewhere
herein.
RESULTS
OF OPERATIONS
Operating
Highlights
Net sales
for the quarter ended March 31, 2005, increased approximately 57.4% primarily
due to the addition of TFY. Gross margin increased to 50.9% for the first
quarter of 2005 from 50.6% for the first quarter of 2004 primarily due to
product sales mix. Selling, general and administrative expenses as a percentage
of net sales decreased to 36.9% for the first quarter of 2005 from 41.8% for the
first quarter of 2004. Operating income increased to $13.5 million for the first
quarter of 2005 compared to $5.4 million for the first quarter of 2004. As a
percentage of net sales, operating income increased to 14.0% for the first
quarter of 2005 from 8.8% for the first quarter of 2004.
Three
Months Ended March 31, 2005 Compared to Three Months Ended March 31,
2004
Net
sales. Net sales
for the first quarter of 2005 increased $35.2 million, or 57.4%, to $96.5
million from $61.3 million for the first quarter of 2004. This sales increase
was primarily attributable to the addition of TFY which is reflected in the
significant increase in the infant products category. Net sales increases
occurred in our children’s toys and our infant products categories, but these
increases were partially offset by a decrease in our collectible products
category.
Net sales
in our children's toy category increased approximately 11.5% primarily driven by
the Thomas & Friends and John Deere ride-on and toy vehicle product lines.
Net sales in our infant products category increased approximately 662.2%
primarily due to the addition of TFY. Net sales in our collectible products
category decreased approximately 4.5% primarily due to the continued tough
comparisons to The
Fast and The Furious product
line in the first quarter of 2004, lower overall NASCAR product sales and the
discontinuance of distribution at NASCAR events in the first quarter of 2005.
On a pro
forma basis, net sales for the first quarter of 2005 excluding $0.7 million in
net sales of discontinued product lines decreased 1.3% when compared to the
first quarter of 2004 net sales excluding $5.3 million in net sales from these
discontinued product lines. The pro forma net sales assume that the Playing
Mantis and TFY acquisitions occurred as of January 1, 2004.
Gross
profit. Gross
profit increased $18.1 million, or 58.4%, to $49.1 million for the
three months ended March 31, 2005 from $31.0 million for the three
months ended March 31, 2004. The gross profit margin (as a percentage of net
sales) increased slightly to 50.9% in the first quarter of 2005 compared to
50.6% in the first quarter of 2004 primarily due to a favorable product sales
mix, the discontinuance of low volume and low margin product lines and the
implementation of selective price increases which helped partially offset
increased input costs. Our quarterly gross margins can be affected by the mix of
product that is shipped during each quarter. Historically, all of our product
categories approximated a similar gross margin; however, individual product
lines within a category carried gross margins that varied significantly and
caused quarterly fluctuations, based on the timing of these individual shipments
throughout the year. Due to the 2004 acquisition of TFY, which has higher
sales of non-licensed products that carry lower selling prices and gross margins
than the Company has had historically, our quarterly gross margins could not
only significantly fluctuate, but could be lower than those historically
reported. There were no major changes in the components of cost of
sales.
Selling,
general and administrative expenses. Selling,
general and administrative expenses increased $10.0 million, or 39.1%, to
$35.6 million for the three months ended March 31, 2005 from
$25.6 million for the three months ended March 31, 2004. As a percentage of
net sales, selling, general and administrative expenses decreased to 36.9% for
the three months ended March 31, 2005 from 41.8% for the three months ended
March 31, 2004. The decrease in selling, general and administrative
expenses as a percentage of sales was primarily due to operating leverage gained
from increased sales from the 2004 acquisitions, disciplined control over
discretionary operating costs and the timing of certain marketing
costs.
Operating
income. Operating
income increased to $13.5 million for the first quarter of 2005 from $5.4
million for the first quarter of 2004. As a percentage of net sales, operating
income also increased to 14.0% of net sales in the first quarter of 2005 from
8.8% in the prior year first quarter.
