Attached files
file | filename |
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EX-23 - EX-23: CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - KID BRANDS, INC | y83554exv23.htm |
EX-31.2 - EX-31.2: CERTIFICATION - KID BRANDS, INC | y83554exv31w2.htm |
EX-32.1 - EX-32.1: CERTIFICATION - KID BRANDS, INC | y83554exv32w1.htm |
EX-31.1 - EX-31.1: CERTIFICATION - KID BRANDS, INC | y83554exv31w1.htm |
EX-32.2 - EX-32.2: CERTIFICATION - KID BRANDS, INC | y83554exv32w2.htm |
EX-21.1 - EX-21.1: LIST OF SUBSIDIARIES - KID BRANDS, INC | y83554exv21w1.htm |
EX-10.40 - EX-10.40: EMPLOYMENT AGREEMENT - KID BRANDS, INC | y83554exv10w40.htm |
EX-10.41 - EX-10.41: EMPLOYMENT AGREEMENT - KID BRANDS, INC | y83554exv10w41.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-8681
KID BRANDS, INC.
(Exact name of registrant as specified in its charter)
New Jersey | 22-1815337 | |
(State of or other jurisdiction of | (I.R.S. Employer Identification Number) | |
incorporation or organization) | ||
1800 Valley Road, Wayne, New Jersey | 07470 | |
(Address of principal executive offices) | (Zip Code) |
Registrants Telephone Number, Including Area Code: (201) 405-2400
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange | ||
Title of each Class | on which registered | |
Common Stock, $0.10 stated value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. 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 o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The aggregate market value of the voting common equity held by non-affiliates of the
Registrant computed by reference to the price of such stock at the close of business on June 30,
2009 was approximately $48.9 million.
The number of shares outstanding of each of the Registrants classes of common stock, as of
March 19, 2010, was as follows:
Class | Number of Shares | ||||||
Common Stock, $0.10 stated value |
21,577,699 | ||||||
Documents Incorporated by Reference
Certain information called for by Part III is incorporated by reference to the definitive
Proxy Statement for the Companys 2010 Annual Meeting of Stockholders (the 2010 Proxy Statement),
which is intended to be filed not later than 120 days after the end of the fiscal period covered by
this report.
TABLE OF CONTENTS
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EX-10.40: Employment Agreement | ||||||||
EX-10.41: Employment Agreement | ||||||||
EX-21.1: List of Subsidiaries | ||||||||
EX-23: Consent of Independent Registered Public Accounting Firm | ||||||||
EX-31.1: Certification | ||||||||
EX-31.2: Certification | ||||||||
EX-32.1: Certification | ||||||||
EX-32.2: Certification |
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PART I
As used in this Annual Report on Form 10-K, the terms Company, our, us or we refer to
Kid Brands, Inc., a New Jersey corporation (formerly known as Russ Berrie and Company, Inc.), and
each of its consolidated subsidiaries, and the term KID refers to the registrant.
ITEM 1. | BUSINESS |
Background
We are a leading designer, importer, marketer and distributor of branded infant and juvenile
consumer products. Prior to December 23, 2008, we operated in two reportable segments: our infant
and juvenile segment; and our gift segment. During 2008, however, we strategically repositioned our
business to further enhance and focus our position in the infant and juvenile market. In
connection therewith, among other things, (i) in April 2008, we consummated the acquisition of each
of: (x) the assets of LaJobi Industries, Inc. (LaJobi), a privately-held company based in
Cranbury, New Jersey that designs, imports and sells infant and juvenile furniture and related
products; and (y) the capital stock of CoCaLo, Inc. (CoCaLo), a privately-held company based in
Costa Mesa, California that designs, markets and distributes infant bedding and related
accessories; and (ii) as of December 23, 2008, we consummated the sale to The Russ Companies, Inc.,
a Delaware corporation (TRC), of the capital stock of our subsidiaries actively engaged in our
gift business (the Gift Business), substantially all of our assets used in our gift business and
the assumption by TRC of specified obligations, but excluding, among other specified items, certain
intellectual property licensed to TRC. As a result of the sale of our Gift Business (the Gift
Sale), our infant and juvenile business now constitutes our only segment.
Together with our 2004 acquisition of Kids Line, LLC (Kids Line) which designs, imports
and sells infant bedding and related accessories and our 2002 acquisition of Sassy, Inc.
(Sassy) which designs, imports and sells developmental toys and feeding, bath and baby care
items, the actions described above have focused our operations on the infant and juvenile business,
and have enabled us to offer a more complete range of products for the baby nursery.
Consistent with our strategy of building a confederation of complementary businesses, each
operating subsidiary in our infant and juvenile business is operated 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.
General
Our continuing operations, which currently consist of Kids Line, Sassy, LaJobi and CoCaLo,
each of which is a direct or indirect wholly-owned subsidiary of KID, designs, manufactures through
third parties and market products in a number of categories including, among others: infant bedding
and related nursery accessories and decor (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). Our products are sold primarily to
retailers in North America, the UK and Australia, including large, national retail accounts and
independent retailers (including toy, specialty, food, drug, apparel and other retailers). We
generated annual net sales of approximately $243.9 million in 2009.
We maintain a direct sales force and distribution network to serve our customers in the United
States, the UK and Australia. We also maintain relationships with several independent
manufacturers representatives and distributors to service certain retail customers in several
other foreign countries. See BusinessMarketing and Sales below.
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We were founded in 1963 by the late Mr. Russell Berrie, and were incorporated in New Jersey in
1966. Our common stock has been traded on the New York Stock Exchange since its initial public
offering on March
29, 1984 (under the symbol RUS until September 22, 2009, when we changed our name to Kid
Brands, Inc., and under the symbol KID thereafter).
See Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations for a discussion of the principal elements of our global business strategy.
We maintain our principal executive offices at 1800 Valley Road, Wayne, New Jersey 07470. Our
wholly-owned subsidiaries are located in the United States, the United Kingdom and Australia with
distribution centers situated at their various locations. See Business Properties. Our
telephone number is (201) 405-2400.
Continuing Operations
Products
Our infant and juvenile product line currently consists of approximately 5,700 products that
principally focus on children of the age group newborn to three years. Kids Line
® products, which are marketed primarily under the Kids Line®,
Carters®
and Disney®
brands, and CoCaLo® products, which are marketed primarily under the CoCaLo Baby® ,
CoCaLo Couture® , and CoCaLo NaturalsTM brands, each
consist primarily of infant bedding and related nursery accessories and décor such as blankets,
rugs, mobiles, nightlights, hampers, lamps and wall art. LaJobi® products,
which are marketed primarily under the Babi Italia®, Europa Baby®, Bonavita®, Graco® and
Serta® brands, consist primarily of cribs, mattresses and other nursery furniture.
Sassy® products, which are marketed primarily under the Sassy
® brand, consist primarily of developmental toys and feeding, bath and baby care items
with features that address the various stages of an infants early years.
During 2008 and 2009, we expanded our product line to offer products at a broader variety of
price points and also added several environmentally friendly products. For example, Kids Line
significantly increased its sales of Carters® brand bedding separates, while
Kids Line and CoCaLo each introduced new organic, eco-friendly brands. CoCaLo also expanded and
refined its CoCaLo Couture® brand, which targets higher price points. LaJobi
also developed a new brand Nursery 101® which was introduced in 2009,
which represents products at a lower price point than the rest of its line. We have also expanded
the collaborative activities between our business units, and co-develop and cross market certain
products.
Most of our infant and juvenile products have selling prices between $1 and $220, with the
exception of LaJobi furniture products, which have selling prices of $12 to $595. Product sales are
highly diverse, and no single item represented more than 2% of our consolidated net sales from
continuing operations in 2009. The Company categorizes its sales in five product categories,
Functional Soft Goods, Functional Hard Goods, Accessories and Décor, Toys and Entertainment and
Other. Functional Soft Goods includes: bedding, blankets, mattresses and sleep positioners;
Functional Hard Goods includes: cribs and other nursery furniture, feeding products, baby gear and
organizers; Accessories and Décor includes: hampers, lamps, rugs and décor; Toys and Entertainment
includes: developmental toys, bath toys and mobiles; Other includes all other products that do not
fit in the above four categories. The following table sets forth the Companys consolidated net
sales by product category, as a percentage of total consolidated net sales, for the years ended
December 31, 2009, 2008 and 2007:
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Functional Soft Goods |
44.6 | % | 41.7 | % | 45.7 | % | ||||||
Functional Hard Goods |
33.3 | % | 32.0 | % | 17.3 | % | ||||||
Accessories and Décor |
11.2 | % | 12.5 | % | 15.3 | % | ||||||
Toys and Entertainment |
10.0 | % | 12.9 | % | 20.8 | % | ||||||
Other |
0.9 | % | 0.9 | % | 0.9 | % | ||||||
Total |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
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Design and Production
We maintain a continuing program of new product development. We design most of our own
products, although certain products are designed by independent designers or are licensed from
other third parties. Items are added to the product line only if we believe that they can be
sourced and marketed on a basis that meets our profitability standards.
Generally, a new design is brought to market in less than one year after a decision is made to
produce the product. Sales of our products are, in large part, dependent on our ability to
anticipate, identify and react quickly to changing consumer preferences and to effectively utilize
our sales and distribution systems to bring new products to market.
We occasionally engage in market research and test marketing to evaluate consumer reactions to
our products. Research into consumer buying trends often suggests new products. We assemble
information from retail stores, our sales force, focus groups, industry experts and our product
development personnel. We continually analyze our products to determine whether they should be
adapted into new or different products using elements of the initial design or whether they should
be removed from the product line.
Substantially all of our products are produced by independent manufacturers, generally in
Eastern Asia, under the quality review of our personnel. Our products are designed, manufactured,
packaged and labeled to conform to all applicable safety requirements under U.S. federal and other
applicable laws and regulations, various industry-developed voluntary standards and
product-specific standards.
During 2009, we utilized numerous manufacturers in Eastern Asia for our continuing operations,
with facilities primarily in the Peoples Republic of China (PRC) and other Eastern Asia
countries. During 2009, approximately 67% of our dollar volume of purchases for our continuing
operations was attributable to manufacturing in the PRC. Members of our Eastern Asia and U.S.
product development staff make frequent visits to such manufacturers. The PRC currently enjoys
permanent normal trade relations (PNTR) status under U.S. tariff laws, which provides a
favorable category of U.S. import duties. The loss of such PNTR status would result in a
substantial increase in the import duty for products manufactured for us in the PRC and imported
into the United States and would result in an increase in our sourcing costs. In 2009, the supplier
accounting for the greatest dollar volume of the purchases for our continuing operations accounted
for approximately 20% of such purchases and the five largest suppliers accounted for approximately
46% in the aggregate. We believe that there are alternate manufacturers for our products and
sources of raw materials. See Item 1A, Risk Factors We rely on foreign suppliers, primarily in
the PRC, to manufacture most of our products, which subjects us to numerous international business
risks that could increase our costs or disrupt the supply of our products and Note 18 of Notes to
Consolidated Financial Statements for a discussion of risks attendant to our foreign operations.
Pursuant to the terms of a transition services agreement entered into in connection with the
acquisition of LaJobi, we currently utilize the full time services of approximately 32 employees of
a Thailand company owned by the former owners of the LaJobi business, including Lawrence Bivona,
who currently serves as President of LaJobi, and certain members of Mr. Bivonas family. These
employees are engaged primarily in quality control activities with respect to the manufacture of
LaJobi products. Pursuant to the terms of our arrangements with LaJobi, we reimburse the Thailand
company for the actual, direct costs incurred in connection with the employment of these
individuals, and we intend to establish arrangements to directly employ a staff in Thailand. See
Note 13 of Notes to Consolidated Financial Statements and Item 13, Certain Relationships and
Related Transactions and Director Independence, for more information regarding these arrangements.
In addition, we employ additional staff in the PRC who monitor the production process with
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responsibility for the quality, safety and prompt delivery of our products, as well as product
development and compliance issues.
Marketing and Sales
Our products are marketed through our own direct sales force of 19 full-time employees as of
December 31, 2009 and through independent manufacturers representatives and distributors to retail
customers in the United States and certain foreign countries including, but not limited to, mass
merchandisers, baby superstores, specialty stores, department stores and boutiques. During 2009, we
maintained a direct sales force and distribution network for our continuing operations in the
United States, the United Kingdom and Australia. We also maintain relationships with several
independent manufacturers representatives and distributors to service certain retail customers in
several other foreign countries. Our sales by foreign based operations were $8.5 million, $8.5
million and $6.5 million for the years ended December 31, 2009, 2008 and 2007, respectively. Our
consolidated foreign sales from continuing operations, including export sales from the United
States, aggregated $19.8 million, $18.8 million, and $15.4 million for the years ended December 31,
2009, 2008 and 2007, respectively. See Note 18 of Notes to Consolidated Financial Statements for
information with respect to revenues from external customers, a measure of profit or loss and total
assets for each of the years ending December 2009, 2008 and 2007, respectively, as well as
specified geographic information.
During 2009, we sold infant and juvenile products to approximately 1,900 customers worldwide.
Toys R Us, Inc. and Babies R Us, Inc. in the aggregate accounted for approximately 46.9%, and
Target Corporation (Target) accounted for approximately 12.3%, of our consolidated gross sales
from continuing operations during 2009. The loss of any of these customers, or the loss of certain
other large customers, could have a material adverse affect on us. See Item 1A, Risk Factors Our
business is dependent on several large customers and Note 6 to Notes to Consolidated Financial
Statements.
We reinforce the marketing efforts of our sales force through an active promotional program,
including showrooms at our principal facilities, participation in trade shows, trade and consumer
advertising. We also seek to further capture synergies between our businesses by cross-marketing
products and building upon the strong customer relationships developed by each of our subsidiaries,
as well as by consolidating certain operational activities.
Customer service is an essential component of our marketing strategy. We maintain customer
service departments that respond to customer inquiries, investigate and resolve issues and
generally assist customers.
Our general terms of sale are competitive with others in our industry. Sales are typically
made utilizing standard credit terms of 30 to 60 days. We do not ordinarily sell our products on
consignment, and we ordinarily accept returns only for defective merchandise. In certain instances,
where retailers are unable to resell the quantity of products that they have purchased from us, we
may, in accordance with industry practice, assist retailers in selling such excess inventory by
offering credits and other price concessions.
Distribution
Many of our customers, particularly mass merchandisers, pick up their goods at our regional
distribution centers, which are located in: South Gate, California; Cranbury, New Jersey; Kentwood,
Michigan; Eastleigh, Hampshire (U.K.); and Sydney, Australia. We also use common carriers to
arrange shipments to customers who request such arrangements, including smaller retailers and
specialty stores. CoCaLo distributes its products through a third party logistics provider (that is
a related company). LaJobi also utilizes the services of an independent third party logistics
provider in California for a portion of its distribution requirements. See Note 13 of Notes to
Consolidated Financial Statements and Item 13, Certain Relationships and Related Transactions and
Director Independence, for more information regarding CoCaLos third party logistics agreement.
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Seasonality
We typically do not experience significant seasonal variations in demand for our products.
Sales to our retail customers may be higher in periods when retailers take initial shipments of new
products, as these orders typically incorporate enough products to fill each store plus additional
amounts to be kept at the customers
distribution center. The timing of these initial shipments varies by customer depending on
when they finalize store layouts for the upcoming year, and whether there are any mid-year product
introductions.
Competition
The infant and juvenile products industry is highly competitive and is characterized by the
frequent introduction of new products and includes numerous domestic and foreign competitors, many
of which are substantially larger and have financial and other resources greater than ours. We
compete with a number of different competitors, depending on the product category, and compete
against no single company across all of our product categories. Our competition includes large,
infant and juvenile product companies and specialty infant and juvenile product manufacturers. We
compete principally on the basis of proprietary product design, brand name recognition, product
quality, innovation, relationships with major retailers, customer service and price/value
relationship.
In addition, certain of our potential customers, in particular mass merchandisers, have the
financial and other resources necessary to buy products similar to those that we sell directly from
manufacturers in Eastern Asia and elsewhere, thereby potentially reducing the size of our potential
market. See Item 1A, Risk Factors Competition in our markets could reduce our net sales and
profitability.
Copyrights, Trademarks, Patents and Licenses
We rely on a combination of trademarks, copyrights, patents, licenses and trade secrets to
protect our intellectual property. We believe our intellectual property has significant value,
though we do not consider our business to be materially dependent on intellectual property due to
the availability of substitutes, creation of other designs, and the variety of other products.
Intellectual property protections are limited or even unavailable in some foreign countries and
preventing unauthorized use of our intellectual property can be difficult even in countries with
substantial legal protection. In addition, the portion of our business that relies on the use of
intellectual property is subject to the risk of challenges by third parties claiming infringement
of their proprietary rights.
We enter into license agreements relating to trademarks, copyrights, patents, designs and
products which enable us to market items compatible with our product line. We currently maintain
license agreements with, among others, The William Carter Company (Carters ®),
Disney ® Enterprises, Inc., Graco ® Childrens Products,
Inc., and Serta®, Inc. Our license agreements are typically for terms of two to
five years with extensions possible if agreed to by both parties. Royalties are paid on licensed
products and, in many cases, advance royalties and minimum guarantees are required by these license
agreements. We do not believe our business is dependent on any single license, although the
Carters® license accounted for a significant percentage of net revenue of Kids
Line for the years ended 2009, 2008 and 2007, and the Graco® and
Serta® licenses each accounted for a significant percentage of net revenues of
LaJobi for the years ended 2009 and 2008.
In connection with the Gift Sale, a newly-formed Delaware limited liability company owned 100%
by KID (the Licensor) executed a license agreement (the License Agreement) with TRC. Pursuant
to the License Agreement, the Licensor has granted to TRC an exclusive license (subject to certain
specified exceptions) permitting the Licensee to use specified intellectual property, consisting
generally of the Russ and Applause trademarks and trade names (the Retained IP). Subject to
provisions for early termination for specified events of default, the License Agreement will expire
on December 23, 2013 (subject to a nine-month extension under specified circumstances). TRC has the
option to purchase all of the Retained IP from the Licensor for $5.0 million at any time, subject
to certain requirements, including the absence of any defaults and
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the prior repayment in full of
the Seller Note (as defined in the License Agreement). If TRC does not purchase the Retained IP by
December 23, 2013 (or, under certain circumstances, nine months thereafter), the Licensor will have
the option to require TRC to purchase all of the Retained IP for $5.0 million. During the term of
the License Agreement, TRC is required to pay the Licensor a fixed, annual royalty (the Royalty)
equal to $1,150,000. The initial annual Royalty payment was due and was payable in one lump sum on
December 31, 2009. Thereafter, the Royalty is due quarterly at the close of each three (3) month
period during the term.
Licensor has not received either the initial, lump sum Royalty payment or the first quarterly
Royalty payment due on March 23, 2010. KID and TRC are currently in active negotiations with
respect to, among other things, a potential restructuring of: (i) the consideration received by KID
for its former gift business; (ii) payments due to IP Sub under the License Agreement; and (iii)
ongoing arrangements between the parties and their respective affiliates. However, there can be no
assurance that any such defaulted payments under the License Agreement will be made in a timely
manner, or at all, or that such negotiations will result in any definitive agreement. See Item 7
Managements Discussion and Analysis of Financial Condition and Results of Operations under the
section captioned Other Events and Circumstances Pertaining to Liquidity for a discussion of the
Royalty defaults under the License Agreement with TRC. Further detail with respect to the License
Agreement can be found in our Current Report on Form 8-K filed on December 29, 2008.
Employees
As of December 31, 2009, we employed approximately 340 persons. We consider our employee
relations to be good. Most of our employees are not covered by a collective bargaining agreement,
although approximately 21 Sassy employees, representing approximately 6% of our total employees,
were represented by a collective bargaining agreement as of December 31, 2009.
Government Regulation
Certain of our products are subject to the provisions of, among other laws, the Federal
Hazardous Substances Act, the Federal Consumer Product Safety Act and the Federal Consumer Product
Safety Improvement Act. Those laws empower the Consumer Product Safety Commission (the CPSC) to
protect consumers from certain hazardous articles by regulating their use or excluding them from
the market and requiring the recall of products that are found to be potentially hazardous. The
CPSCs determination is subject to judicial review. Similar laws exist in some states and cities in
the United States and in certain foreign jurisdictions in which our products are sold. We maintain
a quality control program in order to comply with such laws, and we believe we are in substantial
compliance with all the foregoing laws. Notwithstanding the foregoing, no assurance can be made
that all products are or will be free from hazards or defects. See Item 1A, Risk Factors Product
liability, product recalls and other claims relating to the use of our products could increase our
costs.
Corporate Governance and Available Information
We make available a wide variety of information free of charge on our website at
www.kidbrandsinc.com. Our reports that are filed or furnished with the United States Securities and
Exchange Commission (the SEC), including our Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and any amendments to such reports, are available on our
website as soon as reasonably practicable after the reports are electronically filed with or
furnished to the SEC. Our website also contains news releases, financial information, company
profiles and certain corporate governance information, including current versions of our Complaint
Procedures for Accounting and Auditing Matters, Corporate Governance Guidelines, Code of
Business Conduct and Ethics, Code of Ethics for Principal Executive Officer and Senior Financial
Officers, Criteria and Procedures with respect to Selection and Evaluation of Directors and
Communications with the Board of Directors, and the charters of the Audit Committee, the
Compensation Committee and the Nominating/Governance Committee of the Board of Directors. To access
our SEC reports or amendments, log onto our website and then click onto Investor Relations on the
main menu and then onto the SEC Filings link near the bottom of the page. Mailed copies of such
information can be
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obtained free of charge by writing to us at Kid Brands, Inc., 1800 Valley Road,
Wayne, New Jersey 07470, Attention: Corporate Secretary. The contents of our websites are not
incorporated into this filing.
ITEM 1A. | RISK FACTORS |
The risks and uncertainties described below constitute the material risks pertaining to our
business. If any of the events or circumstances described in the following risk factors actually
occurs, our business, financial
condition or results of operations could be materially adversely affected. In such cases, the
trading price of our common stock could decline.
Our net sales and profitability depend on our ability to continue to conceive, design and market
products that appeal to consumers.
The introduction of new products is critical in our industry and to our growth strategy. A
significant percentage of our product line is replaced each year with new products. Our business
depends on our ability to continue to conceive, design and market new products and upon continuing
market acceptance of our product offerings. Rapidly changing consumer preferences and trends make
it difficult to predict how long consumer demand for our existing products will continue or which
new products will be successful. Our current products may not continue to be popular or new
products that we introduce may not achieve adequate consumer acceptance for us to recover
development, manufacturing, marketing and other costs. A decline in consumer demand for our
products, our failure to develop new products on a timely basis in anticipation of changing
consumer preferences or the failure of our new products to achieve and sustain consumer acceptance
could reduce our net sales and profitability. In addition, changes in customer preferences leave
us vulnerable to an increased risk of inventory obsolescence. Thus, our ability to manage our
inventories properly is an important factor in our operations. Inventory shortages can adversely
affect the timing of shipments to customers and diminish sales and brand loyalty. Conversely,
excess inventories can result in lower gross margins due to the excessive discounts and markdowns
that might be necessary to reduce inventory levels. Our inability to effectively manage our
inventory could have a material adverse effect on our business, financial condition and results of
operations.
Gross margin could be adversely affected by several factors.
Gross margin may be adversely affected in the future by increases in vendor costs (including
as a result of increases in the cost of raw materials or fluctuations in foreign currency exchange
rates), excess inventory, obsolescence charges, changes in shipment volume, price competition and
changes in channels of distribution or in the mix of products sold. For example, increased costs in
the PRC, primarily for labor, raw materials and the impact of certain tax laws, as well as the
appreciation of the Chinese Yuan against the U.S. dollar, have at times negatively impacted our
gross margins. In addition, increased pressure from major retailers, primarily as a result of
prevailing economic conditions, to offer additional mark-downs and other credits or price
concessions to clear existing inventory and secure new product placements, may also negatively
impact our margins. Economic conditions, such as rising fuel prices and currency exchange
fluctuations, may also adversely impact our margins.
In addition, our Kids Line and CoCaLo businesses use significant quantities of cotton, either
in the form of cotton fabric or cotton-polyester fabric. Cotton is subject to ongoing price
fluctuations because it is an agricultural product impacted by changing weather patterns, disease
and other factors, such as supply and demand considerations, both domestically and internationally.
In addition, increased oil prices affect key components of the raw material prices in many of our
products. Significant increases in the prices of cotton or oil could adversely affect our gross
margins and our operations.
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The state of the economy may impact our business.
Economic conditions have deteriorated significantly in many of the countries and regions in
which we do business and may remain depressed for the foreseeable future. Global economic
conditions have been challenged by slowing growth and the sub-prime debt devaluation crisis,
causing worldwide liquidity and credit concerns. Continuing adverse global economic conditions in
our markets would likely negatively impact our business, which could result in:
| Reduced demand for our products; | ||
| Increased price competition for our products; | ||
| Increased risk of excess and obsolete inventories; | ||
| Limitations in the capital resources available to us and others with whom we conduct business; | ||
| Increased risk in the collectability of accounts receivable from our customers; | ||
| Increased risk of potential reserves for doubtful accounts and write-offs of accounts receivable; | ||
| Higher operating costs as a percentage of revenues; and | ||
| Delays in signing or failing to sign customer contracts or signing customer agreements at reduced purchase levels. |
In addition, our operations and performance depend significantly on levels of consumer
spending, which have deteriorated significantly in many countries and regions, including without
limitation the United States, and may remain depressed for the foreseeable future. For example,
some of the factors that could influence the levels of consumer spending include consumer
confidence, increases in fuel and other energy costs, conditions in the residential real estate and
mortgage markets, stock market conditions, labor and healthcare costs, access to credit and other
macroeconomic factors affecting consumer spending behavior.
These potential effects of the current global financial crisis are difficult to forecast and
mitigate. As a consequence, our operating results for any particular period may be difficult to
predict, and, therefore, prior results are not necessarily indicative of results to be expected in
future periods. Any of the foregoing effects could have a material adverse effect on our business,
results of operations, and financial condition and could adversely affect our stock price.
If the national and world-wide financial crisis intensifies, further 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.
If sufficient internal funds are not available from our operations, we may be required to
further rely on the banking and credit markets to meet our financial commitments and short-term
liquidity needs. Disruptions in the capital and credit markets, as have been experienced during
2008 and 2009, 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.
Longer term disruptions in the capital and credit markets as a result of uncertainty, changing
or increased regulation, reduced alternatives, or failures of significant financial institutions
could adversely affect our access to liquidity needed for our business. Any disruption 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
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can be arranged. Such measures could
include deferring capital expenditures, and reducing or eliminating discretionary uses of cash.
Competition in our markets could reduce our net sales and profitability.
We operate in highly competitive markets. Certain of our competitors have greater brand
recognition and greater financial, technical, marketing and other resources than we have. In
addition, we may face competition from new participants in our markets because the infant and
juvenile product industry has limited barriers to entry.
Many of our principal customers are large mass merchandisers. The rapid growth of these large
mass merchandisers, together with changes in consumer shopping patterns, have contributed to the
formation of dominant multi-category retailers that have strong negotiating power with suppliers.
Current trends among retailers include fostering high levels of competition among suppliers,
demanding innovative new products and requiring suppliers to maintain or reduce product prices and
deliver products with shorter lead times. Other trends are for retailers to import products
directly from factory sources and to source and sell products under their own private label brands
that compete with our products.
The combination of these market influences has created an intensely competitive environment in
which our principal customers continuously evaluate which product suppliers to use, resulting in
downward pricing pressures and the need for consumer-meaningful brands, the ongoing introduction
and commercialization of innovative new products, continuing improvements in customer service, and
the maintenance of strong relationships with large, high-volume purchasers. We also face the risk
of changes in the strategy or structure of our major retailer customers, such as overall store and
inventory reductions and retailer consolidation. The resulting risks include possible loss of
sales, reduced profitability and limited ability to recover cost increases through price increases.
We also experience price competition for our products, competition for shelf space at
retailers and competition for licenses, all of which may increase in the future. If we cannot
compete successfully in the future, our net sales and profitability will likely decline.
To compete successfully, we must develop and maintain consumer-meaningful brands.
Our ability to compete successfully also depends increasingly on our ability to develop and
maintain consumer-meaningful brands so that our retailer customers will need our products to meet
consumer demand. The development and maintenance of such brands requires significant investment in
brand building and marketing initiatives, although any such investment may not deliver the
anticipated results.
Our debt covenants may affect our liquidity or limit our ability to complete acquisitions, incur
debt, make investments, sell assets, merge or complete other significant transactions.
Our current credit agreement includes provisions that place limitations on a number of our
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; dispose
of or sell assets; or enter into acquisitions, mergers or similar transactions. These covenants
could restrict our ability to pursue opportunities to expand our business operations.
We are required to make prepayments of our debt upon the occurrence of certain transactions,
including most asset sales or debt or equity issuances and extraordinary receipts.
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Inability to maintain compliance with the bank covenants.
Our ability to maintain compliance with the financial and other covenants in our current
credit agreement is dependent upon our ability to continue to execute our business model and
current operational plans. See The state of the economy may impact our business above. If an
event of default in such covenants occurs and is continuing, among other things, the lenders may
accelerate the loans, declare the commitments thereunder to be terminated, seize collateral or take
other actions of secured creditors. If the loans are accelerated or commitments terminated, we
could face substantial liquidity problems and may be forced to dispose of material assets or
operations, seek to obtain equity capital, or restructure or refinance our indebtedness. Such
alternative measures may not be available or successful. Also, our bank covenants may limit our
ability to dispose of material assets or operations or to restructure or refinance our
indebtedness. Even if we
are able to restructure or refinance our indebtedness, the economic terms may not be favorable
to us. In addition, an event of default under our credit agreement could result in a cross-default
under certain license agreements that we maintain. All of the foregoing could have serious
consequences to our financial condition and results of operations and could cause us to become
bankrupt or insolvent.
Our cash flows and capital resources may be insufficient to make required payments on our
indebtedness.
Our ability to generate cash to meet scheduled payments with respect to our debt depends on
our financial and operating performance, which, in turn, is subject to prevailing economic and
competitive conditions and the other factors discussed in this Risk Factors section. If our cash
flow and capital resources are insufficient to fund our debt service obligations, we could face
substantial liquidity problems and may be forced to dispose of material assets or operations, seek
to obtain equity capital, or restructure or refinance our indebtedness. As discussed in the
immediately preceding risk factor, such alternative measures may not be successful and may not
permit us to meet our scheduled debt services obligations. The breach of any covenants or
restrictions in our credit agreement could result in a default thereunder, which would permit the
lenders to take the actions discussed in the immediately preceding risk factor. In addition, an
event of default under our credit agreement could result in a cross-default under certain license
agreements that we maintain. As discussed above, this could have serious consequences to our
financial condition and results of operations and could cause us to become bankrupt or insolvent.
If we lose key personnel we may not be able to achieve our objectives.
We are dependent on the continued efforts of various members of senior management, as well as
senior executives of several of our subsidiaries. If for any reason, these or other key members of
management do not continue to be active in management, our business, financial condition or results
of operations could be adversely affected. We cannot assure you that we will be able to continue to
attract and retain senior executives or other personnel necessary for the continued success of our
business.
Our business is dependent on several large customers.
The continued success of our infant and juvenile businesses depends on our ability to continue
to sell our products to several large mass market retailers. In particular, Toys R Us, Inc. and
Babies R Us, Inc. (considered together) and Target accounted for approximately 46.9% and 12.3%,
respectively, of our consolidated gross sales from continuing operations during 2009. We typically
do not have long-term contracts with our customers and the loss of the foregoing customers or one
or more of our other large customers could have a material adverse affect on our results of
operations. In addition, our success depends upon the continuing willingness of large retailers to
purchase and provide shelf space for our products. Our access to shelf space at retailers for our
products may be reduced by store closings, consolidation among these retailers, competition from
other products or stricter requirements for infant and juvenile products by retailers that we may
not be able to meet. An adverse change in our relationship with, or the financial viability of, one
or more of our customers could reduce our net sales and profitability.
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We may not be able to collect outstanding accounts receivable from our major retail customers.
Certain of our retail customers purchase large quantities of our products on credit, which may
cause a concentration of accounts receivable among some of our largest customers. Our profitability
may be harmed if one or more of our largest customers were unable or unwilling to pay these
accounts receivable when due or demand credits or other concessions for products they are unable to
sell or for other reasons.
Federal and state statutes allow courts, under certain specific circumstances, to void purchase
transactions in the event of the bankruptcy of the purchaser.
Under current federal bankruptcy law and comparable provisions of state fraudulent transfer or
fraudulent conveyance laws, in the event of the bankruptcy of a purchaser of the Companys assets,
the sale
transaction may be voided or cancelled, and damages imposed on the Company, if, among other
things, such purchaser, at the time the transaction was consummated, received less than reasonably
equivalent value for the consideration paid; and either was insolvent or rendered insolvent by
reason of such transaction. The measures of insolvency for purposes of fraudulent transfer or
conveyance laws vary depending upon the particular law applied in any proceeding to determine
whether a fraudulent transfer or conveyance has occurred. With respect to the Gift Sale, we believe
that, on the basis of historical financial information, operating history and other factors, TRC
did receive reasonably equivalent value for the consideration paid by TRC, and that TRC was neither
insolvent prior or subsequent to the consummation of the transaction. We cannot assure you,
however, as to what standard a court would apply in making these determinations or that a court
would agree with our conclusions in this regard. In addition, although we obtained a solvency
opinion in connection with this transaction confirming our position, we cannot assure what weight,
if any, would be accorded thereto by a court.
We rely on foreign suppliers, primarily in the PRC, to manufacture most of our products, which
subjects us to numerous international business risks that could increase our costs or disrupt the
supply of our products.
Approximately 67% of our dollar volume of purchases for our continuing operations are
attributable to manufacturers in the PRC. The supplier accounting for the greatest dollar volume of
purchases for our continuing operations accounted for approximately 20% and the five largest
suppliers accounted for approximately 46% in the aggregate during 2009. While we believe that there
are many other manufacturing sources available for our product lines, difficulties encountered by
one or several of our larger suppliers such as a fire, accident, natural disaster or an outbreak of
illness (e.g., H1N1, SARS or avian or other flu) at one or more of their facilities, could halt or
disrupt production at the affected facilities, delay the completion of orders, cause the
cancellation of orders, delay the introduction of new products or cause us to miss a selling season
applicable to some of our products. In addition, our international operations subject us to certain
other risks, including:
| economic and political instability; | ||
| restrictive actions by foreign governments; | ||
| greater difficulty enforcing intellectual property rights and weaker laws protecting intellectual property rights; | ||
| changes in import duties or import or export restrictions; | ||
| delays in shipping of product and unloading of product through ports, as well as timely rail/truck delivery to our warehouses and/or a customers warehouse; | ||
| complications in complying with the laws and policies of the United States affecting the importation of goods, including duties, quotas and taxes; | ||
| complications in complying with trade and foreign tax laws; and | ||
| the effects of terrorist activity, armed conflict and epidemics. |
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Any of these risks could disrupt the supply of our products or increase our expenses. The
costs of compliance with trade and foreign tax laws may increase our expenses and actual or alleged
violations of such laws could result in enforcement actions or financial penalties that could
result in substantial costs. In addition, the introduction of certain social programs in the PRC or
otherwise will likely increase the cost of doing business for certain of our manufacturers, which
could increase our manufacturing costs.
Currency exchange rate fluctuations could increase our expenses.
Our net sales are primarily denominated in U.S. dollars, except for a small amount of net
sales denominated in U.K. pounds, Australian dollars and Euros. Our purchases of finished goods
from Eastern Asian manufacturers are denominated in U.S. dollars. Expenses for these manufacturers
are denominated in Chinese
Yuan or other Eastern Asian currencies. As a result, any material increase in the value of the
Yuan (or such other currencies) relative to the U.S. or Australian dollars or the U.K. pound would
increase the prices at which we purchase finished goods and therefore could adversely affect our
profitability. We are also subject to exchange rate risk relating to transfers of funds denominated
in U.K. pounds, Australian dollars or Euros from our foreign subsidiaries to the United States.
Product liability, product recalls and other claims relating to the use of our products could
increase our costs.
We face product liability risks relating to the use of our products. We also must comply with
a variety of product safety and product testing regulations. In particular, our products are
subject to, among other statutes and regulations, the Consumer Product Safety Act, the Federal
Hazardous Substances Act (FHSA) and the Consumer Product Safety Improvement Act (CPSIA), which
empower the Consumer Product Safety Commission (the CPSC), to take action against hazards
presented by consumer products, including adjudication and promulgation of regulations and uniform
safety standards. With expanded authority under the CPSIA, the CPSC has and continues to adopt new
regulations for safety and products testing that apply to substantially all of our products. These
new regulations have or likely will significantly increase the regulatory requirements governing
the manufacture and sale of childrens products and increase the potential penalties for
noncompliance with applicable regulations. The CPSC has the authority to exclude from the market
and recall certain consumer products that are found to be potentially hazardous. Consumer product
safety laws also exist in some states and cities within the United States and in Canada, Australia
and Europe, as well as certain other countries. While we take the steps we believe are necessary to
comply with these laws and regulations, there can be no assurance that we will be in compliance in
the future. If we fail to comply with these laws and regulations, or if we face product liability
claims, we may be subject to damage awards or settlement costs that exceed any available insurance
coverage and we may incur significant costs in complying with recall requirements. Furthermore,
concerns about potential liability may lead us to recall voluntarily selected products. For
instance, following the receipt of consumer complaints that certain drop-side cribs manufactured by
LaJobi did not work properly when the locking device was damaged or broken, we recently notified the CPSC of our intention to undertake
voluntary corrective action with respect to such cribs. With the exception of one child who
received a bruise, we are unaware of any injuries associated with these cribs. The financial
impact of the proposed corrective action, an estimate of which has been accrued in the three months
ended December 31, 2009, is not expected to be material.
Recalls or post-manufacture repairs of our products could harm our reputation, increase our
costs or reduce our net sales. Governments and regulatory agencies in the markets where we
manufacture and sell products may enact additional regulations relating to product safety and
consumer protection in the future that may adversely impact childrens products, including the
categories of products that we produce and sell. In addition, one or more of our customers might
require changes or impose their own standards for our products, such as the non-use of certain
materials. Complying with existing or any such additional regulations or requirements could impose
increased costs on our business. Similarly, increased penalties for non-compliance could subject us
to greater expense in the event any of our products were found to not comply with such
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regulations. Furthermore, substantially all of our licenses give the licensor the right to terminate the license
agreement if any products marketed under the license are subject to a product liability claim,
recall or similar violations of product safety regulations or if we breach covenants relating to
the safety of the products or their compliance with product safety regulations. A termination of a
license could adversely affect our net sales. Even if a product liability claim is without merit,
the claim could harm our reputation and divert managements attention and resources from our
business.
Competition for licenses could increase our licensing costs or limit our ability to market
products.
We market a portion of our products through licenses with other parties. These licenses are
generally limited in scope and duration and generally authorize the sale of specific licensed
products on an exclusive or nonexclusive basis. Our license agreements often require us to make
minimum guaranteed royalty payments that may exceed the amount we are able to generate from actual
sales of the licensed products. Any termination of or failure to renew our significant licenses, or
inability to develop and enter into new licenses, could limit our
ability to market our licensed products or develop new products, and could reduce our net
sales and profitability. Competition for licenses could require us to pay licensors higher
royalties and higher minimum guaranteed payments in order to obtain or retain attractive licenses,
which could increase our expenses. In addition, licenses granted to other parties, whether or not
exclusive, could limit our ability to market products, including products we currently market,
which could cause our net sales and profitability to decline.
Trademark infringement or other intellectual property claims relating to our products could
increase our costs.
We have from time to time received claims of alleged infringement of intellectual property
relating to certain of our products, and we may face similar claims in the future. The defense of
intellectual property litigation can be both costly and disruptive of the time and resources of our
management, even if the claim is without merit. We also may be required to pay substantial damages
or settlement costs to resolve intellectual property litigation. In addition, these claims could
materially harm our brand name, reputation and operations.
We may experience difficulties in integrating strategic acquisitions.
As part of our growth strategy, we may pursue acquisitions that are consistent with our
mission and enable us to leverage our competitive strengths. The integration of acquired companies
and their operations into our operations involves a number of risks including:
| possible failure to maintain customer, licensor and other relationships after the closing of the transaction of the acquired company; | ||
| the acquired business may experience losses which could adversely affect our profitability; | ||
| unanticipated costs relating to the integration of acquired businesses may increase our expenses; | ||
| difficulties in achieving planned cost-savings and synergies may increase our expenses or decrease our net sales; | ||
| diversion of managements attention could impair their ability to effectively manage our business operations, and unanticipated management or operational problems or liabilities may adversely affect our profitability and financial condition; or | ||
| possible failure to obtain any necessary consents to the transfer of licenses or other agreements of the acquired company. |
Additionally, we financed our acquisitions of Kids Line, LaJobi and CoCaLo with senior debt
financing. This debt leverage, or additional leverage that may be incurred with any other future
acquisitions, could adversely affect our profitability and limit our ability to capitalize on
future business opportunities.