Net interest expense. Net
interest expense of $1.3 million for the three months ended March 31, 2005
and $0.8 million for the three months ended March 31, 2004 relates
primarily to bank term loans and lines of credit. The
increase in net interest expense was primarily due to the increase in average
outstanding debt balances.
Income
tax. Income
tax expense for the three months ended March 31, 2005 and 2004 includes
provisions for federal, state and foreign income taxes at an effective rate of
36.0%.
Related
Party Transactions
The
Company purchased some of its product during the first quarter of 2005 and 2004
from a company in which a relative of one of the Company’s
stockholders/directors has ownership interests. Additionally, during the first
quarter of 2005, the Company began purchasing product from a second company in
which the same relative of one of the Company’s stockholders/directors has a
partial ownership interest. The Company purchased approximately $0.9 million of
product from the second company during the first quarter of 2005.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company's operations provided net cash of approximately $19.7 million during the
three months ended March 31, 2005. Capital expenditures for the three
months ended March 31, 2005 were approximately $3.3 million, of which
approximately $2.7 million was for molds and tooling. Cash and cash equivalents
decreased by approximately $4.8 million during the three months ended March 31,
2005.
Upon the
closing of the acquisition of TFY on September 15, 2004, the Company entered
into a new credit facility to replace its March 4, 2003 credit facility (see
below). This credit facility is comprised of an $85.0 million term loan and a
$100.0 million revolving line of credit, both of which mature on September 14,
2008 with scheduled quarterly principal payments ranging from $3.8 million to
$6.9 million commencing on December 31, 2004 and continuing thereafter with a
final balloon payment upon maturity. Forty million dollars of the term loan has
an interest rate of 3.45% through the first three years of the agreement. The
remaining term loan and revolving loan bear interest, at the Company’s option,
at a base rate or at a LIBOR rate plus applicable margin. The applicable margin
is based on the Company’s ratio of consolidated debt to consolidated EBITDA
(earnings before interest, taxes, depreciation and amortization) and varies
between 1.00% and 1.75%. At March 31, 2005, the margin in effect was 1.50% for
LIBOR loans. The Company is also required to pay a commitment fee of 0.30% to
0.45% per annum on the average daily unused portion of the revolving loan. Under
the terms of this credit facility, the Company is required to comply with
certain financial and non-financial covenants. Among other restrictions, the
Company is restricted in its ability to pay dividends, incur additional debt and
make acquisitions above certain amounts. The key financial covenants include
minimum EBITDA and interest coverage and leverage ratios. The credit facility is
secured by working capital assets and certain intangible assets. On March 31,
2005, the Company had $109.5 million outstanding on this credit facility and was
in compliance with all covenants.
In August
2004, the Company completed a public offering of 2,655,000 shares of common
stock and certain selling stockholders sold 220,000 shares of common stock at a
price of $31.00 per share. The Company received proceeds of $77.8 million from
the offering, net of underwriting discount, and used $74.0 million of the
proceeds to repay outstanding debt.
Upon the
closing of the acquisition of LCI on March 4, 2003, with an effective date of
February 28, 2003, the Company entered into a credit facility to replace its
previous credit facility. This credit facility was comprised of a $60.0 million
term loan and an $80.0 million revolving loan, both of which were to mature on
April 30, 2006. Thirty million dollars of the term loan had an interest rate of
2.61% plus applicable margin through the maturity of the agreement. The
remaining term loan and revolving loan bore interest, at the Company's option,
at a base rate or at a LIBOR rate plus applicable margin. The applicable margin
was based on the Company's ratio of consolidated debt to consolidated EBITDA and
varied between 0.75% and 1.75%. This facility was replaced with the September
2004 credit facility discussed above.
During
the three months ended March 31, 2005, the Company made total payments of $18.0
million on its line of credit and $3.8 million on its term loan. At March 31,
2005, the Company had $67.0 million available on its line of
credit.