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Disruptions in our current information technology systems or difficulties in implementing
alternative information technology systems could harm our business.
System failure or malfunctioning in our information technology systems may result in
disruption of operations and the inability to process transactions and could adversely affect our
financial results. In addition, we currently intend to commence the implementation in 2010 of a new
consolidated information technology system for our operations, which we believe will provide
greater efficiencies, lower costs 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 costs of an aggregate of approximately $1.3 million, a
substantial portion of which is expected to be incurred in 2010, and 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.
A limited number of our shareholders can exert significant influence over us.
As reported in various Schedules 13D filed with the SEC, (i) various investment funds and
accounts managed by Prentice Capital Management, LP, and (ii) D. E. Shaw Laminar Portfolios,
L.L.C., beneficially own approximately 20.4% and 20.4%, respectively, of the outstanding shares of
our common stock. Prentice and Laminar each currently has the right to nominate two members of our
Board of Directors. This share ownership would permit these and other large stockholders to exert
significant influence over the outcome of stockholder votes, including votes concerning the
election of directors, by-law amendments, possible mergers, corporate control contests and other
significant corporate transactions.
Changes in our effective tax rate may have an adverse effect on our results of operations.
Our future effective tax rate and the amount of our provision for income taxes may be
adversely affected by a number of factors, including:
| adjustments to estimated taxes upon finalization of various tax returns; | ||
| increases in expenses not deductible for tax purposes; | ||
| changes in available tax credits; | ||
| changes in share-based compensation expense; | ||
| changes in the valuation of our deferred tax assets and liabilities; | ||
| changes in accounting standards or tax laws and regulations, or interpretations thereof; | ||
| the jurisdictions in which profits are determined to be earned and taxed; | ||
| the resolution of issues arising from uncertain positions and tax audits with various tax authorities; and | ||
| penalties and/or interest expense that we may be required to recognize on liabilities associated with uncertain tax positions. |
Any significant increase in our future effective tax rates could adversely impact our net
income for future periods.
Actual results differing from estimates.
If actual events, circumstances, outcomes and amounts differ from judgments, assumptions and
estimates made or used in determining the amount of certain assets (including the amount of
recoverability of property, plant and equipment, intangible assets, valuation allowances for
receivables, inventories and deferred
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income tax assets), liabilities (including accruals for
income taxes and liabilities) and or other items reflected in our consolidated financial
statements, it could adversely affect our results of operations and financial condition.
Increased costs associated with corporate governance compliance may affect our results of
operations.
The Sarbanes Oxley Act of 2002 has required changes in some of our corporate governance and
securities disclosure and compliance practices, and requires ongoing review of our internal control
procedures. These developments have increased our legal compliance and financial reporting costs,
and to the extent that we identify areas of our disclosures controls and procedures and/or internal
controls requiring improvement we may have to incur additional costs and divert managements time
and attention. Any such action could adversely affect our results of operations and financial
condition.
If our divested gift business fails to satisfy certain obligations relating to their operations, we
could face third-party claims seeking to hold us liable for those obligations.
In December of 2008, we completed the Gift Sale. We remain contingently liable to third
parties for some obligations of the gift business, such as a real estate lease assumed by the buyer
in the transaction, and may remain contingently liable for certain contracts and other obligations
that have not been novated, in either case if such buyer fails to meet its obligations. Our
financial condition and results of operations could be adversely affected if we receive any such
third-party claims.
The trading price of our common stock has been volatile and investors in our common stock may
experience substantial losses.
The trading price of our common stock has been volatile and may continue to be volatile in the
future. The trading price of our common stock could decline or fluctuate in response to a variety
of factors, including:
| changes in financial estimates of our net sales and operating results; | ||
| buy/sell recommendations by securities analysts; | ||
| the timing of announcements by us or our competitors concerning significant product developments, acquisitions or financial performance; | ||
| fluctuation in our quarterly operating results; | ||
| other economic or external factors; | ||
| our failure to meet the performance estimates of securities analysts or investors; | ||
| substantial sales of our common stock or the registration of substantial shares for sale; or | ||
| general stock market conditions. |
You may be unable to sell your stock at or above your purchase price.
If we fail to maintain compliance with the listing standards of the New York Stock Exchange, our
common stock may be delisted therefrom.
Our common stock is currently listed on the New York Stock Exchange (NYSE). We may fail to
comply with the continued listing requirements of the NYSE, which may result in the delisting of
our common stock. The NYSE rules require, among other things, that the minimum listing price of our
common stock be at least $1.00 for more than 30 consecutive trading days, and that our average
market capitalization be at least $15 million over any 30 consecutive trading day period.
Delisting would have an adverse effect on the liquidity of our common stock and, as a result, the
market price for our common stock might become more volatile. Delisting could also make it more
difficult for us to raise additional capital. As of March 19, 2010, our 30 day
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average market
capitalization was approximately $111.0 million and our 30 trading day average stock price was
$5.14.
We do not anticipate paying regular dividends on our common stock in the foreseeable future, so any
short-term return on your investment will depend on the market price of our common stock.
The covenants in our credit agreement limit our ability to pay dividends to our shareholders.
No assurance, therefore, may be given that there will be any future dividends declared or that
future dividend declarations, if any, will be commensurate in amount or frequency with past
dividends.
Terrorist attacks and threats may disrupt our operations and negatively impact our revenues, costs
and stock price.
The terrorist attacks of September 11, 2001 in the U.S., the U.S. response to those attacks
and the resulting decline in consumer confidence had a substantial adverse effect on the U.S.
economy. Any similar future events may disrupt our operations directly or indirectly by affecting
the operations of our customers. In addition, these events have had and may continue to have an
adverse impact on the U.S. economy in general and on consumer confidence and spending in
particular, which could harm our revenues. Any new terrorist events or threats could have a
negative effect on the U.S. and world financial markets generally, which could reduce the price of
our common stock and may limit the capital resources available to us and others with whom we
conduct business. If any of these events occur, they could have a significant adverse effect on our
results of operations and could result in increased volatility in the market price of our common
stock.
Various restrictions in our charter documents, policies, New Jersey law and our credit agreement
could prevent or delay a change in control of us which is not supported by our board of directors.
We are subject to a number of provisions in our charter documents, policies, New Jersey law
and our credit agreement that may discourage, delay or prevent a merger, acquisition or change of
control that a stockholder may consider favorable. These anti-takeover provisions include:
advance notice procedures for nominations of candidates for election as directors and for
stockholder proposals to be considered at stockholders meetings;
the absence of cumulative voting in the election of directors;
covenants in our credit agreement restricting mergers, asset sales and similar transactions
and a provision in our credit agreement that triggers an event of default upon certain acquisitions
by a person or group of persons with beneficial ownership of 50.1% or more of our outstanding
common stock; and
the New Jersey Shareholders Protection Act.
The New Jersey Shareholders Protection Act, as it pertains to us, prohibits, among other
things, a merger, consolidation, specified asset sale, specified issuance or transfer of stock, or
other similar business combination or disposition between the Company and any beneficial owner of
10% or more of our voting stock for a period of five years after such interested stockholder
acquires 10% or more of our voting stock, unless the transaction is approved by our board of
directors before such interested stockholder acquires 10% or more of our voting stock. In addition,
no such transaction shall occur at any time unless: (1) the transaction is approved by our board of
directors before the interested stockholder acquires 10% or more of our voting stock, (2) the
transaction is approved by the holders of two-thirds of our voting stock excluding shares of our
voting stock owned by such interested stockholder or (3) (A) the aggregate consideration received
per share by stockholders in such transaction is at least equal to the higher of (i) the highest
per share price (including any brokerage commissions, transfer taxes and soliciting dealers fees)
paid by the interested stockholder (x) within the 5-year period preceding the announcement date of
such transaction or (y) within the 5-year period
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preceding, or in the transaction, in which the
stockholder became an interested stockholder, whichever is higher, in each case plus specified
interest, less the value of dividends paid since that earliest date, up to the amount of such
interest, and (ii) the market value per share of common stock on the announcement date of such
transaction or on the date the interested stockholder became an interested stockholder, whichever
is higher, plus specified interest, less the value of dividends paid since that date, up to the
amount of such interest, (B) the consideration in the transaction received by stockholders is in
cash or in the same form as the interested stockholder used to acquire the largest number of shares
previously acquired by it, and (C) after the date the interested stockholder became an interested
stockholder, and prior to the consummation of the transaction, such interested stockholder has not
become the beneficial owner of additional shares of our stock, except (w) as part of the
transaction which resulted in the interested stockholder becoming an interested stockholder, (x) by
virtue of proportionate stock splits, stock dividends or other distributions not constituting a
transaction covered by the New Jersey Shareholders Protection Act, (y) through a transaction
meeting the conditions of paragraph (B) above and this paragraph (C) or (z) through purchase by the
interested stockholder at any price, which, if that price had been paid in an otherwise permissible
transaction under the New Jersey Shareholders Protection Act, the
announcement date and consummation date of which were the date of that purchase, would have
satisfied the requirements of paragraphs (A) and (B) above.
We have granted stock options, stock appreciation rights, restricted stock and restricted stock
units to certain management employees and directors as compensation, which may depress our stock
price and result in dilution to our common stockholders.
As of March 19, 2010, options to purchase approximately 880,615 shares of our common stock
were outstanding, 46% of which are currently vested; 1,266,193 stock appreciation rights have been
issued, 16% of which are currently vested; 56,980 non-vested shares of restricted stock are
outstanding; and 188,370 non-vested restricted stock units are outstanding. Our Equity Incentive
Plan allows for the granting of additional incentive stock options, non-qualified stock options,
stock appreciation rights, stock units, restricted and non-restricted shares and/or dividend
equivalent rights, up to a total of 1.5 million shares (plus additional shares in the event of
specified circumstances). If the market price of our common stock rises above the exercise price of
outstanding vested options, holders of those securities may exercise their options and sell the
common stock acquired upon exercise of such options in the open market. Sales of a substantial
number of shares of our common stock in the public market by holders of exercised vested options,
vested restricted stock, vested stock appreciation rights and/or vested restricted stock units
settled in or exercised for stock may depress the prevailing market price for our common stock and
could impair our ability to raise capital through the future sale of our equity securities.
Additionally, if the holders of outstanding vested options exercise those options, our common
stockholders will incur dilution. The exercise price of all common stock options is subject to
adjustment upon stock dividends, splits and combinations, as well as anti-dilution adjustments as
set forth in the relevant award agreement.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
ITEM 2. | PROPERTIES |
We own an office and distribution facility used by Sassy in Kentwood, Michigan. We lease
additional office and distribution facilities located in South Gate, California; and Cranbury, New
Jersey. We also sublease office space in Wayne, New Jersey (from TRC), and lease office space in
Bannockburn, Illinois and Irvine, California, and until December 31, 2009, Costa Mesa, California.
We also sublease from TRC office space and distribution facilities in Eastleigh, Hampshire England
and Sydney, Australia. See Note 13 of Notes to Consolidated Financial Statements and Item 13,
Certain Relationships and Related Transactions and Director Independence, for more information
regarding our Costa Mesa lease.
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Bank of America, N.A. and certain of its affiliates, as administrative agent for the lenders
under our current credit agreement, has a lien on substantially all of our assets. Such lien
includes a mortgage on the real property located at 2305 Breton Industrial Park Drive, S.E.,
Kentwood, Michigan. See Note 8 of Notes to Consolidated Financial Statements.
We believe that our facilities are maintained in good operating condition and are, in the
aggregate, adequate for our purposes. At December 31, 2009, we were obligated under operating lease
agreements (principally for buildings and other leased facilities) for remaining lease terms
ranging from 6 months to 7.6 years. See Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations Contractual Obligations. Also see Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operations Off-Balance Sheet
Arrangements for a description of our contingent liability with respect to a lease assumed by TRC
in connection with the sale of the Gift Business and Note 19 of Notes to the Consolidated Financial
Statements.
ITEM 3. | LEGAL PROCEEDINGS |
In the ordinary course of its business, we are party to various copyright, patent and
trademark infringement, unfair competition, breach of contract, customs, employment and other legal
actions incidental to our business, as plaintiff or defendant. In the opinion of management, the
amount of ultimate liability with respect to these actions will not materially adversely affect our
consolidated results of operations, financial condition or cash flows.
ITEM 4. | REMOVED AND RESERVED |
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides information with respect to our executive officers as of March
19, 2010. All officers are elected by the Board of Directors and may be removed with or without
cause by the Board. As is discussed under the section captioned Debt Financings in Managements
Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital
Resources, all of our operations are currently conducted through our subsidiaries. As a result, we
have determined that it is appropriate to include the leaders of each of our principal business
units as executive officers, even where such leaders are employed by our subsidiaries. As a result,
Lawrence Bivona, President of LaJobi, Inc.; David Sabin, President of Kids Line, LLC; Richard F.
Schaub, Jr., President of Sassy, Inc. and Renee Pepys-Lowe, President of CoCaLo, Inc. are each
deemed to be executive officers.
NAME | AGE | POSITION WITH THE COMPANY | ||||
Bruce G. Crain(1)
|
49 | President and Chief Executive Officer | ||||
Marc S. Goldfarb
|
46 | Senior Vice President, General Counsel and Corporate Secretary | ||||
Guy A. Paglinco
|
52 | Vice President, Chief Financial Officer | ||||
Lawrence Bivona
|
54 | President of LaJobi, Inc. | ||||
David Sabin
|
60 | President of Kids Line, LLC | ||||
Richard F. Schaub, Jr.
|
50 | President of Sassy, Inc. | ||||
Renee Pepys-Lowe
|
45 | President of CoCaLo, Inc. |
(1) | Member of our Board of Directors |
Bruce G. Crain joined the Company as President and Chief Executive Officer and a member of our
Board of Directors in December 2007. From March 2007 until December 2007, he provided consulting
services to the Company and to Prentice Capital Management, L.P. and D.E. Shaw & Co., L.P.
Previously, he served in various executive capacities with Blyth, Inc, a NYSE-listed, multi-channel
designer and marketer of home décor and gift products from 1997 to September 2006, including Senior
Vice President (Corporate) from 2002 to 2006, a member of the Chairmans Office Executive Committee
from 2004 to 2006, Group President of the worldwide Wholesale Group segment from 2004 to 2006,
President of the Home Fragrance Group from 2002 to 2004 and President of the European Affiliate
Group from 1999 to 2001.
Marc S. Goldfarb joined the Company as Vice President, General Counsel and Corporate Secretary
in September 2005. In November 2006, he was promoted to the position of Senior Vice President.
Prior to joining the Company, from January 2003 to September 2005, Mr. Goldfarb was Vice President,
General Counsel and Corporate Secretary of Journal Register Company, a publicly traded newspaper
publishing company. From July 1998 to January 2003, he served as Managing Director and General
Counsel of The Vertical Group, an international private equity firm. Prior to that, Mr. Goldfarb
was a Partner at Bachner, Tally, Polevoy & Misher LLP, a law firm.
Guy A. Paglinco joined the Company as Vice PresidentCorporate Controller in September 2006,
and was promoted to Vice President and Chief Accounting Officer of the Company as of November 13,
2007, Interim Chief Financial Officer as of January 30, 2009, and Chief Financial Officer as of
August 14, 2009. Immediately prior to joining the Company, Mr. Paglinco served in various roles at
Emerson Radio Corp., an AMEX-listed international distributor of consumer electronic products,
including Chief Financial Officer from 2004-2006, and Corporate Controller from 1998-2004.
Lawrence Bivona joined the Company as President of LaJobi, Inc. upon its acquisition in April
2008. Prior to such acquisition, he served as President of LaJobi Industries, Inc. (the predecessor
of LaJobi) since he co-founded the company in 1994.
David Sabin joined the Company as Executive Vice President of Kids Line on December 7, 2009,
and effective January 1, 2010, assumed the position of President of Kids Line. From 1988 to 2006,
Mr. Sabin was a
founder and Chairman of Salton, Inc., a designer, marketer and distributor of branded small
appliances, home
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décor and personal care products under well-recognized brands such as Salton®,
George Foreman®, Westinghouse® and Toastmaster®. Since 2008, Mr. Sabin has served as President of
Greystone Brands, Ltd., a house-wares company, where he led sales and marketing efforts to launch
several new products domestically and internationally and established new licensing opportunities
for several well-known brands. Mr. Sabin has also held several other executive and managerial
positions in the home décor and tabletop industries.
Richard F. Schaub, Jr. joined the Company as President of Sassy, Inc. on February 17, 2010.
From 2007 to 2009, he was the General Manager of RC2/Learning Curve Brands Mother, Infant and
Toddler Group. From 2000 to 2007, he held various Senior Vice President Sales positions at RC2.
Prior to his tenure at RC2, Mr. Schaub held various management and sales leadership roles at
infant and juvenile product category leaders including Maclaren, Evenflo, Priss Prints and Dolly.
Earlier in his career, he was a buyer and marketing director for Child World, a juvenile retailer
with 181 stores.
Renee Pepys-Lowe joined the Company as President of CoCaLo, Inc. upon its acquisition in April
2008. Prior to such acquisition, she served as President and Chief Executive Officer of CoCaLo
since she founded the company in 1998.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
At March 19, 2010, our Common Stock was held by approximately 454 shareholders of record. Our
Common Stock has been traded on the New York Stock Exchange, under the symbol KID since September
22, 2009, and prior thereto under the symbol RUS since its initial public offering on March 29,
1984. The following table sets forth the high and low sale prices of our Common Stock, as set forth
on the New York Stock Exchange Composite Tape, for the calendar periods indicated:
2009 | 2008 | |||||||||||||||
HIGH | LOW | HIGH | LOW | |||||||||||||
First Quarter |
$ | 4.56 | $ | 0.88 | $ | 15.54 | $ | 11.87 | ||||||||
Second Quarter |
4.76 | 1.31 | 14.52 | 7.97 | ||||||||||||
Third Quarter |
6.63 | 3.05 | 10.24 | 6.20 | ||||||||||||
Fourth Quarter |
6.79 | 3.64 | 7.18 | 1.05 |
The Company has not paid a dividend since April 2005 and currently does not anticipate paying any
dividends.
In accordance with the terms of our current credit agreement, we are restricted in our ability
to pay dividends to our shareholders. See Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations Liquidity and Capital Resources and Note 8 of
Notes to Consolidated Financial Statements, for a description of our current credit agreement,
including such dividend restrictions.
See Item 12 of this Annual Report on Form 10-K for Equity Compensation Plan Information.
CUMULATIVE TOTAL STOCKHOLDER RETURN
The following line graph compares the performance of our Common Stock during the five-year
period ended December 31, 2009 with the S&P 500 Index and an index composed of other publicly
traded companies that we consider to be our peers (the Peer Group). The graph assumes an
investment of $100 on December 31, 2004 in our Common Stock, the S&P 500 Index and the Peer Group
index.
The Peer Group is comprised of the following publicly traded companies: (1) Crown Crafts,
Inc.; (2) Dorel Industries, Inc.; (3) RC2 Corporation; and (4) Summer Infant, Inc.
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The Peer Group returns are weighted by market capitalization as of the beginning of each year.
Cumulative total return assumes reinvestment of dividends. The performance shown is not necessarily
indicative of future performance.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Kid Brands, Inc. The S&P 500 Index
And A Peer Group
Among Kid Brands, Inc. The S&P 500 Index
And A Peer Group
$ 100 invested on 12/31/04 In stock or Index, including reinvestment of dividends.
Fiscal year ending December 31.
Fiscal year ending December 31.
Copyright©
2010 S&P, a division of The McGrew-Hill Companies Inc. All rights reserved.
12/04 | 12/05 | 12/06 | 12/07 | 12/08 | 12/09 | |||||||||||||||||||||||||||
Kid Brands, Inc. |
100.00 | 50.32 | 68.08 | 72.09 | 13.09 | 19.30 | ||||||||||||||||||||||||||
S&P 500 |
100.00 | 104.91 | 121.48 | 128.16 | 80.74 | 102.11 | ||||||||||||||||||||||||||
Peer Group |
100.00 | 85.39 | 103.02 | 87.47 | 55.13 | 77.32 | ||||||||||||||||||||||||||
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ITEM 6. | SELECTED FINANCIAL DATA |
The following table presents our selected financial data. The table should be read in
conjunction with Item 7, Managements Discussion and Analysis of Financial Condition and Results
of Operations, and Item 8, Financial Statements and Supplementary Data, of this Annual Report on
Form 10-K. As of December 23, 2008, we completed the Gift Sale. As a result, the Gift Business has
been reflected as discontinued operations in our consolidated Statements of Operations for 2008 and
all periods prior thereto presented in this Annual Report on Form 10-K, including the data in the
table below. The December 31, 2008 Balance Sheet data presented do not include the Gift Business
assets and liabilities as a result of the consummation of the Gift Sale as of December 23, 2008,
but do include the fair values of the consideration received from the Gift Sale. The Balance Sheet
data presented for the years ended December 31, 2007 and prior thereto, included in the table
below, have not been restated.
Years Ended December 31,* | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(Dollars in Thousands, Except Per Share Data) | ||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||
Net Sales |
$ | 243,936 | $ | 229,194 | $ | 163,066 | $ | 147,100 | $ | 131,519 | ||||||||||
Cost of Sales |
168,741 | 160,470 | 111,361 | 84,338 | 76,232 | |||||||||||||||
Income (Loss) from continuing
operations |
10,992 | (118,986 | ) | 16,915 | 34,077 | 29,790 | ||||||||||||||
Income (Loss) before Provision
(Benefit) for Income Taxes |
4,543 | (128,371 | ) | 13,222 | 24,429 | 14,245 | ||||||||||||||
Income Tax (Benefit)Provision
(Benefit) |
(7,162 | ) | (29,031 | ) | 4,127 | 10,363 | 3,593 | |||||||||||||
Income (Loss) from continuing
operations |
11,705 | (99,340 | ) | 9,095 | 14,066 | 10,652 | ||||||||||||||
Income (Loss) from discontinued
operations, net of tax |
| (12,216 | ) | (187 | ) | (23,502 | ) | (45,751 | ) | |||||||||||
Net Income (Loss) |
11,705 | (111,556 | ) | 8,908 | (9,436 | ) | (35,099 | ) | ||||||||||||
Basic Earnings (Loss) Per Share: |
||||||||||||||||||||
Income (Loss) from continuing
operations |
0.55 | (4.66 | ) | 0.43 | 0.67 | 0.51 | ||||||||||||||
Income (Loss) from
discontinued operations |
| (0.57 | ) | (0.01 | ) | (1.12 | ) | (2.20 | ) | |||||||||||
Net Earnings (Loss) per
common share |
0. 55 | (5.23 | ) | 0.42 | (0.45 | ) | (1.69 | ) | ||||||||||||
Diluted Income (Loss) Per Share: |
||||||||||||||||||||
Income (Loss) from continuing
operations |
0.54 | (4.66 | ) | 0.43 | 0.67 | 0.51 | ||||||||||||||
Income (Loss) from
discontinued operations |
| (0.57 | ) | (0.01 | ) | (1.12 | ) | (2.20 | ) | |||||||||||
Net Earnings (Loss) per
common share |
0.54 | (5.23 | ) | 0.42 | (0.45 | ) | (1.69 | ) | ||||||||||||
Dividends Per Share |
0.00 | 0.00 | 0.00 | 0.00 | 0.10 | |||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Working Capital |
$ | 28,982 | $ | 25,046 | $ | 63,133 | $ | 45,872 | $ | 71,511 | ||||||||||
Property, Plant and Equipment, net |
4,251 | 4,466 | 13,093 | 13,993 | 17,856 | |||||||||||||||
Total Assets |
206,878 | 235,434 | 340,123 | 303,767 | 328,961 | |||||||||||||||
Debt |
83,125 | 102,812 | 66,844 | 54,332 | 76,517 | |||||||||||||||
Shareholders Equity |
91,094 | 77,876 | 204,639 | 190,664 | 193,854 |
* | The above results include LaJobi and CoCaLo since their acquisitions on April 2, 2008. |
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ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The financial and business analysis below provides information that 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 Item 6, Selected Financial Data, and our consolidated financial statements and
accompanying Notes to Consolidated Financial Statements set forth in Item 8 below.
Overview
We are a leading designer, importer, marketer and distributor of branded infant and juvenile
consumer products. We generated annual net sales from continuing operations of approximately $244
million in 2009. On September 22, 2009, as a result of the Gift Sale and our resulting focus on our
infant and juvenile business, we changed our corporate name to Kid Brands, Inc. and our NYSE ticker
symbol to KID.
Shift to Infant and Juvenile Business
During 2008, we strategically refocused our business to further enhance our position in the
infant and juvenile business. In April 2008, we consummated the acquisitions of each of the net
assets of LaJobi Industries, Inc. and the capital stock of CoCaLo, Inc. LaJobi designs, imports
and sells infant and juvenile furniture and related products, and CoCaLo designs, imports and sells
infant bedding and related accessories. In addition, on December 23, 2008, we sold our Gift
Business.
Together with our 2004 acquisition of Kids Line which designs, imports and sells infant
bedding and related accessories and our 2002 acquisition of Sassy which designs, imports and
sells developmental toys and feeding, bath and baby care items the foregoing actions have
focused our operations on the infant and juvenile business, and have enabled us to offer a more
complete range of products for the baby nursery.
The results of operations of LaJobi and CoCaLo are included in our consolidated results of
operations from and after April 2, 2008; accordingly, our fiscal year 2008 results include only
nine months of activity from these acquired entities.
Prior to December 23, 2008, we had two reportable segments: (i) our infant and juvenile
segment; and (ii) our gift segment. As a result of the Gift Sale, we currently operate in one
infant and juvenile segment. Consistent with our strategy of building a confederation of
complementary businesses, each subsidiary in our infant and juvenile business is operated
substantially independently by a separate group of managers. Our senior corporate management,
together with senior management of our subsidiaries, coordinates the operations of all of our
businesses and seeks to identify cross-marketing, procurement and other complementary business
opportunities.
Prior to the Gift Sale, the Gift Business designed, manufactured through third parties and
marketed a wide variety of gift products, primarily under the trademarks Russ ®
and Applause®, to retail stores throughout the United States and the world via
wholly-owned subsidiaries and independent distributors. The consideration received from the Gift
Sale (the Gift Sale Consideration) was recorded at fair value as of December 23, 2008 at
approximately $19.8 million, and consisted of a Note Receivable of $15.3 million and an Investment
of $4.5 million (for 19.9% of the common stock of TRC) on our consolidated balance sheet. The Gift
Sale Consideration, as well as a related license to TRC of the Russ® and
Applause® trademarks and trade names, is discussed in more detail in Liquidity
and Capital Resources below under the section captioned Recent Disposition. In connection with
the Gift Sale, we recognized an impairment charge on the Applause® trademark of
approximately $6.7 million in 2008, which was recorded in impairment of goodwill and intangibles of
continuing operations.
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During the quarter ended June 30, 2009, in conjunction with the preparation of our financial
statements for such period, a series of impairment indicators emerged in connection with TRC, which
resulted in the Company recording in the quarter ended June 30, 2009 certain non-cash impairment
charges and a valuation reserve aggregating $15.6 million against the Gift Sale Consideration and
the Applause® trade name.
Prior to its divestiture, the Gift Business had revenues of approximately $124.0 million in
2008 (through December 23, 2008), and $168.1 million in 2007. The loss from discontinued
operations, net of tax, for 2008 was $12.2 million. This loss included: (i) an impairment charge
of $7.0 million related to the write-down of fixed assets; (ii) a $1.0 million charge in cost of
goods sold related to the write-off of Shining Stars website development; and (iii) a $1.6 million
inventory charge in the second quarter of 2008 in connection with the unfavorable results of a
voluntary quality test on certain gift products. Losses from discontinued operations, net of tax,
were $187,000 in 2007.
As a result of the Gift Sale, the Consolidated Statements of Operations have been restated to
show the Gift Business as discontinued operations for the years ended December 31, 2008 and 2007.
The Consolidated Balance Sheet of December 31, 2008 does not include the Gift Business assets and
liabilities, as a result of the consummation of the Gift Sale as of December 23, 2008, but includes
the fair value of the consideration received from the Gift Sale, which was fully impaired and
reserved during the quarter ended June 30, 2009. The Consolidated Statements of Cash Flows for the
years ended December 31, 2008 and 2007 have not been restated. The accompanying Notes to
Consolidated Financial Statements have been restated to reflect the discontinued operations
presentation described above for the basic financial statements where applicable.
Continuing Operations
Our infant and juvenile business which currently consists of Kids Line, LaJobi, Sassy and
CoCaLo designs, manufactures through third parties, imports and sells products in a number of
complementary categories including, among others: infant bedding and related nursery accessories
(Kids Line and CoCaLo); infant furniture and related products (LaJobi); and developmental toys and
feeding, bath and baby care items with features that address the various stages of an infants
early years (Sassy). Our products are sold primarily to retailers in North America, the UK and
Australia, including large, national retail accounts and independent retailers (including toy,
specialty, food, drug, apparel and other retailers). We maintain a direct sales force and
distribution network to serve our customers in the United States, the UK and Australia, and sell
through independent manufacturers representatives and distributors in certain other countries.
International sales from continuing operations, defined as sales outside of the United States,
including export sales, constituted 8.1%, 8.2% and 9.5% of our net sales for the years ended
December 31, 2009, 2008 and 2007, respectively. One of our strategies is to increase our
international sales, both in absolute terms and as a percentage of total sales, as we seek to
expand our presence outside of the U.S.
Aside from funds supplied 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 our
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.
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Our products are manufactured by third parties, principally located in the PRC and other
Eastern Asian countries. Our purchases of finished products from these manufacturers are primarily
denominated in U.S.
dollars. Expenses for these manufacturers are primarily denominated in Chinese Yuan. As a
result, any material increase in the value of the Yuan relative to the U.S. dollar, as occurred in
2008 and 2007, would increase our expenses, and therefore, adversely affects our profitability.
Conversely, a small portion of our revenues are generated by our subsidiaries in Australia and the
U.K. and are denominated primarily in those local currencies. Any material increase in the value of
the U.S. dollar relative to the value of the Australian dollar or British pound would result in a
decrease in the amount of these revenues upon their translation into U.S. dollars for reporting
purposes.
If our suppliers experience increased raw materials, labor or other costs, and pass along such
cost increases to us through higher prices for finished goods, our cost of sales would increase. To
the extent we are unable to pass such price increases along to our customers, our gross margins
would decrease. For example, during 2008, increased costs in the PRC, primarily for raw materials,
labor, taxes and currency lead our vendors to raise our prices, resulting in increased cost of
goods sold and reduced gross margins in 2008.
Our gross profit may not be comparable to those of other entities, since some entities include
the costs of warehousing, outbound handling costs and outbound shipping costs in their costs of
sales. We account for the above expenses as operating expenses and classify them under selling,
general and administrative expenses. For the fiscal years ended December 31, 2009, 2008 and 2007,
the costs of warehousing, outbound handling costs and outbound shipping costs were $7.0 million,
$8.8 million, and $6.1 million, respectively. The majority of outbound shipping costs are paid by
our customers, as many of our customers pick up their goods at our distribution centers.
During 2008 and 2009, our gross profit margins have declined as a result of: (i) a shift in
product mix toward lower margin products, including increased sales of licensed products, which
typically generate lower margins as a result of required royalty payments (which we record in cost
of goods sold); and (ii) our acquisition of LaJobi, which has experienced significant sales growth
but which also typically generates lower gross margins, on average, than our other business units;
and (iii) increased pressure from major retailers, primarily as a result of prevailing economic
conditions, to offer additional mark downs and other pricing accommodations to clear existing
inventory and secure new product placements.
We continue to seek to mitigate this margin pressure through the development of new products
that can command higher pricing, the identification of alternative, lower-cost sources of supply
and, where possible, price increases. Particularly in the mass market, our ability to increase
prices or resist requests for mark-downs and/or other allowances is limited by market and
competitive factors, and, while we have implemented selective price increases, we have generally
focused on maintaining (or increasing) shelf space at retailers and, as a result, our market share.
Goodwill and Intangible Assets
Prior to 2009, we carried significant goodwill and intangible assets on our balance sheet. We
recorded, in our consolidated financial statements for the fourth quarter and fiscal year ended
December 31, 2008, non-cash impairment charges to: (i) goodwill related to our continuing infant
and juvenile operations in the approximate amount of $130.2 million, in connection with our annual
assessment of goodwill; (ii) our Applause® trademark, in connection with the
Gift Sale of $6.7 million; and (iii) intangible assets related to our continuing infant and
juvenile operations of $3.7 million, in connection with our annual assessment of indefinite-life
intangible assets. As all of our goodwill was impaired in 2008, as discussed below, there was no
annual goodwill assessment for our continuing operations as of December 31, 2009. However, we have
performed an annual assessment of our indefinite lived intangible assets as of December 31, 2009.
There was no impairment of the Companys other intangible assets (either definite-lived or
indefinite-lived) during 2009, except for the impairment to the Applause trade name during the
second quarter of 2009 in the amount of $0.8
27
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million. See Critical Accounting Policies below for
a discussion of impairment charges incurred in 2008 and our evaluation of the useful life of our
Kids Line customer relationships.
With respect to the goodwill previously carried on our balance sheet, we performed our annual
goodwill assessment for our continuing operations as of December 31, 2008. The goodwill impairment
test is accomplished using a two-step process. The first step compares the fair value of a
reporting unit that has goodwill to its carrying value. The fair value of a reporting unit using
discounted cash flow analysis is estimated. If the fair value of the reporting unit is determined
to be less than its carrying value, a second step is performed to compute the amount of goodwill
impairment, if any. Step two allocates the fair value of the reporting unit to the reporting units
net assets other than goodwill. The excess of the fair value of the reporting unit (using
fair-value based tests) over the amounts assigned to its net assets other than goodwill is
considered the implied fair value of the reporting units goodwill. The implied fair value of the
reporting units goodwill is then compared to the carrying value of its goodwill. Any shortfall
represents the amount of goodwill impairment.
As of December 31, 2008, after completing the first step of the impairment test, there was
indication of impairment because our carrying value exceeded our market capitalization.
Managements determination of the fair value of the goodwill for the second step in the
analysis was performed with the assistance of a public accounting firm, other than the Companys
auditors. The analysis used a variety of testing methods that are judgmental in nature and involve
the use of significant estimates and assumptions, including: (i) the Companys operating forecasts;
(ii) revenue growth rates; (iii) risk-commensurate discount rates and costs of capital; and (iv)
price or market multiples. The Companys estimates of revenues and costs are based on historical
data, various internal estimates and a variety of external sources, and are developed by the
Companys routine long-range planning process.
During the year ended December 31, 2008, stock market valuations in general, and the Companys
stock price in particular, declined substantially. Such decline in the Companys stock price in
2008 indicated the potential for impairment of the Companys goodwill. In addition, during 2008,
gross margins for Kids Line and Sassy declined substantially from the previous year, and Sassy
terminated a distribution agreement (the MAM Agreement) that had contributed approximately $22
million in revenues that was not expected to recur in 2009. These adverse conditions, resulting in
part from difficult equity and credit market conditions, led the Company to revise its estimates
with respect to net sales and gross margins, which in turn negatively impacted our cash flow
forecasts for Kids Line and Sassy. These revised cash flows forecasts resulted in the conclusion in
the second step of the analysis that the Companys goodwill was entirely impaired (it was
determined to have no implied value), and as a result, the Company recorded a goodwill impairment
charge in the amount of $130.2 million, representing the shortfall between the fair value of its
continuing operations for which goodwill had been allocated and its carrying value.
Inventory
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
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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 prove to be less favorable than we have projected, however, additional inventory
reserves may be necessary in future periods.
General Economic Conditions as they Impact Our Business
Economic conditions have deteriorated significantly in the United States and many of the other
regions in which we do business and may remain depressed for the foreseeable future. Global
economic conditions have been challenged by slowing growth and the sub-prime debt devaluation
crisis, causing worldwide liquidity and credit concerns. Continuing adverse global economic
conditions in our markets may result in, among other things, (i) reduced demand for our products,
(ii) increased price competition for our products, and/or (iii) increased risk in the
collectability of cash from our customers. See Item 1A, Risk Factors The state of the economy
may impact our business. In addition, our operations and performance depend significantly on
levels of consumer spending, which have deteriorated significantly in many countries and regions as
a result of fluctuating energy costs, conditions in the residential real estate and mortgage
markets, stock market conditions, labor and healthcare costs, access to credit, consumer confidence
and other macroeconomic factors affecting consumer spending behavior.
In addition, if internal funds are not available from our operations, we may be required to
rely on the banking and credit markets to meet our financial commitments and short-term liquidity
needs. Continued disruptions in the capital and credit markets could adversely affect our ability
to draw on our bank revolving credit facility. Our access to funds under 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 Factors If the
national and world-wide financial crisis intensifies, potential disruptions in the credit markets
may adversely affect the availability and cost of short-term funds for liquidity requirements and
our ability to meet long-term commitments, which could adversely affect our results of operations,
cash flows, and financial condition.
Company Outlook
The principal elements of our global business strategy include:
| focusing on design-led and branded product development at each of our subsidiaries to enable us to continue to introduce compelling new products; | ||
| pursuing organic growth opportunities to capture additional market share, including: |
(i) | expanding our product offerings into related categories; | ||
(ii) | increasing our existing product penetration (selling more products to existing customer locations); | ||
(iii) | increasing our existing store penetration (selling to more store locations within each large, national retail customer); and | ||
(iv) | expanding and diversifying our distribution channels, with particular emphasis on sales into international markets; |
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| growing through licensing, distribution or other strategic alliances, including pursuing acquisition opportunities in businesses complementary to ours; | ||
| implementing strategies to further capture synergies within and between our confederation of businesses, through cross-marketing opportunities, consolidation of certain operational activities and other collaborative activities; and | ||
| continuing efforts to manage costs within each of our businesses. |
We believe that we have made substantial progress in successfully implementing this strategy.
As noted above, we acquired each of LaJobi and CoCaLo on April 2, 2008, which enabled us to
significantly expand our infant and juvenile business and offer a more complete range of products
for the baby nursery. We also sold our Gift Business on December 23, 2008, enabling us to focus our
efforts and resources on our infant and juvenile business. In addition, during 2008 and 2009, we
expanded our product line to offer products at a broader variety of price points and also added
several environmentally friendly products. For example, Kids Line significantly increased its sales
of Carters ® brand bedding separates, while Kids Line and CoCaLo each
introduced new organic, eco-friendly brands. CoCaLo also expanded and refined its CoCaLo Couture
brand, which targets higher price points. LaJobi also developed a new brand Nursery
101® which represents products at a lower price point than the rest of its
line. We have also expanded the collaborative activities between our business units, and co-develop
and cross-market certain products.
Effective December 2008, Sassy terminated its distribution agreement with MAM Babyartikel
GmbH, which accounted for approximately $22 million of sales in 2008 that did not recur in 2009,
and also terminated its license agreement with Leap Frog during 2008 due to unacceptable levels of
sales and profitability associated with this agreement. During the fourth quarter of 2008, Sassy
right-sized its operations in light of the termination of the MAM distribution agreement. Under
this plan, in addition to reducing approximately 30% of its full-time workforce, Sassy repositioned
its operations around its core strength as a developmental product company and developed new
products and packaging to support this effort.
As discussed in the section captioned Continuing Operations above, in the year ended
December 31, 2008, we recorded an impairment charge to goodwill in the approximate amount of $130.2
million, resulting from decreased cash flow forecasts due in part to adverse equity and credit
market conditions that caused, among other things, a sustained decrease in our stock price and a
continued challenging retail environment. As a result of the current challenging retail
environment, future sales and/or margins may be lower than what was historically forecasted, which
would negatively impact our prior cash flow forecasts. However, we expect the acquisitions of
LaJobi and CoCaLo to partially mitigate the impact of such lower forecasts. With the exception of
the impairment charge for the Applause trade name in the second quarter of 2009 in connection with
the impairment of the Gift Sale Consideration, no further impairments to intangible assets were
recorded in 2009; however, there can be no assurance that the outcome of future reviews will not
result in further impairment charges. Impairment assessments inherently involve judgments as to
assumptions about expected future cash flows and the impact of market conditions on those
assumptions. Future events and changing market conditions may impact our assumptions as to prices,
costs or other factors that may result in changes in our estimates of future cash flows. Although
we believe the assumptions we use in testing for impairment are reasonable, significant changes in
any of our assumptions could produce a significantly different result.