The
Company has met its working capital needs through funds generated from
operations and available borrowings under the credit agreement. The Company's
working capital requirements fluctuate during the year based on the seasonality
related to sales. Due to seasonal increases in demand for the Company's
products, working capital financing requirements are usually highest during the
third and fourth quarters. The Company expects that capital expenditures during
2005, principally for molds and tooling, will be approximately
$16.0 million.
The
Company believes that its cash flow from operations, cash on hand and available
borrowings will be sufficient to meet its working capital and capital
expenditure requirements and provide the Company with adequate liquidity to meet
anticipated operating needs for 2005. However, if the Company's capital
requirements vary materially from those currently planned, the Company may
require additional debt or equity financing. There can be no assurance that
financing, if needed, would be available on terms acceptable to the Company, if
at all.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
Company makes certain estimates and assumptions that affect the reported amounts
of assets and liabilities and the reported amounts of revenues and expenses. The
accounting policies described below are those the Company considers critical in
preparing its consolidated financial statements. These policies include
significant estimates made by management using information available at the time
the estimates are made. However, as described below, these estimates could
change materially if different information or assumptions were used.
Allowance
for Doubtful Accounts. The
allowance for doubtful accounts represents adjustments to customer trade
accounts receivable for amounts deemed uncollectible. The allowance for doubtful
accounts reduces gross trade receivables to their net realizable value. The
Company's allowance is based on management's assessment of the business
environment, customers' financial condition, historical trends, customer payment
practices, receivable aging and customer disputes. The Company has purchased
credit insurance that covers a portion of its receivables from major customers.
The Company will continue to proactively review its credit risks and adjust its
customer terms to reflect the current environment.
Inventory.
Inventory, which consists of finished goods, has been written down for excess
quantities and obsolescence, and is stated at lower of cost or market. Cost is
determined by the first-in, first-out 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. Inventory
write-downs are recorded for damaged, obsolete, excess and slow-moving
inventory. The Company's management uses estimates to record these write-downs
based on its review of inventory by product category, length of time on hand and
order bookings. Changes in public and consumer preferences and demand for
product or changes in customer buying patterns and inventory management could
impact the inventory valuation.
Impairment
of Long-Lived Assets, Goodwill and Other Intangible Assets.
Long-lived assets have been reviewed for impairment based on Statement of
Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement
requires that an impairment loss be recognized whenever the sum of the expected
future cash flows (undiscounted and without interest charges) resulting from the
use and ultimate disposal of an asset is less than the carrying amount of the
asset. Goodwill and other intangible assets have been reviewed for impairment
based on SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS No.
142, goodwill and other intangible assets that have indefinite useful lives will
not be amortized, but rather will be tested at least annually for impairment.
The Company's management reviews for indicators that might suggest an impairment
loss could exist. Testing for impairment requires estimates of expected cash
flows to be generated from the use of the assets. Various uncertainties,
including changes in consumer preferences, deterioration in the political
environment or changes in general economic conditions, could impact the expected
cash flows to be generated by an asset or group of assets. Intangible assets
that have finite useful lives will continue to be amortized over their useful
lives.
Income
Taxes. The
Company records current and deferred income tax liabilities. Management
considers all available evidence in evaluating the realizability of the deferred
tax assets and records valuation allowances against its deferred tax assets as
needed. Management believes it is more likely than not that the Company will
generate sufficient taxable income in the appropriate carry-forward periods to
realize the benefit of its deferred tax assets. In determining the required
liability, management considers certain tax exposures and all available
evidence. However, if the available evidence were to change in the future, an
adjustment to the tax-related balances may be required.