Basis of Presentation
As discussed above, as a result of the Gift Sale, the Consolidated Statement of Operations for
the year ended December 31, 2008 (and the discussion below) presents the Gift Business as
discontinued operations, and all prior periods presented in the Consolidated Statements of
Operations herein and the discussion below have been restated to conform with such presentation. In
addition, the results of operations of LaJobi and CoCaLo, each of which was acquired on April 2,
2008, are included in the consolidated results of operations from and after the date of acquisition
and, accordingly, the fiscal year 2008 results include only nine months of activity from these
acquired entities.
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Results of Operations
Year ended December 31, 2009 compared to year ended December 31, 2008
Net sales for the year ended December 31, 2009 increased 6.4% to $243.9 million, compared to
$229.2 million for the year ended December 31, 2008. This increase was primarily attributable to
the inclusion of $26.7 million in sales generated by LaJobi and CoCaLo in the first quarter of 2009
which were not included in the comparable period in 2008, as well as sales growth at LaJobi and
CoCaLo during the remainder of 2009, partially offset by a decline of $27.5 million in net sales
for Sassy. The decline in net sales at Sassy was largely the result of the termination of the MAM
Agreement, which generated approximately $22.0 million of net sales for Sassy in the year ended
December 31, 2008 that did not recur in 2009.
Gross
profit was $75.2 million, or 30.8% of net sales, for the year ended December 31, 2009,
as compared to $68.7 million or 30.0% of net sales, for the year ended December 31, 2008. Gross
profit margins increased primarily as a result of lower product and commodity prices and lower
prices resulting from the consolidation of suppliers (particularly
with respect to Kids Line and CoCaLo),
partially offset by: (i) sales mix changes resulting in higher sales of lower margin products,
including higher sales of licensed products, including Carters® and Graco® branded products; (ii)
increases in markdowns and advertising allowances provided to assist retailers in clearing existing
inventory and to secure product placements; and (iii) the inclusion in the first quarter of 2009 of
sales from LaJobi, which typically carry lower gross profit margins, on average, than our other
business units. On an absolute basis, gross profit increased primarily as a result of the increase
in net sales for 2009 and the impact of the increase in gross profit margins. This increase was
partially offset by lower gross profit at Sassy resulting from Sassys sales decline (partially
offset by Sassys significantly higher gross profit margins resulting from new branding and
packaging initiatives and new product development), as well as lower gross margins at Kids Line.
Selling, general and administrative expense was $48.6 million, or 19.9% of net sales, for the
year ended December 31, 2009, compared to $50.8 million, or 22.2% of net sales, for the year ended
December 31, 2008. Selling, general and administrative expense decreased on an absolute and
relative basis due to a heightened focus on containing discretionary expenses as a result of the
economic climate, partially offset by: (i) the inclusion in the first quarter of 2009 of
approximately $4.5 million of SG&A expenses from LaJobi and CoCaLo, which costs were not included
in SG&A for the first quarter of 2008; (ii) severance costs recorded in 2009 of approximately
$850,000 associated with two former executives; and (iii) increased investments across our
operations for trade shows and other business-building efforts.
In connection with an impairment test conducted during the preparation of the Companys
financial statements for the second quarter of 2009, triggered by the emergence of a series of
impairment indicators concerning TRC, (including the impact of macro-economic factors on TRC, the
deterioration of conditions in the gift market, and other TRC- specific factors, including
declining financial performance, operational and integration challenges and liquidity issues), the
Company concluded that the Gift Sale Consideration was fully impaired, and, in connection
therewith, recorded a non-cash charge to income/(loss) from continuing operations in the second
quarter of 2009 in an aggregate amount of $15.6 million ($4.5 million and $0.8 million,
respectively, against the investment in TRC and the Applause® trade name, and $10.3 million to
reserve against the difference between the note receivable and deferred revenue liability). As a
result of our annual goodwill impairment test during the fourth quarter of 2008, we concluded that
our goodwill was fully impaired and, as a result, recorded an aggregate non-cash impairment charge
to goodwill of $130.2 million in the fourth quarter of 2008. We also recorded an impairment charge
on the Applause ® trade name during the fourth quarter of 2008 in the amount of
$6.7 million in connection with the Gift Sale.
Other expense was $6.4 million for the year ended December 31, 2009 compared to $9.4 million
for the year ended December 31, 2008. The decrease was primarily attributable to a net favorable
change of $1.4 million in the fair value of an interest rate swap agreement entered into in
connection with our Credit Agreement in 2009 compared to a $2.1 million unfavorable change in 2008,
as well as lower borrowings and
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lower borrowing costs in 2009, partially offset by an approximately
$500,000 increase in deferred financing costs.
The income tax benefit for the year ended December 31, 2009 was $7.2 million as compared to an
income tax benefit from continuing operations of $29.0 million for the year ended December 31,
2008. The 2009 benefit primarily resulted from the lapse of the statute of limitations with respect to the Companys
2005 federal tax return, a decrease in valuation allowances related to intangible amortization, and
a decrease in valuation allowances related to foreign tax credit carry forwards related to overall
domestic losses previously generated by our former Gift business. The 2009 and 2008 effective tax
rates differed from the statutory rate primarily due to the release of the Companys tax reserve in
each year due to the respective closings of relevant statutes of limitations, and reductions in
valuation allowances.
As a result of the foregoing, income from continuing operations for the year ended December
31, 2009 was $11.7 million, compared to a loss from continuing operations of $99.3 million for the
year ended December 31, 2008.
Loss from discontinued operations, net of tax, was $12.2 million for the year ended December
31, 2008. Net sales for the Gift Business were $124.0 million for the year ended December 31, 2008.
The income tax benefit from discontinued operations was a benefit of $4.1 million for the year
ended December 31, 2008.
As a result of the foregoing, net income for the year ended December 31, 2009 was $11.7
million, or $0.54 per diluted share, compared to a net loss of $111.6 million, or ($5.23) per
diluted share, for the year ended December 31, 2008.
Year ended December 31, 2008 compared to year ended December 31, 2007
The Companys net sales for the year ended December 31, 2008 increased by 40.6% to $229.2
million, compared to $163.1 million for the year ended December 31, 2007. This increase was
attributable to the inclusion of sales generated by LaJobi and CoCaLo since their respective
acquisitions as of April 2, 2008, partially offset by an approximately $1.8 million aggregate
decline in net sales for Kids Line and Sassy. The decline in Kids Line and Sassy sales resulted
primarily from weakness in retail markets due to the economic slowdown and the resultant aggressive
inventory management by retailers, particularly in the fourth quarter of 2008.
Gross profit was $68.7 million, or 30.0% of net sales, for the year ended December 31, 2008,
as compared to gross profit of $51.7 million, or 31.7% of net sales, for the year ended December
31, 2007. Gross profit margin was negatively impacted in 2008 by: (i) competitive pricing
pressures; (ii) increased cost of goods sold resulting from higher raw material, labor and tax
expenses incurred by our suppliers, as well as the unfavorable impact of foreign currency exchange
rates; (iii) increased costs associated with product safety and compliance testing; (iv) a shift in
product mix (primarily due to higher sales of licensed products that carry lower margins); and (iv)
an aggregate impairment charge to infant and juvenile trade names of $3.7 million, or approximately
1.6% of net sales, recorded in the fourth quarter of 2008 in connection with the Companys testing
of intangible assets. Gross profit for fiscal 2007 was negatively impacted by aggregate impairment
charges (incurred in the third and fourth quarters of 2007) of $10 million (or 6.1% of net sales)
related to the MAM Agreement.
Selling, general and administrative expense was $50.8 million, or 22.2% of net sales, for the
year ended December 31, 2008, compared to $34.8 million, or 21.3% of net sales, for the year ended
December 31, 2007. Selling, general and administrative expense increased in absolute terms due to:
(i) the inclusion from April 2, 2008 of the results of operations from the LaJobi and CoCaLo
acquisitions, which costs were not included in the results of operations in 2007; and (ii) an
increase in non-cash share-based compensation expense that was approximately $1.4 million higher in
2008 as compared to 2007.
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As a result of our annual goodwill impairment test required by accounting standards, during
the fourth quarter of 2008, we concluded that our goodwill was fully impaired and, as a result,
recorded an aggregate non-cash impairment charge to goodwill of $130.2 million in the fourth
quarter of 2008. The majority of the
goodwill originated from the purchase of Kids Line in 2004. We also recorded an impairment
charge on the Applause ® trade name in the amount of $6.7 million in connection
with the sale of the Gift Business.
Other expense was $9.4 million for the year ended December 31, 2008 compared to $3.7 million
for the year ended December 31, 2007, an increase of $5.7 million. This increase was primarily
attributable to increased interest and interest-related charges, which resulted from additional
borrowing costs associated with the acquisitions of LaJobi and CoCaLo, the related write-off of
deferred financing and other costs incurred in connection with the expanded credit facility
necessitated by such acquisitions ($0.7 million) and unfavorable changes ($2.1 million) in the fair
value of an interest rate swap agreement required by such expanded credit facility.
(Loss) income from continuing operations before income tax was a loss of $128.4 million for
the year ended December 31, 2008 compared to income of $13.2 million for the year ended December
31, 2007. This decrease of $141.6 million was primarily the result of the $130.2 million goodwill
impairment charge discussed above, the impairment on the Applause® trade name
of $6.7 million as a result of the sale of the Gift Business, and the impairment in other trade
names of $3.7 million, resulting in aggregate impairment charges of $140.6 million recorded in the
year ended December 31, 2008, as well as the $5.7 million increase in interest and interest related
charges. The 2007 results include a $10 million impairment charge recorded in connection with the
MAM Agreement and a $0.9 million write-off of a note receivable from a 2004 disposition.
The income tax benefit on continuing operations for the year ended December 31, 2008 was $29.0
million as compared to an income tax expense on continuing operations of $4.1 million in 2007. The
Company recorded a current federal tax benefit of approximately $1.8 million primarily related to a
decrease in tax reserves associated with the expiration of the statute of limitations in various
jurisdictions during 2008, partially offset by foreign tax expense of approximately $0.6 million on
profitable foreign operations, and state income tax expense of approximately $0.6 million on
profitable operations in LaJobi. The Company recorded a federal deferred tax benefit of
approximately $19 million related to the deferred tax asset associated with tax amortization of
intangible assets relating to the Kids Line, Sassy, Applause, LaJobi and CoCaLo acquisitions. These
deferred tax assets are indefinite in nature for accounting purposes. In addition, the Company
recorded an additional tax benefit of approximately $9.4 million related to the reversals of
valuation allowances related to various tax reserves, foreign tax credit carry forwards,
contribution carry forwards and state NOL carry forwards, which the Company has determined that it
no longer needs as a result of the disposition of the Gift Business, which generated losses. The
Company has recorded valuation allowances against that portion of its deferred tax assets where
management believes it is more likely than not that the Company will not be able to realize such
deferred tax assets.
As a result of the foregoing, (loss) income from continuing operations for the year ended
December 31, 2008 was a loss of $99.3 million, compared to income from continuing operations of
$9.1 million, for the year ended December 31, 2007.
Loss from discontinued operations, net of tax, was $12.2 million in 2008 as compared to
$187,000 in 2007. This loss resulted from the sale of the Gift Business as of December 23, 2008,
and consists of three components: a loss from discontinued operations; a gain on disposition; and
the related income tax provision or benefit. Net sales for the Gift Business were $124.0 million
and $168.1 million for the years ended December 31, 2008 and 2007, respectively. The lower sales in
2008 were primarily attributable to decreases in sales of Shining Stars ®
products as compared to the prior year, and further weakness in the gift market as a result of the
continuing economic slowdown. Gross profit margins for the Gift Business were 40.0% for the year
ended December 31, 2008 as compared to 43.8% for the year ended December 31, 2007, as a result of
the impact of certain unusual charges during the second quarter of 2008 in the aggregate amount of
$2.9 million, which charges consisted of an inventory charge ($1.6 million), the non-cash
write-down of Shining Stars
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website development expenses ($1.0 million) and a gift segment
impairment charge ($0.3 million). As a percentage of sales, selling general and administrative
expenses for the Gift Business were 65.0% in 2008 compared to 44.8% in 2007. The primary reason for
this increase was an additional impairment charge of $6.7 million to write down fixed assets, which
was recorded in the second quarter of 2008, and the effect of fixed costs on a reduced
sale base. As a result of the foregoing factors, the loss from discontinued operations was
$17.3 million in 2008 as compared to $1.4 million for 2007. The gain on disposition was $0.9
million for the year ended December 31, 2008. This gain resulted from a valuation of the fair value
of the consideration received in the Gift Sale of approximately $19.8 million, recorded as Note
Receivable of $15.3 million and Investments of $4.5 million, which was offset by deferred revenue
of $5.0 million from licensing arrangements entered into with the buyer of the Gift Business (the
License Agreement) as compared to the book value of net assets exchanged. The income tax
provision (benefit) from discontinued operations was a benefit of $4.1 million in 2008 as compared
to a benefit of $1.2 million in 2007.
As a result of the foregoing, net loss for the year ended December 31, 2008 was a loss of
$111.6 million, or $(5.23) per diluted share, compared to net income of $8.9 million, or $0.42 per
diluted share, for the year ended December 31, 2007.
Liquidity and Capital Resources
Our principal sources of liquidity are cash flows from operations, cash and cash equivalents
and availability under our bank facility. Our operating activities generally provide sufficient
cash to fund our working capital requirements and, together with borrowings under our bank
facility, are expected to be sufficient to fund our operating needs and capital requirements for at
least the next 12 months. Any significant future business or product acquisitions may require
additional debt or equity financing.
The proceeds of our bank facility have historically been used to fund acquisitions, and cash
flows from operations are typically swept on a daily basis and utilized to pay down our revolving
credit facility and required amortization of our term loan. Accordingly, with the exception of
funding short-term working capital requirements (which are necessitated by our strategy of sweeping
cash to pay down debt), we typically do not actively utilize our revolving credit facility to fund
operations. As a result of this ability to generate sufficient cash flow to pay down our
indebtedness in recent periods, during the negotiations with our senior bank lenders in connection
with the Second Amendment (defined below), we determined that a reduced facility would still be
sufficient to meet our operating needs. Consequently, we agreed to reduce the maximum commitments
available under such facility from $175 million to $130 million. Notwithstanding such reduction,
which had the benefit of reducing the amount of unused facility fees that we are required to pay,
we continue to believe that our cash flows from operations and available capacity under our credit
facility will be sufficient to fund our operating needs and capital requirements for at least the
next 12 months, as described above.
As of December 31, 2009, the Company had cash and cash equivalents of $1.6 million compared to
$3.7 million at December 31, 2008. This decrease of $2.1 million primarily reflects the use of cash
coupled with cash generated by operations, to fund repayment of long term debt.
Net cash provided by operating activities was approximately $20.6 million for the year ended
December 31, 2009, compared to net cash provided by operating activities of approximately $25.5
million for the year ended December 31, 2008. Operating activities reflected net income of $11.7
million in 2009, which included full year results of LaJobi and CoCaLo and the write-down of the
Gift Sale Consideration of $15.6 million, as compared to a net (loss) of $111.6 million in 2008,
which included the 2008 non-cash impairment charges of an aggregate of $140.6 million. The 2008
operating cash flows also reflect the impact of the nine month results from the acquisitions of
LaJobi and CoCaLo and the disposition of the Gift Business, which resulted in net decreases in
accounts receivable and inventory, partially offset by decreases in accrued expenses.
Net cash used in investing activities was $0.8 million for the year ended December 31, 2009,
as compared to $79.7 million for the year ended December 31, 2008. Net cash used in investing
activities in 2009
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was primarily related to capital expenditures. Net cash used in investing
activities in 2008 was primarily related to: (i) the purchase of LaJobi ($52.0 million); (ii) the
purchase of CoCaLo ($16.6 million); (iii) sale of Gift Business cash of $5.2 million; and (iv) a
$3.6 million payment representing a portion of the Kids Line earnout consideration.
Net cash used in financing activities was $21.8 million for 2009 compared to net cash provided
by financing activities of $35.7 million in 2008. The net cash used in 2009 primarily reflects the
payment of long-term debt under the Credit Agreement. The cash provided by financing activities
for 2008 was primarily the result of borrowings under the Credit Agreement to fund the Companys
2008 acquisitions of LaJobi and CoCaLo.
As of December 31, 2009 and 2008, working capital was $29.0 million and $25.0 million,
respectively. The increase in working capital primarily results from: (i) income from continuing
operations of $11.7 million, and the use of the cash proceeds therefrom primarily to pay current
liabilities of $11.2 million; (ii) aggressive inventory management in light of economic conditions,
resulting in a $10.2 million reduction in inventory during the year ended December 31, 2009 as
compared to the year ended December 31, 2008; (iii) an increase in accounts receivable of $3.4
million, due to increased sales; and (iv) an increase in current deferred taxes of $1.7 million.
Recent Acquisitions
LaJobi
As of April 2, 2008, LaJobi, Inc. a newly-formed and indirect, wholly-owned Delaware
subsidiary of KID (LaJobi) consummated the transactions contemplated by an Asset Purchase
Agreement (the Asset Agreement) with LaJobi Industries, Inc., a New Jersey corporation
(Seller), and each of Lawrence Bivona and Joseph Bivona (collectively, the Stockholders), for
the purchase of substantially all of the assets and specified obligations of the business of the
Seller (the Business). The aggregate purchase price for the Business was equal to $50.0 million
(the $2.5 million deposited in escrow at the closing was released from escrow on October 2, 2009).
In addition, provided that the EBITDA of the Business, as defined in the Asset Agreement (the
LaJobi Earnout EBITDA) has grown at a compound annual growth rate (CAGR) of not less than 4%
during the three years ending December 31, 2010 (the Measurement Date), determined in accordance
with the Asset Agreement, LaJobi will pay to the Stockholders an amount (the LaJobi Earnout
Consideration) equal to a percentage of the Agreed Enterprise Value of LaJobi as of the
Measurement Date (subject to acceleration under certain limited circumstances), with the Agreed
Enterprise Value defined as the product of (i) the LaJobi Earnout EBITDA during the twelve (12)
months ending on the Measurement Date, multiplied by (ii) an applicable multiple (ranging from 5 to
9) depending on the specified levels of CAGR achieved. The LaJobi Earnout Consideration can range
between $0 and a maximum of $15.0 million. In addition, we have agreed to pay 1% of the Agreed
Enterprise Value to a financial institution (which has been previously paid a finders fee in
connection with the Assets Agreement), payable in the same manner and at the same time as the
LaJobi Earnout Consideration is paid to the Stockholders.
CoCaLo
On April 2, 2008, a newly-formed, wholly-owned Delaware subsidiary of KID, I&J Holdco, Inc.
(the CoCaLo Buyer), consummated the transactions contemplated by the Stock Purchase Agreement
(the Stock Agreement) with each of Renee Pepys Lowe and Stanley Lowe (collectively, the
Sellers), for the purchase of all of the issued and outstanding capital stock of CoCaLo, Inc., a
California corporation (CoCaLo). The aggregate base purchase price payable for CoCaLo was equal
to: (i)$16.0 million; minus (ii) the aggregate debt of CoCaLo outstanding at the closing of the
acquisition (including accrued interest) of $4.0 million; minus (iii) specified transaction
expenses ($0.3 million); plus (iv) a working capital adjustment of $1.5 million paid by the
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CoCaLo
Buyer. A portion of the purchase price ($1.6 million, which was discounted to $1.4 million for
financial statement purposes) was evidenced by a non-interest bearing promissory note and is being
paid in equal annual installments over a three-year period from the closing date. The first payment
of $533,000 was paid during April 2009.
In addition, the CoCaLo Buyer will pay to the Sellers the following earnout consideration
amounts (the CoCaLo Earnout Consideration) with respect to CoCaLos performance for the aggregate
three year period ending December 31, 2010: (i) $666,667 will be paid for the achievement of
specified initial performance targets with respect to each of net sales, gross profit and specified
CoCaLo EBITDA (the latter combined with specified Kids Line EBITDA) (the Initial Targets), for a
maximum payment of $2.0 million in the event of achievement of the Initial Targets in all three
categories; and (ii) up to an additional $666,667 will be paid, on a sliding scale basis, for
achievement in excess of the Initial Targets up to specified maximum performance targets in each
category, for a potential additional payment of $2.0 million in the event of achievement of the
maximum targets in all three categories. The CoCaLo Earnout Consideration can range between $0 up
to an aggregate maximum of $4.0 million.
Any LaJobi Earnout Consideration and/or CoCaLo Earnout Consideration will be recorded as
additional goodwill when and if paid or, if earlier, when the amount of the Earnout Consideration
becomes probable and estimable.
The results of operations of LaJobi and CoCaLo and the fair value of assets acquired and
liabilities assumed are included in our consolidated financial statements beginning on their
acquisition date.
Detailed descriptions of the LaJobi and CoCaLo acquisitions can be found in the Companys
Current Report on Form 8-K filed on April 8, 2008.
Recent Disposition
On December 23, 2008, KID completed the sale of the Gift Business to The Russ Companies, Inc.
(TRC). The aggregate purchase price payable by TRC for the Gift Business was: (i) 199 shares of
the Common Stock, par value $0.001 per share, of TRC (the Buyer Common Shares), 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). During the 90-day period following the fifth anniversary of the consummation of the sale of
the Gift Business, KID will have the right to cause TRC to repurchase any Buyer Common Shares then
owned by KID, at its assumed original value (which was $6.0 million for all Buyer Common Shares),
as adjusted in the event that the number of Buyer Common Shares is adjusted, plus interest at an
annual rate of 5%, compounded annually. The consideration received from the Gift Sale was recorded
at fair value as of December 23, 2008 at approximately $19.8 million and was recorded as Note
Receivable of $15.3 million and Investment of $4.5 million on the Companys consolidated balance
sheet.
In addition, in connection with the sale of the Gift Business, our newly-formed, wholly-owned
Delaware limited liability company (the Licensor) executed a license agreement (the License
Agreement) with TRC. Pursuant to the License Agreement, TRC must 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 is due quarterly at the close of each
three-month period during the term. At any time during the term of the License Agreement, TRC shall
have the option to purchase all of the intellectual property subject to the License Agreement,
consisting generally of the Russ ® and Applause ®
trademarks and trade names (the Retained IP) from the Licensor for $5.0 million, to the extent
that at such time (i) the Seller Note shall have been paid in full (including all principal and
accrued interest with respect thereto), and (ii) there shall be no continuing default under the
License Agreement. If TRC does not purchase the Retained IP by December 23, 2013 (or nine months
thereafter, if applicable), the Licensor will have the option to require TRC to purchase all of the
Retained IP for $5.0 million. Licensor has not received either the initial, lump sum Royalty
payment or the first quarterly Royalty payment due on March 23, 2010. KID and TRC are currently in
active negotiations
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with respect to, among other things, a potential restructuring of: (i) the
consideration received by KID for its former gift business; (ii) payments due to IP Sub under the
License Agreement; and (iii) ongoing arrangements between the parties and their respective
affiliates. However, there can be no assurance that any such defaulted payments under the License
Agreement will be made in a timely manner, or at all, or that such negotiations will result in any
definitive agreement.
In connection with the preparation of the Companys financial statements for the second
quarter of 2009, a series of impairment indicators emerged in connection with TRC. These
indicators included the impact of current macro-economic factors on TRC, the deterioration of
conditions in the gift market, and other TRC-specific factors, including declining financial
performance, operational and integration challenges and liquidity issues. As a result of these
impairment indicators, the Company tested for impairment its 19.9% investment in TRC and critically
evaluated the collectibility of its $15.3 million note receivable from TRC. As a result of this
review, the Company determined that its 19.9% investment in TRC well as the Applause® trade name
were other than temporarily impaired and recorded non-cash charges of approximately $4.5 million
and $0.8 million, respectively, against these assets. The Company also recorded a $10.3 million
charge, to reserve against the difference between the note receivable and deferred revenue
liability. The aggregate impact of the actions resulted in a non-cash charge to income/ (loss)
from continuing operations in an aggregate amount of $15.6 million in the second quarter of 2009,
representing full impairment of the Gift Sale Consideration.
A detailed description of the Gift Sale can be found in the Companys Current Report on Form
8-K filed on December 29, 2008.
Debt Financings
Consolidated long-term debt at December 31, 2009 and December 31, 2008 consisted of the
following (in thousands):
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Term Loan (Credit Agreement) |
$ | 67,000 | $ | 89,200 | ||||
Note Payable (CoCaLo purchase) |
1,025 | 1,498 | ||||||
Total |
68,025 | 90,698 | ||||||
Less current portion |
13,533 | 14,933 | ||||||
Long-term debt |
$ | 54,492 | $ | 75,765 | ||||
At December 31, 2009 and December 31, 2008, there was approximately $15.1 million and $12.1
million, respectively, borrowed under the Revolving Loan (defined below), which is classified as
short-term debt. At December 31, 2009, Revolving Loan Availability was $31.4 million.
As of December 31, 2009, the applicable interest rate margins were: 4.00% for LIBOR Loans and
3.00% for Base Rate Loans. The weighted average interest rates for the outstanding loans as of
December 31, 2009 were as follows:
At December 31, 2009 | ||||||||
LIBOR Loans | Base Rate Loans | |||||||
Revolving Loan |
4.24 | % | 6.25 | % | ||||
Term Loan |
4.27 | % | 6.25 | % |
Credit Agreement Summary
In connection with the purchase of LaJobi and CoCaLo as of April 2, 2008, KID, Kids Line,
Sassy, the CoCaLo Buyer, LaJobi and CoCaLo (via a Joinder Agreement) entered into an Amended and
Restated Credit Agreement (the Credit Agreement) with certain financial institutions party
thereto (the Lenders), LaSalle Bank National Association, as Agent and Fronting Bank, Sovereign
Bank as Syndication Agent, Wachovia
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Bank, N.A. as Documentation Agent and Banc of America
Securities LLC as Lead Arranger. Kids Line, Sassy, the CoCaLo Buyer, LaJobi and CoCaLo are referred
to herein collectively as the Borrowers.
As of March 29, 2009 KID and the Borrowers entered into a Second Amendment to Credit Agreement
with the Lenders and the Agent (the Second Amendment). In connection therewith , KID pledged the
membership interest in IP Sub (in addition to the existing pledge of 100% of the stock of each of
the Borrowers to the Agent, KID became a guarantor under the Credit Agreement, and all of the
existing and future assets of
KID (subject to specified exceptions) were pledged as security (in addition to the existing
pledge of all existing and future assets of the Borrowers) for the obligations of all the
Borrowers.
As a result of the execution of the Second Amendment:
(i) The commitments now consist of: (a) a $50.0 million revolving credit facility (the
Revolving Loan), with a subfacility for letters of credit in an amount not to exceed $5.0
million, and (b) an $80.0 million term loan facility (the Term Loan).
(ii) The Loans under the Credit Agreement bear interest at a rate per annum equal to the Base
Rate (for Base Rate Loans) or the LIBOR Rate (for LIBOR Loans) at the option of the Borrowers, plus
an applicable margin, in accordance with a pricing grid based on the most recent quarter end
Total Debt to Covenant EBITDA Ratio. The applicable interest rate margins (to be added to the
applicable interest rate) under the Credit Agreement now range from 2.0% 4.25% for LIBOR Loans
and from 1.0% 3.25% for Base Rate Loans, based on a pricing grid set forth in the Second
Amendment. The Base Rate definition now includes a floor of 30 day LIBOR plus 1%.
(iii) The Credit Agreement now contains the following financial covenants: (a) a minimum Fixed
Charge Coverage Ratio of 1.25:1.00 for the fourth quarter of 2009 and the first quarter of 2010 and
1.35:1.00 for each fiscal quarter thereafter; (b) a maximum Total Debt to Covenant EBITDA Ratio of
3.50:1.00 for the fourth quarter of 2009, a step down to 3.25:1.00 for first three quarters of 2010
and, a step down to 2.75:1.00 for the fourth quarter of 2010 and each fiscal quarter thereafter;
and (c) an annual capital expenditure limitation. Covenant EBITDA, as defined in the Second
Amendment, is a non-GAAP financial measure used to determine our compliance with the minimum Fixed
Charge Coverage Ratio and Total Debt to Covenant EBITDA ratio, as well as to determine Total Debt
to Covenant EBITDA for purposes of the relevant interest rate margins applicable to the Loans under
the Credit Agreement, and whether certain dividends and repurchases can be made if other
pre-requisites described in the Second Amendment are met. Covenant EBITDA is determined on a
consolidated basis, and is defined generally as consolidated net income (after excluding specified
non-cash, non-recurring and other specified items), as adjusted for interest expense; income tax
expense; depreciation; amortization; other non-cash charges (gains); specified costs in connection
with each of our senior financing, specified acquisitions, and specified requirements under the
Credit Agreement; non-cash transaction losses (gains) due solely to fluctuations in currency
values; and specified costs in connection with the sale of our Gift Business. For purposes of the
Fixed Charge Coverage Ratio, Covenant EBITDA is further adjusted for unfinanced capital
expenditures; specified cash taxes and distributions pertaining thereto; and specified cash
dividends. The Borrowers were in compliance with all applicable financial covenants in the Credit
Agreement as of December 31, 2009.
(iv) The principal of the Term Loan is being repaid in quarterly installments of $3.25 million
on the last day of each fiscal quarter commencing with the quarter ended March 31, 2009 through
December 31, 2012, and a final payment of $28.0 million due on April 1, 2013.
(v) The Borrowers are required to make prepayments of the Term Loan upon the occurrence of
certain transactions, including most asset sales or debt or equity issuances, and extraordinary
receipts. In addition, IP Sub must make mandatory prepayments of 100% of any net cash proceeds of
any asset sale.
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(vi) The Second Amendment eliminated all restrictions on the ability of the Borrowers to
distribute cash to KID for the payment of KIDs overhead expenses. However, the Credit Agreement,
as amended contains significant restrictions on our ability to declare and pay dividends and on our
ability to repurchase or redeem stock.
(vii) The following fees are now applicable to the Credit Agreement: an agency fee of $35,000
per annum, an annual non-use fee of 0.55% to 0.80% of the unused amounts under the Revolving Loan,
as well as other customary fees as are set forth in the Credit
Agreement, as amended
(viii) The definition of Borrowing Base is 85% of eligible receivables plus the lesser of (x)
$25.0 million and (y) 55% of eligible inventory.
(ix) The Borrowers are required to maintain in effect Hedge Agreements that protect against
potential fluctuations in interest rates with respect to a minimum of 50% of the outstanding amount
of the Term Loan.
More detail with respect to these and other provisions of the Credit Agreement, as amended,
can be found in Note 8 of Notes to Consolidated Financial Statements. Historical information with
respect to the Credit Agreement prior to the Second Amendment can be found in Note 6 to Notes to
Unaudited Consolidated Financial Statements of the Companys Quarterly Report on Form 10-Q for the
quarter ended September 30, 2009.
Financing costs associated with the Revolving Loan and Term Loan are deferred and are
amortized over their contractual term. As a result of the Second Amendment, based upon the
Financial Accounting Standards Board (FASB) standard for deferred financing costs, the Company
recorded a non-cash charge to results of operations of approximately $0.4 million for the write off
of deferred financing costs in the year ended December 31, 2009.
Other Events and Circumstances Pertaining to Liquidity
See
Off-Balance-Sheet Arrangements below for a description
of: (i) KIDs contingent obligations
under a former Gift Business lease (a maximum potential remaining obligation of approximately $2.7
million as of December 31, 2009); and (ii) KIDs contingent obligations with respect to certain
contracts and other obligations that were not novated in connection with their transfer. No
payments have been made by KID in connection with the foregoing as of, the date of filing of this
Annual Report on Form 10-K, but there can be no assurance that payments will not be required of KID
in the future.
We are subject to legal proceedings and claims arising in the ordinary course of our business
that we believe will not have a material adverse impact on our consolidated financial condition,
results of operations or cash flows.
Following the receipt of consumer complaints that certain drop-side cribs manufactured by
LaJobi did not work properly when the locking device was damaged or broken, we recently notified the CPSC of our intention to undertake
voluntary corrective action with respect to such cribs. With the exception of one child who
received a bruise, we are unaware of any injuries associated with these cribs. The financial
impact of the proposed corrective action, an estimate of which has been accrued in the three months
ended December 31, 2009, is not expected to be material.
We currently intend to commence the implementation in 2010 of a new consolidated information
technology system for our operations, which we believe will provide greater efficiencies, lower
costs 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 costs of approximately $1.3 million, a substantial
portion of which is expected to be incurred in 2010 and is intended to be financed with borrowings under our
revolving credit facility. 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
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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.
Consistent with our past practices and in the normal course of our business, we regularly
review acquisition opportunities of varying sizes. We may consider the use of debt or equity
financing to fund potential acquisitions. Our current credit agreement includes provisions that
place limitations on our ability to enter into acquisitions, mergers or similar transactions, as
well as a number of other activities, including our ability to: incur additional debt; create liens
on our assets or make guarantees; make certain investments or loans; pay dividends; repurchase our
common stock; or dispose of or sell assets. These covenants could restrict our ability
to pursue opportunities to expand our business operations. We are required to make prepayments of
our debt upon the occurrence of certain transactions, including most asset sales or debt or equity
issuances and extraordinary receipts.
We have entered into certain transactions with certain parties who are or were considered
related parties, and these transactions are disclosed in Note 13 of Notes to Consolidated Financial
Statements and Item 13, Certain Relationships and Related Transactions and Director Independence.
Contractual Obligations
The following table summarizes our significant known contractual obligations as of December
31, 2009 and the future periods in which such obligations are expected to be settled in cash (in
thousands):
Total | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | ||||||||||||||||||||||
Operating Lease Obligations |
$ | 11,827 | $ | 2,380 | $ | 2,049 | $ | 1,945 | $ | 2,012 | $ | 941 | $ | 2,500 | ||||||||||||||
Capitalized Leases |
8 | 7 | 1 | | | | | |||||||||||||||||||||
Note Payable (1) |
1,067 | 533 | 534 | | | | | |||||||||||||||||||||
Purchase Obligations (2) |
35,108 | 35,108 | | | | | | |||||||||||||||||||||
Debt Repayment Obligations(3) |
67,000 | 13,000 | 13,000 | 13,000 | 28,000 | | | |||||||||||||||||||||
Interest on Debt Repayment
Obligations(4) |
6,729 | 2,723 | 2,138 | 1,553 | 315 | | | |||||||||||||||||||||
Royalty Obligations |
9,985 | 3,360 | 2,630 | 2,895 | 1,100 | | ||||||||||||||||||||||
Total Contractual
Obligations* |
$ | 131,724 | $ | 57,111 | $ | 20,352 | $ | 19,393 | $ | 31,427 | $ | 941 | $ | 2,500 | ||||||||||||||
(1) | Reflects note payable with respect to CoCaLo purchase. The present value of the note is $1,025,000 and the aggregate remaining imputed interest at 5.5% is $42,000. Upon the occurrence of an event of default under the note, the holder could elect to declare all amounts outstanding to be immediately due and payable. | |
(2) | The Companys purchase obligations consist primarily of purchase orders for inventory. | |
(3) | Reflects repayment obligations under the Second Amendment effective as of March 20, 2009. See Note 8 of Notes to Consolidated Financial Statements for a description of the Second Amendment, including amounts and dates of repayment obligations and provisions that create, increase and/or accelerate obligations thereunder. Excludes, as of December 31, 2009, approximately $15.1 million borrowed under the Revolving Loan. The estimated 2009 interest payment for this Revolving Loan using an assumed 4.5% interest rate is $0.7 million. Such amounts are estimates only and actual interest payments could differ materially. The Revolving Loan facility matures in April 2013, at which time any amounts outstanding are due and payable. | |
(4) | This amount reflects estimated interest payments on the long-term debt repayment obligation as of December 31, 2009 calculated using an assumed interest rate of 4.5% and then-current levels of outstanding long-term debt. The foregoing amounts are estimates only and actual interest payments could differ materially. This amount also excludes interest on amounts borrowed under the Revolving Loan, discussed in footnote (3) above. | |
* | Does not include contingent obligations under a former Gift Business lease (or contingent obligations under other off-balance sheet arrangements described below), as the amount, if any, and/or timing of their |
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potential settlement is not reasonably estimable. See Off-Balance Sheet Arrangements below. In connection with the acquisitions of LaJobi and CoCaLo, the Company has agreed to make certain potential Earnout Consideration payments based on the performance of the acquired businesses. See Managements Discussion and Analysis of Financial Condition and of Results of Operations Recent Acquisitions. These amounts are not included in the above table as the timing of their potential settlement is not reasonably estimable. Of the total income tax payable for uncertain tax positions of $4.5 million, we have classified $3.8 million as current as of December 31, 2009; 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. |
Off-Balance Sheet Arrangements
In connection with the sale of the Gift Business, KID and U.S. Gift (our subsidiary at the
time) sent a notice of termination, effective December 23, 2010, with respect to the Lease.
Although this Lease has become the obligation of TRC (through its ownership of U.S. Gift), KID
remains obligated for the payments due thereunder (to the extent they are not paid by U.S. Gift)
until the termination of the Lease becomes effective (i.e., for a maximum potential remaining
obligation of approximately $2.7 million). It is our understanding that U.S. Gift has failed to pay
certain amounts due under the Lease and that TRC, U.S. Gift and the landlord have initiated
discussions with respect thereto. No payments have been made by KID in connection with the Lease
since the sale of the Gift Business, but there can be no assurance that payments will not be
required of KID with respect thereto to the extent U.S. Gift continues to fail to make such
payments and no accommodation is secured from the landlord. The amount of payments required by
KID, if any, cannot be ascertained at this time. To the extent KID is required to make any
payments to the landlord in respect of the Lease, it intends to seek reimbursement from TRC under
the purchase agreement governing the sale of our former Gift Business. However, we cannot assure
that we will be able to recover any such amounts in a timely manner, or at all.
The purchase agreement pertaining to the Gift Sale contains various KID indemnification,
reimbursement and similar obligations. In addition, KID may remain obligated with respect to
certain contracts and other obligations that were not novated in connection with their transfer. No
payments have been made by KID in connection with the foregoing as of December 31, 2009, but there
can be no assurance that payments will not be required of KID in the future.
We have obligations under certain letters of credit that contingently require us to make
payments to guaranteed parties upon the occurrence of specified events. As of December 31, 2009
there were $0.1 million of letters of credit outstanding.
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 our
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 our
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 our significant accounting estimates,
assumptions or the judgments affecting the application of such estimates and assumptions during
2009. The Companys significant accounting estimates described below have historically been and
are expected to remain reasonably accurate, but actual results could differ materially from those
estimates under different assumptions or conditions.
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Note 2 of Notes to Consolidated Financial Statements includes a summary of the significant
accounting policies used in the preparation of our consolidated financial statements. The
following, however, is a discussion of those accounting policies which management considers being
critical within the SEC definition discussed above.
Accounts Receivable Allowances
Accounts receivable are recorded at the invoiced amount. Amounts collected on trade accounts
receivable are included in net cash provided by operating activities in the consolidated statements
of cash flows. We maintain an allowance for doubtful accounts for estimated losses inherent in our
accounts receivable portfolio. In establishing the required allowance, management considers
historical losses, current receivable aging, and existing industry and national economic data. We
review our allowance for doubtful accounts
monthly. Past due balances over 90 days and over a specified amount are reviewed individually
for collectability. Account balances are charged off against the allowance after commercially
reasonable means of collection have been exhausted and the potential for recovery is considered
unlikely. The Company also analyzes its allowance programs to assess the adequacy of allowance
levels and adjusts such allowances as necessary. We do not have any off-balance sheet credit
exposure related to our customers.
Revenue Recognition
The Company recognizes revenue when products are shipped and the customer takes ownership and
assumes risk of loss, which is generally on the date of shipment, collection of the relevant
receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed
and determinable. The Company records reductions to revenue for estimated returns and customer
allowances, price concessions or other incentive programs that are estimated using historical
experience and current economic trends. Material differences may result in the amount and timing of
net sales for any period if management makes different judgments or uses different estimates.
Inventory Valuation
We value inventory at the lower of cost or its current estimated market value. We regularly
review inventory quantities on hand, by item, and record inventory at the lower of cost or market
based primarily on our historical experience and estimated forecast of product demand using
historical and recent ordering data relative to the quantity on hand for each item.
Long-Lived Assets
Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject
to amortization, are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted
future net cash flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which
the carrying amount of the asset exceeds the fair value of the asset, which is generally based on
discounted cash flows.
Indefinite-lived intangible assets are not amortized but are reviewed for impairment at least
annually, and more frequently in the event of a triggering event indicating that an impairment may
exist. Our annual impairment testing is performed in the fourth quarter of each year. Our trade
names were tested for impairment as part of our annual 2009 impairment testing of other
indefinite-lived assets, which is performed in the fourth quarter of each year (unless specified
triggering events warrant more frequent testing).