Accrued
Allowances. The
Company ordinarily accepts returns only for defective merchandise. In certain
instances, where retailers are unable to resell the quantity of products that
they have purchased from the Company, the Company may, in accordance with
industry practice, assist retailers in selling excess inventory by offering
credits and other price concessions, which are typically evaluated and issued
annually. Other allowances can also be issued for defective merchandise, volume
programs and co-op advertising. All allowances are accrued for throughout the
year, as sales are recorded. The allowances are based on the terms of the
various programs in effect; however, management also takes into consideration
historical trends and specific customer and product information when making its
estimates. For the volume programs, the Company generally sets a volume target
for the year with each participating customer and issues the discount if the
target is achieved. The allowance for the volume program is accrued throughout
the year, and if it becomes clear to management that the target for the
participating customer will not be reached, the Company will change the estimate
for that customer as required. Certain Learning Curve branded products carry a
lifetime product warranty and certain TFY branded products carry a satisfaction
guarantee. Historical results of these product warranties have shown that they
have had an immaterial impact on the Company. Based upon the historical results,
appropriate allowances for product warranty claims are accrued throughout the
year.
Accrued
Royalties. Royalties
are accrued based on the provisions in licensing agreements for amounts due on
net sales during the period as well as management estimates for additional
royalty exposures. Royalties vary by product category and are generally paid on
a quarterly basis. Multiple royalties may be paid to various licensors on a
single product. Royalty expense is included in selling, general and
administrative expenses on the condensed consolidated statements of
earnings.
Recently
Issued Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” This
statement is a revision of SFAS No. 123, “Accounting for Stock-Based
Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to
Employees.” This statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services and also addresses transactions in which an entity incurs liabilities
in exchange for goods and services that are based on the fair value of the
entity’s equity instruments or that may be settled by the issuance of those
instruments. This statement applies to all awards granted after the required
effective date and to awards modified, repurchased, or cancelled after that
date. This statement is effective as of the beginning of the first annual period
beginning after June 15, 2005. The Company will adopt this statement for the
quarter beginning January 1, 2006. We believe the best indication of the
approximate impact on net income of adopting the provisions of this revised
Statement may be determined by reviewing the table provided under Note 3 -
Accounting for Stock-Based Compensation. We plan to use the prospective method
and accordingly will not be restating prior periods upon adoption of SFAS No.
123R.
In
December 2004, the FASB issued FASB Staff Position (FSP) 109-2, “Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004.” This FSP was issued to provide accounting
and disclosure guidance for the repatriation provision of the American Jobs
Creation Act of 2004 (the Act) which was signed into law on October 22, 2004.
This FSP was effective upon issuance. Pursuant to the Act, the Company is in the
process of evaluating those provisions relating to the repatriation of certain
foreign earnings that are repatriated, as defined in the Act. The Company may
elect to apply this provision in 2005. The Company has started its evaluation of
the effects of the repatriation provision, but does not expect to complete the
evaluation until after the Treasury Department provides additional clarifying
language on key elements of the provision. Once such additional clarifying
language is provided, the Company expects to be able to complete its evaluation
within a reasonable time. The range of possible amounts the Company is
considering repatriating is between zero and $5.5 million. The related range of
income tax effects of such repatriation is between zero and $0.7
million.
FORWARD-LOOKING
STATEMENTS
Certain
statements contained in this report are considered "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements may be identified by the use of forward-looking words or
phrases such as "anticipate," "believe," "could," "expect," "intend," "may,"
"planned," "potential," "should," "will," "would" or the negative of those terms
or other words of similar meaning. Such forward-looking statements are
inherently subject to known and unknown risks and uncertainties. The Company's
actual results and future developments could differ materially from the results
or developments expressed in, or implied by, these forward-looking
statements.
Factors
that may cause actual results to differ materially from those contemplated by
such forward-looking statements include, but are not limited to, the following:
the Company may experience unanticipated difficulties in integrating its
acquisition of The First Years; the Company may not be able to manufacture,
source and ship new and continuing products on a timely basis; the Company is
dependent upon timely shipping of product and unloading of product through West
Coast ports as well as timely rail/truck delivery to the Company's warehouse
and/or customers' warehouses; increases in the cost of raw materials used to
manufacture the Company’s products and increases in freight costs could increase
the Company’s cost of sales and reduce the Company’s gross margins; currency
exchange rate fluctuations could increase the Company’s expenses; customers and
consumers may not accept the Company’s products at prices sufficient for the
Company to profitably recover development, manufacturing, marketing, royalty and
other costs; the inventory policies of retailers, together with increased
reliance by retailers on quick response inventory management techniques, may
increase the risk of underproduction of popular items, overproduction of less
popular items and failure to achieve tight shipping schedules; competition in
the markets for the Company's products may increase significantly; the Company
is dependent upon continuing licensing arrangements with vehicle manufacturers,
agricultural equipment manufacturers, major race sanctioning bodies, race team
owners, drivers, sponsors, agents and other licensors; the Company may
experience unanticipated negative results of litigation; the Company relies upon
a limited number of independently owned factories located in China to
manufacture a significant portion of its vehicle replicas and certain other
products; the Company is dependent upon the continuing willingness of leading
retailers to purchase and provide shelf space for the Company's products; and
general economic conditions in the Company's markets.