We tested the non-amortizing intangible trade names recorded on our balance sheet as of December
31, 2009. The trade names tested were: Kids Line®; Sassy®; LaJobi®; CoCaLo®. As with respect to
the testing for
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impairment of goodwill, the review for impairment of indefinite-lived intangible
assets, including trade names, is based on whether the fair value of such trade names exceeds their
carrying value. We determined fair value by performing a projected discounted cash flow analysis
based on the Relief-From-Royalty Method for all indefinite-lived trade names. In the Companys
analysis for 2009, it used a five-year projection period, which has been its prior practice, with
long-term growth rates ranging from 4% to 15%, as well as royalty rates of 5%, 2.6%, 4% and 4% for
Kids Line, Sassy, LaJobi and CoCaLo, respectively. For the 2009 testing, the royalty rate used for
Sassy was increased from the rate used in 2008 to 2.6%, due to the increased operating
profitability of Sassy-branded products and the royalty rate used for LaJobi was lowered to 4.0% due to
a decrease in the operating profitability of LaJobi-branded products,
primarily resulting from a change in product mix. For Kids Line
and CoCaLo, the royalty rate remained the same as that used in 2008. The results of the 2009
testing indicated that non-amortizing intangible trade names were not impaired at December 31,
2009.
With respect to our 2008 testing, the difference between the fair value of the trade names and
their carrying value resulted in an aggregate impairment charge of $3.7 million related to the
trade names of three infant and juvenile subsidiaries, including CoCaLo® ($1.9 million), Sassy®
($1.7 million) and LaJobi® ($0.1 million) in the fourth quarter of 2008. In addition, in 2008, we
also tested for the impairment of our Applause® trade name, which is a definite-lived intangible
asset as a result of the Gift Sale. With respect to Applause®, fair value was based on the terms
of its license to TRC. As a result of the Gift Sale, an impairment charge of $6.7 million was
recorded with respect to the Applause® trade name in the fourth quarter of 2008.
With respect to our 2008 analysis, we used a five-year projection period, which has been our
prior practice, with single digit long-term growth rates, as well as royalty rates of 5%, 2%, 5%
and 4% for Kids Line, Sassy, LaJobi and CoCaLo, respectively. For the 2008 testing, the royalty
rate for Sassy was decreased from the rate used in 2007 due to lower gross profit margins reported
and expected by Sassy and the previously-disclosed anticipated reduction in revenue and cash flows
resulting from the termination of the MAM Agreement. At the time of the assessment of impairment
(the fourth quarter of 2008), combined net revenues of Sassy and Kids Line had declined by
approximately 1% from the prior year, and further softness in sales was anticipated during the
remainder of 2009 with respect to Sassy, primarily as a result of the anticipated substantial
decrease in net revenues due to the termination of the MAM Agreement, and with respect to Kids
Line, primarily as a result of anticipated continued revenue softness reflecting worsening economic
conditions. However, we applied conservative long-term growth rates thereafter for each of Sassy
and Kids Line based on the following. With respect to Sassy, our assumptions were based on
anticipated new product introductions, a re-branding initiative, new packaging for the product
line, and the expiration at the end of 2009 of certain non-competition restrictions associated with
the MAM Agreement. Although the long-term growth rate for Kids Line branded products in 2009 (as
opposed to licensed products) was reduced from historical growth rates due to anticipated revenue
reduction, we assumed growth in the four years thereafter reflecting planned new product
introductions and expansion. With respect to the Applause® trade name, in connection with the Gift
Sale, TRC agreed to pay an annual royalty for the Applause® and Russ® trademarks and trade names of
$1.15 million, as well as a $5 million purchase price for such intellectual property at the end of
five years. Accordingly, the Company determined that the fair value of the allocated royalty stream
of the Applause® and Russ® trade names, based on a present value analysis, was $913,000 for the
Applause® trade names, resulting in the impairment charge recorded. The Russ® trade names do not
have any value ascribed to them on our financial statements.
Our other intangible assets with definite lives (consisting of the Applause® trade name until
its total impairment as of June 30, 2009, customer lists and royalty agreements) continue to be
amortized over their estimated useful lives and are tested if events or changes in circumstances
indicate that an asset may be impaired. In testing for impairment, we compare the carrying value of
such assets to the estimated undiscounted future cash flows anticipated from the use of the assets
and their eventual disposition. When the estimated undiscounted future cash flows are less than
their carrying amount, an impairment charge is recognized in an amount equal to the difference
between the assets fair value and its carrying value. Other than an impairment of the Applause®
trade name recorded in the second quarter of 2009 in the amount of $0.8 million in connection with
the impairment of the Gift Sale Consideration, no impairments to intangible assets with definite
lives was recorded in 2009. As discussed in Note 5 to Notes to Consolidated Financial Statements,
in
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connection with the annual impairment testing of intangible assets during the fourth quarter of
2008, we determined that, based upon current economic conditions, the Kids Line customer
relationships would be amortized over a 20-year period rather than having an indefinite life. In
connection therewith, we recorded $389,000 of amortization expense for the three months and year
ended December 31, 2008 and $1.6 million for the year ended December 31, 2009. In addition, as
discussed above, an impairment charge to our Applause® trade name was recorded in the fourth
quarter of 2008 as a result of the Gift Sale. Other than the foregoing, we determined that the
carrying value of our definite lived intangible assets was fully recoverable.
As many of the factors used in assessing fair value are outside the control of management, the
assumptions and estimates used in such assessment may change in future periods, which could require
that we record additional impairment charges to our assets. We will continue to monitor
circumstances and events in future periods to determine whether additional asset impairment testing
or recordation is warranted.
Accrued Liabilities and Deferred Tax Valuation Allowances
The preparation of our Consolidated Financial Statements in conformity with generally accepted
accounting principles in the United States requires management to make certain estimates and
assumptions that affect the reported amounts of liabilities and disclosure of contingent
liabilities at the date of the financial statements. Such liabilities include, but are not limited
to, accruals for various legal matters, tax exposures and valuation allowances for deferred tax
assets. The settlement of the actual liabilities could differ from the estimates included in our
consolidated financial statements. Our valuation allowances for deferred tax assets could change if
our estimate of future taxable income changes.
The Company uses the asset and liability approach for financial accounting and reporting on
income taxes. A valuation allowance is provided for deferred tax assets when it is more likely than
not that some portion or all of the deferred tax asset will not be realized. In assessing the
realizability of deferred tax assets, management considers the scheduled reversals of deferred tax
liabilities, projected future taxable income and tax planning strategies. The Companys ability to
realize its deferred tax assets depends upon the generation of sufficient future taxable income to
allow for the utilization of its deductible temporary differences and loss and credit carry
forwards.
We considered both the positive and negative evidence supporting our determination that it is
more likely than not that we will realize our deferred tax assets, other than those with respect to
which a valuation allowance has been recorded. Specifically, we considered: (i) the Companys
cumulative earnings from continuing operations for the three years ended December 31, 2009, (ii)
the character of the pre-tax income expected to be generated (ordinary income), (iii) the earnings
trends incorporated into our forecasting models, (iv) our historical ability to prepare reasonable
forecasts, (v) the relative stability in the industry of our continuing operations and, (vi) our
market leading industry position as positive evidence in support of our determination that it was
not appropriate to record a valuation allowance on the remaining deferred income tax assets. The
Company also considered negative evidence, such as current and prior year losses and the present
economic climate and uncertainty. In determining the appropriate weighting relative to each source
of evidence, we concluded that the Companys historical results from continuing operations would
receive a greater weighting, and determined that projecting those results forward using
conservative estimates and assumptions considering the current recession, would provide a
reasonable basis for our conclusion relative to the deferred tax asset valuation allowance.
Specifically, we considered the historical net revenues, gross margins and operating expenses of
each of our continuing operating units and projected those results forward giving consideration to
the current economic climate, knowledge of our customers purchasing patterns, new product
initiatives and other factors specific to our market. The business units that comprise our
continuing operations have been profitable since each of their respective dates of purchase and are
expected to continue to be profitable over the next three years. Sassy was acquired in 2002 and
Kids Line was acquired in 2004, and both have historically generated pre-tax income. LaJobi and
CoCaLo were each acquired in April of 2008 and have a history of profitability. The Companys
continuing operations generated profit before taxes and impairment charges domestically of
approximately $19.0 million for 2009. Although we have prepared forecasts for 5 years,
44
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we have
determined that our forecasts are most accurate for a period of three years from the balance sheet
date. We have determined that, for the years 2010 2012, we would need to generate an aggregate
of approximately $50 million in pre-tax income to realize the deferred tax assets we have recorded
and, after considering the factors above and based upon our current forecasts, we believe that it
is more likely than not that we will be able to utilize such deferred tax assets.
In determining our deferred tax asset valuation allowance, we considered the timing of the
reversals of temporary differences and the character of the related deferred tax asset. We
currently have a valuation allowance of $24.3 million for our deferred tax assets, of which $4.6
million consists of valuation allowances against foreign tax credit carry forwards, foreign NOL
carry forwards and state NOL carry forwards as management feels that it is currently more likely
than not that these deferred tax assets will not be fully realized in the foreseeable future. The
balance of the valuation allowance of $19.7 million relates to the Deferred Tax Asset of the
intangible amortization related to our various acquisitions. We have determined it appropriate to
only assume profit for the three year period starting December 31, 2009, and have recorded
valuation
allowances against our Deferred Tax Assets related to the intangible amortization after that
three year period. We assume that full inventory reserve, bad debt reserve, inventory
capitalization and other current assets will reverse in 2010, which are in same jurisdictions and
will not be offset by the creation of future deferred tax assets. In addition, our current
forecasted income for the years ending December 31 2010, 2011 and 2012 is expected to be able to
absorb the tax goodwill amortization projected for this period. We had no significant deferred tax
liabilities, and as a result there were no significant reversals accounted for in our analysis. In
addition, there were no tax planning strategies relevant in our analysis of deferred tax assets.
Acquisitions
At acquisition, we recognize assets acquired and liabilities assumed based on their fair
values at the date of acquisition. Accounting for business combinations requires significant
assumptions and estimates to measure fair value and may include the use of appraisals, market
quotes for similar transactions, discounted cash flow techniques or other information we believe to
be relevant. Any excess of the cost of a business acquisition over the fair values of the assets
acquired and liabilities assumed is recorded as goodwill. Should the acquisition result in a
bargain purchase, where the fair value of assets and liabilities exceed the amount of consideration
transferred, the resulting gain will be recorded into earnings on the acquisition date. All
acquisition-related costs, other than the costs to issue debt or equity securities, are accounted
for as expense in the period in which they are incurred. All assets and liabilities arising from
contractual contingencies are recognized as of the acquisition date if the acquisition date fair
value of that asset or liability can be determined during the measurement period.
Recently Issued Accounting Standards
See Note 2 of the Notes to Audited Consolidated Financial Statements for a discussion of
recently issued accounting standards.
Forward-Looking Statements
This Annual Report on Form 10-K 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, expenses, 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. Material risks and uncertainties are set forth under Item 1A, Risk Factors.
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to market risk primarily from changes in interest rates and foreign currency
exchange rates.
Interest Rate Changes
Debt
The interest applicable to the loans under the Credit Agreement is based upon the LIBOR Rate
and the Base Rate (each as defined in the Credit Agreement). At December 31, 2009, a sensitivity
analysis to measure potential changes in interest rates indicates that a one percentage point
increase in interest rates would increase our interest expense by approximately $0.8 million
annually. See Note 8 of Notes to Consolidated Financial Statements for a discussion of the
applicable interest rates under our Credit Agreement.
On May 2, 2008, we entered into an interest rate swap agreement with a notional amount of
$70.0 million as a risk management tool to lock the interest cash outflows on the floating rate
debt. See Notes 6 and 8 of Notes to Consolidated Financial Statements for information with respect
to the interest rate swap agreement.
Foreign Currency Exchange Rates
At December 31, 2009 and 2008, a sensitivity analysis to changes in the value of the U.S.
dollar on foreign currency denominated derivatives and monetary assets and liabilities indicates
that if the U.S. dollar uniformly weakened by 10% against all currency exposures, our income before
income taxes would decrease by approximately $113,000 for each such year. Additional information
required for this Item is included in Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and Capital Resources and Note 6 of Notes to
Consolidated Financial Statements. See also Item 1A, Risk FactorsCurrency exchange rate
fluctuations could increase our expenses.
We are exposed to market risk associated with foreign currency fluctuations. We periodically
enter into foreign currency forward exchange contracts as part of our overall financial risk
management policy, but do not use such instruments for speculative or trading purposes. Such
forward exchange contracts do not qualify as hedges under generally accepted accounting principles.
We hold cash and cash equivalents at various regional and national banking institutions.
Management monitors the institutions that hold our cash and cash equivalents. Managements emphasis
is primarily on safety of principal. Management, in its discretion, has diversified our cash and
cash equivalents among banking institutions to potentially minimize exposure to any one of these
entities. To date, we have experienced no loss or lack of access to our invested cash or cash
equivalents; however, we can provide no assurances that access to invested cash and cash
equivalents will not be impacted by adverse conditions in the financial markets, or that third
party institutions will retain acceptable credit ratings or investment practices.
Cash balances held at banking institutions with which we do business may exceed the Federal Deposit
Insurance Corporation (FDIC) insurance limits. While management monitors the cash balances in
these bank accounts, such cash balances could be impacted if the underlying banks fail or could be
subject to other adverse conditions in the financial markets.
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Page No. | |||||
1. Financial Statements: |
|||||
48 | |||||
50 | |||||
51 | |||||
52 | |||||
53 | |||||
54 | |||||
2. Financial Statement Schedule: |
|||||
104 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Kid Brands, Inc.:
We have audited the accompanying consolidated balance sheets of Kid Brands, Inc. (formerly
known as Russ Berrie and Company, Inc.) and subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of operations, shareholders equity and comprehensive income
(loss), and cash flows for each of the years in the three-year period ended December 31, 2009. In
connection with our audit of the consolidated financial statements, we also have audited the
consolidated financial statement schedule Schedule IIValuation and Qualifying Accounts. We also
have audited Kid Brands, Inc.s internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Kid Brands, Inc.s management is
responsible for these consolidated financial statements and related financial statement schedule,
for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying
Managements Annual Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on these consolidated financial statements and financial statement schedule, and
an opinion on the Companys internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the consolidated financial statements included examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Kid Brands, Inc. and subsidiaries as of December 31,
2009 and 2008, and the
48
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results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2009, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein. Also in our opinion, Kid
Brands, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
As discussed in Notes 6 and 11 to the consolidated financial statements, Kid Brands, Inc.
changed its method of accounting for financial assets and liabilities on January 1, 2008 due to the
adoption of the standard on accounting for fair value measurements and changed its method of
accounting for uncertain income tax positions on January 1, 2007 due to the adoption of the
standard on accounting for uncertain tax positions.