The
Company undertakes no obligation to make any revisions to the forward-looking
statements contained in this report or to update them to reflect events or
circumstances occurring after the date of this report.
The
Company's exposure to market risk is limited to interest rate risk associated
with its credit agreement and foreign currency exchange rate risk associated
with its foreign operations.
Based on
the Company's interest rate exposure on variable rate borrowings at
March 31, 2005, a one percentage point increase in average interest rates
on the Company's borrowings would increase future interest expense by
approximately $57,917 per month and a five percentage point increase would
increase future interest expense by approximately $289,583 per month. The
Company determined these amounts based on approximately $69.5 million of
variable rate borrowings at March 31, 2005, multiplied by 1% and 5%,
respectively, and divided by 12. The Company currently is not using any interest
rate collars, hedges or other derivative financial instruments to manage or
reduce interest rate risk. As a result, any increase in interest rates on the
Company's variable rate borrowings would increase interest expense and reduce
net income.
As of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, of
the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended). Based on this evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective in timely alerting them to material information
relating to the Company required to be included in the Company's periodic
filings with the Securities and Exchange Commission. It should be noted that in
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
The Company has designed its disclosure controls and procedures to reach a level
of reasonable assurance of achieving the desired control objectives and based on
the evaluation described above, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective at reaching that level of reasonable
assurance.
There was
no change in the Company's internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934,
as amended) during the Company's most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II. OTHER
INFORMATION
The
Company has certain contingent liabilities resulting from litigation and claims
incident to the ordinary course of business. Management believes that the
probable resolution of such contingencies will not materially affect the
financial position or the results of the Company's operations.
Not
applicable.
Not
applicable.
Not
applicable.
| |
3.1 |
Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to
Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002 (File No. 0-22635) filed by the Company with the
Securities and Exchange Commission on May 14,
2002). |
| |
3.2 |
First
Amendment to the Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.2 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (File
No. 0-22635) filed by the Company with the Securities and Exchange
Commission on May 14, 2002). |
| |
3.3 |
Certificate
of Ownership and Merger changing the Company's name to Racing Champions
Ertl Corporation (incorporated by reference to Exhibit 3.3 of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
2002 (File No. 0-22635) filed by the Company with the Securities and
Exchange Commission on May 14, 2002). |
| |
3.4 |
Certificate
of Ownership and Merger changing the Company's name to RC2 Corporation
(incorporated by reference to Exhibit 3.4 of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2003 (File No.
0-22635) filed by the Company with the Securities and Exchange Commission
on May 14, 2003). |
| |
3.5 |
Amended
and Restated By-Laws of the Company (incorporated by reference to Exhibit
3.5 of the Company’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2004 (File No. 0-22635) filed by the Company with the Securities
and Exchange Commission on May 10, 2004). |
_______________________
| |
|
*This
certification is not "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or incorporated by reference into any
filing under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended. |
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.
Dated
this 9th day of May 2005.
| |
|
|
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RC2
CORPORATION |
|
|
|
|
By: |
/s/ Curtis W.
Stoelting |
| |
Curtis
W. Stoelting, Chief Executive Officer |
| |
|
|
|
By: |
/s/ Jody L.
Taylor |
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Jody
L. Taylor, Chief Financial Officer and
Secretary |