/s/ KPMG LLP
Short Hills, New Jersey
March 26, 2010
March 26, 2010
49
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KID BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2009 AND 2008
(Dollars in Thousands, Except Share and Per Share Data)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2009 AND 2008
(Dollars in Thousands, Except Share and Per Share Data)
2009 | 2008 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 1,593 | $ | 3,728 | ||||
Accounts receivabletrade, less allowances of $7,101 in 2009
and $4,285 in 2008 |
42,940 | 39,509 | ||||||
Inventories, net |
37,018 | 47,169 | ||||||
Prepaid expenses and other current assets |
2,950 | 3,252 | ||||||
Income tax receivable |
241 | 16 | ||||||
Deferred income taxes |
2,607 | 940 | ||||||
Total current assets |
87,349 | 94,614 | ||||||
Property, plant and equipment, net |
4,251 | 4,466 | ||||||
Intangible assets |
80,352 | 84,019 | ||||||
Note receivable, net of allowance of $15,981 in 2009 and $0 in 2008 |
| 15,300 | ||||||
Investment |
| 4,500 | ||||||
Deferred income taxes |
30,993 | 28,960 | ||||||
Other assets |
3,933 | 3,575 | ||||||
Total assets |
$ | 206,878 | $ | 235,434 | ||||
Liabilities and Shareholders Equity |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 13,533 | $ | 14,933 | ||||
Short-term debt |
15,100 | 12,114 | ||||||
Accounts payable |
17,420 | 23,546 | ||||||
Accrued expenses |
8,684 | 13,249 | ||||||
Income taxes payable |
3,630 | 5,726 | ||||||
Total current liabilities |
58,367 | 69,568 | ||||||
Income taxes payable non-current |
1,065 | 4,252 | ||||||
Long-term debt, excluding current portion |
54,492 | 75,765 | ||||||
Deferred royalty income-long-term |
| 5,065 | ||||||
Other long-term liabilities |
1,860 | 2,908 | ||||||
Total liabilities |
115,784 | 157,558 | ||||||
Commitments and contingencies |
||||||||
Shareholders equity: |
||||||||
Common stock: $0.10 stated value per share; authorized
50,000,000 shares; issued 26,727,780 shares at December 31,
2009 and December 31, 2008, respectively |
2,674 | 2,674 | ||||||
Additional paid-in capital |
89,756 | 89,173 | ||||||
Retained earnings |
100,377 | 88,672 | ||||||
Accumulated other comprehensive income |
458 | 134 | ||||||
Treasury stock, at cost, 5,227,985 and 5,258,962 shares at
December 31, 2009 and 2008, respectively |
(102,171 | ) | (102,777 | ) | ||||
Total shareholders equity |
91,094 | 77,876 | ||||||
Total liabilities and shareholders equity |
$ | 206,878 | $ | 235,434 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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KID BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(Dollars in Thousands, Except Share and Per Share Data)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(Dollars in Thousands, Except Share and Per Share Data)
2009 | 2008 | 2007 | ||||||||||
Net sales |
$ | 243,936 | $ | 229,194 | $ | 163,066 | ||||||
Cost of sales |
168,741 | 160,470 | 111,361 | |||||||||
Gross profit |
75,195 | 68,724 | 51,705 | |||||||||
Selling, general and administrative expenses |
48,583 | 50,779 | 34,790 | |||||||||
Impairment of investment and valuation reserve |
15,620 | | | |||||||||
Impairment of goodwill and intangibles |
| 136,931 | | |||||||||
Total operating expenses |
64,203 | 187,710 | 34,790 | |||||||||
Income (loss) from continuing operations |
10,992 | (118,986 | ) | 16,915 | ||||||||
Other (expense) income: |
||||||||||||
Interest expense, including amortization and write-off
of deferred financing costs |
(6,620 | ) | (9,655 | ) | (4,135 | ) | ||||||
Interest and investment income |
10 | 78 | 211 | |||||||||
Other, net |
161 | 192 | 231 | |||||||||
(6,449 | ) | (9,385 | ) | (3,693 | ) | |||||||
Income (loss) from continuing operations before income
tax (benefit) provision |
4,543 | (128,371 | ) | 13,222 | ||||||||
Income tax (benefit) provision |
(7,162 | ) | (29,031 | ) | 4,127 | |||||||
Income (loss) from continuing operations |
11,705 | (99,340 | ) | 9,095 | ||||||||
Discontinued Operations: |
||||||||||||
Loss from discontinued operations |
| (17,268 | ) | (1,370 | ) | |||||||
Gain on disposition |
| 905 | | |||||||||
Income tax (benefit) from discontinued operations |
| (4,147 | ) | (1,183 | ) | |||||||
(Loss) from discontinued operations net of tax benefit |
| (12,216 | ) | (187 | ) | |||||||
Net income (loss) |
$ | 11,705 | $ | (111,556 | ) | $ | 8,908 | |||||
Basic earnings (loss) per share: |
||||||||||||
Continuing operations |
$ | 0.55 | $ | (4.66 | ) | $ | 0.43 | |||||
Discontinued operations |
| (0.57 | ) | (0.01 | ) | |||||||
$ | 0.55 | $ | (5.23 | ) | $ | 0.42 | ||||||
Diluted earnings (loss) per share: |
||||||||||||
Continuing operations |
$ | 0.54 | $ | (4.66 | ) | $ | 0.43 | |||||
Discontinued operations |
| (0.57 | ) | (0.01 | ) | |||||||
$ | 0.54 | $ | (5.23 | ) | $ | 0.42 | ||||||
Weighted Average Shares: |
||||||||||||
Basic |
21,371,000 | 21,302,000 | 21,130,000 | |||||||||
Diluted |
21,532,000 | 21,302,000 | 21,215,000 | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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KID BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE
INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(Dollars in Thousands)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE
INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(Dollars in Thousands)
Common | ||||||||||||||||||||||||||||
Stock | Common | Additional | Accumulated Other | |||||||||||||||||||||||||
Shares | Stock | Paid In | Retained | Comprehensive | Treasury | |||||||||||||||||||||||
Total | Issued | Amount | Capital | Earnings | Income/(Loss) | Stock | ||||||||||||||||||||||
Balance at December 31, 2006 |
$ | 190,664 | 26,713 | $ | 2,673 | $ | 91,836 | $ | 191,320 | $ | 14,985 | $ | (110,150 | ) | ||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||
Net income |
8,908 | | | 8,908 | | | ||||||||||||||||||||||
Other comprehensive income/(loss), net
of tax: |
||||||||||||||||||||||||||||
Foreign currency translation adjustment |
1,991 | | | | 1,991 | | ||||||||||||||||||||||
Comprehensive income |
10,899 | |||||||||||||||||||||||||||
Share transactions under stock plans
(223,147 shares) |
2,890 | 15 | 1 | (1,178 | ) | | | 4,067 | ||||||||||||||||||||
Share-based compensation |
186 | | 186 | | | | ||||||||||||||||||||||
Stock | ||||||||||||||||||||||||||||
Balance at December 31, 2007 |
204,639 | 26,728 | 2,674 | 90,844 | 200,228 | 16,976 | (106,083 | ) | ||||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||
Net loss |
(111,556 | ) | (111,556 | ) | ||||||||||||||||||||||||
Other comprehensive income/(loss), net
of tax: |
||||||||||||||||||||||||||||
Foreign currency translation adjustment |
(16,842 | ) | (16,842 | ) | ||||||||||||||||||||||||
Comprehensive loss |
(128,398 | ) | ||||||||||||||||||||||||||
Share transactions under stock plans
(169,175 shares) |
| | (3,306 | ) | | | 3,306 | |||||||||||||||||||||
Share-based compensation |
1,635 | | 1,635 | | | | ||||||||||||||||||||||
Stock | ||||||||||||||||||||||||||||
Balance at December 31, 2008 |
77,876 | 26,728 | 2,674 | 89,173 | 88,672 | 134 | (102,777 | ) | ||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income |
11,705 | 11,705 | ||||||||||||||||||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||||||||||||||
Foreign currency translation adjustment |
324 | 324 | ||||||||||||||||||||||||||
Comprehensive income |
12,029 | |||||||||||||||||||||||||||
Excess tax provision on share-based
compensation |
(497 | ) | | | (497 | ) | ||||||||||||||||||||||
Share transactions under stock
plans(31,317 shares) |
81 | (525 | ) | 606 | ||||||||||||||||||||||||
Share-based compensation |
1,605 | 1,605 | | |||||||||||||||||||||||||
Stock | Stock | Stock | Stock | |||||||||||||||||||||||||
Balance at December 31, 2009 |
$ | 91,094 | 26,728 | $ | 2,674 | $ | 89,756 | $ | 100,377 | $ | 458 | $ | (102,171 | ) | ||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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KID BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(Dollars in Thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(Dollars in Thousands)
2009 | 2008 | 2007 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income (loss) |
$ | 11,705 | $ | (111,556 | ) | $ | 8,908 | |||||
Adjustments to reconcile net income (loss) to net cash provided by operating
activities: |
||||||||||||
Depreciation and amortization |
3,838 | 5,959 | 5,822 | |||||||||
Impairment of goodwill and other intangibles |
| 140,631 | 10,000 | |||||||||
Amortization and write-off of deferred financing costs |
1,527 | 886 | 655 | |||||||||
Provision for customer allowances |
31,121 | 17,189 | 11,420 | |||||||||
Provision for impairment and valuation reserve |
15,620 | | | |||||||||
Provision for note receivable allowance |
| | 940 | |||||||||
Provision for inventory reserve |
1,209 | 6,828 | 5,533 | |||||||||
Deferred income taxes |
(3,700 | ) | (32,742 | ) | 4,348 | |||||||
Impairment on long term asset |
| 7,041 | | |||||||||
Share-based compensation expense |
1,605 | 1,635 | 186 | |||||||||
Other |
| (462 | ) | 136 | ||||||||
Change in assets and liabilities, excluding the effects of acquisitions: |
||||||||||||
Restricted cash |
| (1 | ) | (2 | ) | |||||||
Accounts receivable |
(34,322 | ) | (6,368 | ) | (17,926 | ) | ||||||
Income tax receivable |
(225 | ) | 209 | 2,819 | ||||||||
Inventories |
9,340 | (13,029 | ) | (15,807 | ) | |||||||
Prepaid expenses and other current assets |
307 | (1,238 | ) | 8,081 | ||||||||
Other assets |
(73 | ) | (1,197 | ) | (666 | ) | ||||||
Accounts payable |
(5,995 | ) | 17,115 | 1,335 | ||||||||
Accrued expenses |
(6,060 | ) | (3,535 | ) | 5,033 | |||||||
Income taxes payable |
(5,278 | ) | (1,865 | ) | (3,521 | ) | ||||||
Net cash provided by operating activities |
20,619 | 25,500 | 27,294 | |||||||||
Cash flows from investing activities: |
||||||||||||
Capital expenditures |
(771 | ) | (2,253 | ) | (4,239 | ) | ||||||
Sale of gift business cash |
| (5,156 | ) | | ||||||||
Payment for purchase of LaJobi Industries, Inc. |
| (52,044 | ) | | ||||||||
Payment for purchase of CoCaLo, Inc., net of cash acquired |
| (16,598 | ) | | ||||||||
Payment of Kids Line, LLC earnout consideration |
| (3,622 | ) | (28,449 | ) | |||||||
Other |
(4 | ) | (23 | ) | | |||||||
Net cash used in investing activities |
(775 | ) | (79,696 | ) | (32,688 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from issuance of common stock |
81 | | 2,890 | |||||||||
Excess tax benefit from stock-based compensation |
(497 | ) | | | ||||||||
Issuance of long-term debt |
| 100,000 | 20,000 | |||||||||
Payments of long-term debt |
(22,673 | ) | (54,300 | ) | (9,000 | ) | ||||||
Net borrowings on revolving credit facility |
2,986 | (8,057 | ) | 1,512 | ||||||||
Capital leases |
| (308 | ) | | ||||||||
Payment of deferred financing costs |
(1,697 | ) | (1,655 | ) | | |||||||
Net cash (used in) provided by financing activities |
(21,800 | ) | 35,680 | 15,402 | ||||||||
Effect of exchange rate changes on cash and cash equivalents |
(179 | ) | 319 | 391 | ||||||||
Net (decrease) increase in cash and cash equivalents |
(2,135 | ) | (18,197 | ) | 10,399 | |||||||
Cash and cash equivalents at beginning of year |
3,728 | 21,925 | 11,526 | |||||||||
Cash and cash equivalents at end of year |
$ | 1,593 | $ | 3,728 | $ | 21,925 | ||||||
Cash paid during the year for: |
||||||||||||
Interest |
$ | 6,457 | $ | 6,254 | $ | 4,206 | ||||||
Income taxes |
$ | 2,711 | $ | 828 | $ | 1,500 | ||||||
Supplemental cash flow information: |
||||||||||||
Note payable CoCaLo purchase |
$ | | $ | 1,439 | | |||||||
Goodwill from Earnout Consideration |
$ | | $ | | $ | 3,622 | ||||||
Equipment financed by capital lease obligations |
$ | | $ | | $ | 455 | ||||||
Note receivable Gift business sale |
$ | | $ | 15,300 | | |||||||
Investment Gift business sale |
$ | | $ | 4,500 | | |||||||
Deferred royalty income Gift business sale |
$ | | $ | 5,000 | |
The accompanying notes are an integral part of the consolidated financial statements.
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KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007
Note 1Description of Business
Kid Brands, Inc., formerly Russ Berrie and Company (KID), and its subsidiaries (collectively
with KID, the Company) is a leading designer, importer, marketer and distributor of infant and
juvenile consumer products. The Company currently operates in one infant and juvenile segment.
On December 23, 2008, KID entered into, and consummated the transactions contemplated by, the
Purchase Agreement as of such date (the Purchase Agreement) with The Russ Companies, Inc., a
Delaware corporation (TRC), for the sale of the capital stock of all of KIDs subsidiaries
actively engaged in the gift business (the Gift Business), and substantially all of KIDs assets
used in the Gift Business (the Gift Sale). As a result of the Gift Sale, the Consolidated
Statements of Operations have been restated to show the Gift Business as discontinued operations
for the years ended December 31, 2008 and 2007. The December 31, 2008 Consolidated Balance Sheet
does not include the Gift Business assets and liabilities, as a result of the consummation of the
Gift Sale on December 23, 2008. The Consolidated Statements of Cash Flows for the years ended
December 31, 2008 and 2007 have not been restated. The accompanying notes to Consolidated Financial
Statements have been restated to reflect the discontinued operations presentation described above
for the basic financial statements. As the Gift Sale was completed in 2008, presentation of
discontinued operations is not applicable with respect to 2009.
The Companys continuing operations, which currently consist of Kids Line, LLC (Kids Line),
Sassy, Inc. (Sassy), LaJobi, Inc., (LaJobi) and CoCaLo, Inc., (CoCaLo), each direct or
indirect wholly-owned subsidiaries, design, manufacture through third parties and market products
in a number of categories including, among others: infant bedding and related nursery accessories
and décor (Kids Line and CoCaLo); nursery furniture and related products (LaJobi); and
developmental toys and feeding, bath and baby care items with features that address the various
stages of an infants early years (Sassy). The Companys products are sold primarily to retailers
in North America, the UK and Australia, including large, national retail accounts and independent
retailers (including toy, specialty, food, drug, apparel and other retailers).
Note 2Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, after elimination
of all inter-company accounts and transactions.
Business Combinations
The Company accounts for business combinations by applying the acquisition method of
accounting. At acquisition, we recognize assets acquired and liabilities assumed based on their
fair values at the date of acquisition. Accounting for business combinations requires significant
assumptions and estimates to measure fair value and may include the use of appraisals, market
quotes for similar transactions, discounted cash flow techniques or other information we believe to
be relevant. Any excess of the cost of a business acquisition over the fair values of the assets
acquired and liabilities
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
assumed is recorded as goodwill. Should the acquisition result in a
bargain purchase, where the fair value of assets and liabilities exceed the amount of consideration
transferred, the resulting gain will be recorded into earnings on the acquisition date. All
acquisition-related costs, other than the costs to issue debt or equity securities, are accounted
for as expense in the period in which they are incurred. All assets and liabilities arising from
contractual contingencies are recognized as of the acquisition date if the acquisition date fair
value of that asset or liability can be determined during the measurement period.
If initial accounting for the business combination has not been completed by the end of the
reporting period in which the business combination occurs, provisional amounts will be reported for
which the accounting is incomplete, with retrospective adjustment made to such provisional amounts
during the measurement period to present new information about facts and circumstances that existed
as of the acquisition date. Once the measurement period ends, and in no case beyond one year from
the acquisition date, subsequent revisions of the accounting for the business combination will only
be accounted for as correction of an error.
Revenue Recognition
The Company recognizes revenue when products are shipped and the customer takes ownership and
assumes risk of loss, which is generally on the date of shipment, collection of the relevant
receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed
and determinable. The Company records reductions to revenue for estimated returns and customer
allowances, price concessions or other incentive programs that are estimated using historical
experience and current economic trends. Material differences may result in the amount and timing of
net sales for any period if management makes different judgments or uses different estimates.
Cost of Sales
The most significant components of cost of sales are cost of the product, including inbound
freight charges, duty, packaging and display costs, labor, depreciation, any inventory adjustments,
purchasing and receiving costs, product development costs and quality control costs.
The Companys 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. The Company accounts for the above expenses as operating expenses and
classify them under selling, general and administrative expenses. For the years ended December 31,
2009, 2008 and 2007, the costs of warehousing, outbound handling costs and outbound shipping costs
were $7.0 million, $8.8 million and $6.1 million, respectively. In addition, the majority of
outbound shipping costs are paid by the Companys customers, as many of the Companys customers
pick up their goods at the Companys distribution centers.
Advertising Costs
Production costs for advertising are charged to operations in the period the related
advertising campaign begins. All other advertising costs are charged to operations during the
period in which they
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
are incurred. Advertising costs for continuing operations for the years ended
December 31, 2009, 2008 and 2007 amounted to $0.9 million, $1.3 million, and $0.6 million
respectively.
Cash and Cash Equivalents
Cash equivalents consist of investments in interest bearing accounts and highly liquid
securities having a maturity of three months or less, at the date of purchase, and their costs
approximate fair value.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount. Amounts collected on trade accounts
receivable are included in net cash provided by operating activities in the consolidated statements
of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses
inherent in its accounts receivable portfolio. In establishing the required allowance, management
considers historical losses, current receivable aging, and existing industry and national economic
data. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90
days and over a specified amount are reviewed individually for collectability. Account balances are
charged off against the allowance after commercially reasonable means of collection have been
exhausted and the potential for recovery is considered unlikely. The Company also analyzes its
allowances policies to access the adequacy of allowance levels and adjusts such allowances as
necessary. The Company does not have any off-balance sheet credit exposure related to its
customers.
Inventories
Inventory, which consists of finished goods, is carried on the Companys 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, the Companys 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 the
Companys inventories all require judgments and estimates, which may also impact the inventory
valuation. However, we believe that, based on prior experience of managing and evaluating the
recoverability of slow moving, excess, damaged and obsolete inventory in response to market
conditions, including decreased sales in specific product lines, the Companys established reserves
are materially adequate. If actual market conditions and product sales prove to be less favorable
than we have projected, however, additional inventory reserves may be necessary in future
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
periods.
At December 31, 2009 and 2008, the balance of the inventory reserve was approximately $1,923,000
and $2,484,000, respectively. The primary reason for the reduction in the inventory reserve between
years was the disposition of Sassys MAM inventory as a result of the termination in December 2008
of the MAM Agreement.
Property, Plant and Equipment
Property, plant and equipment are stated at cost or fair market value and are depreciated
using the straight-line method over their estimated useful lives, which primarily range from three
to twenty-five years. Leasehold improvements are amortized using the straight-line method over the
term of the respective lease or asset life, whichever is shorter. Major improvements are
capitalized, while expenditures for maintenance and repairs are charged to operations as incurred.
Equipment under capital leases is amortized over the lives of the respective leases or the
estimated useful lives of the assets, whichever is shorter. Assets to be disposed of are separately
presented in the balance sheet and reported at the lower of the carrying amount or fair value less
costs to sell, and are no longer depreciated. Gain or loss on retirement or disposal of individual
assets is recorded as income or expense in the period incurred and the related cost and accumulated
depreciation are removed from the respective accounts.
Impairment of Long-Lived Assets
The Company reviews property, plant and equipment and certain identifiable intangibles,
excluding goodwill, for impairment. Long-lived assets, such as property, plant, and equipment and
purchased intangibles subject to amortization, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of
an asset to the estimated undiscounted future net cash flows expected to be generated by the asset.
If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an
impairment charge is recognized for the amount for which the carrying amount of the asset exceeds
its fair value as determined by an estimate of discounted future cash flows.
Goodwill and Indefinite-life Intangible Assets
Goodwill represents the excess of costs over fair value of net assets of businesses acquired.
Goodwill and intangible assets acquired in a purchase business combination and determined to have
an indefinite useful life are not amortized, but instead are tested for impairment at least
annually or sooner whenever events or changes in circumstances indicate that the assets may be
impaired.
The Company tests goodwill for impairment on an annual basis as of its year end. Goodwill of a
reporting unit will be tested for impairment between annual tests if events occur or circumstances
change that would likely reduce the fair value of the reporting units below its carrying value. The
Company uses a two-step process to test goodwill for impairment. First, the reporting units fair
value is compared to its carrying value. If a reporting units carrying amount exceeds its fair
value, an indication exists that the reporting units goodwill may be impaired, and the second step
of the impairment test would be performed. The second step of the goodwill impairment test is used
to
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
measure the amount of the impairment loss. In the second step, the implied fair value of the
reporting units goodwill is determined by allocating the reporting units fair value to all of its
assets and liabilities other than goodwill in a manner similar to a purchase price allocation. The
resulting implied fair value of the goodwill that results from the application of this second step
is then compared to the carrying amount of the goodwill and an impairment charge would be recorded
for the difference. In the fourth quarter of 2008, the Company recorded an impairment charge of
$130.2 million related to goodwill (see Note 5 below for detail with respect to such impairment
charge). As this impairment charge comprised all of the Companys goodwill, no goodwill assessment
testing was required as of December 31, 2009.
Intangible assets with indefinite lives other than goodwill are tested annually for impairment
and the appropriateness of the indefinite life classification, or more often if changes in
circumstances indicate that the carrying amount may not be recoverable or the asset life may be
finite. In testing for impairment, if the carrying amount exceeds the fair value of the assets, an
impairment loss is recorded in the amount of the excess. As of December 31, 2009, the Companys
indefinite life intangibles related to the trademarks acquired in the purchases of: Sassy, Inc. in
2002; Kids Line LLC in 2004; and LaJobi, Inc. and CoCaLo, Inc. in 2008. The Company uses various
models to estimate the fair value. In the Companys analysis for 2009, it used a five-year
projection period, which has been its prior practice, with long-term growth rates ranging from 4%
to 15%, as well as royalty rates of 5%, 2.6%, 4% and 4% for Kids Line, Sassy, LaJobi and CoCaLo,
respectively. The Company recorded an aggregate non-cash impairment charge of approximately
$10.4 million in the fourth quarter of 2008, which consisted of the impairment of its
Applause ® trademark, in connection with the sale of the Gift Business
($6.7 million), which was recorded in Impairment of Goodwill and Intangibles, and the impairment of
certain of its Infant & Juvenile indefinite-life intangible assets($3.7 million), which was
recorded in cost of sales (see Note 5 below for detail with respect to such impairment charges).
Also during the fourth quarter of 2008, the Company determined that the Kids Line customer
relationships should no longer have an indefinite life. An aggregate impairment charge of $10.0
million was recorded in the Companys consolidated statements of operations for 2007 with respect
to the MAM Agreement (see Note 5 for details with respect to the breakdown of such impairment
charges).
Foreign Currency Translation
Financial statements of international subsidiaries are translated into U.S. dollars using the
exchange rate at each balance sheet date for assets and liabilities and the weighted average
exchange rate for each period for revenues, expenses, gains and losses. Translation adjustments
are recorded as a separate component of accumulated other comprehensive income (loss) in the
consolidated balance sheet and foreign currency transaction gains and losses are recorded in other
income (expense) in the consolidated statements of operations.
Accounting for Income Taxes
The Company establishes accruals for tax contingencies when, notwithstanding the reasonable
belief that its tax return positions are fully supported, the Company believes that certain filing
positions are likely to be challenged and moreover, that such filing positions may not be fully
sustained. Accordingly, a tax benefit from an uncertain tax position will only be recognized if it
is more likely
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
than not that the tax position will be sustained on examination by the taxing
authorities based on the technical merits of the position. The Company continually evaluates its
uncertain tax positions and will adjust such amounts in light of changing facts and circumstances
including, but not limited to, emerging case law, tax legislation, rulings by relevant tax
authorities, and the progress of ongoing tax audits. Settlement of a given tax contingency could
impact the income tax provision in the period of resolution. The Companys accruals for gross
uncertain tax positions are presented in the consolidated balance sheet within income taxes payable
for current items and income taxes payable, non-current for items not expected to be settled within
12 months of the balance sheet date.
The Company accounts for income taxes under the asset and liability method. Such approach
results in the recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the book carrying amounts and the tax bases of assets
and liabilities and for operating losses and tax credit carry forwards. Deferred tax assets and
liabilities are determined using the currently enacted tax rates that apply to taxable income in
effect for the years in which those tax assets are expected to be realized or settled. Valuation
allowances are established where expected future taxable income, the reversal of deferred tax
liabilities and development of tax strategies does not support the realization of the deferred tax
asset. See Note 11 Income Taxes for additional information.
The Company and its subsidiaries file separate foreign, state and local income tax returns
and, accordingly, provide for such income taxes on a separate company basis.
Fair Value of Financial Instruments
The Company has estimated that the carrying amount of cash and cash equivalents, accounts
receivable, inventory, prepaid and other current assets, accounts payable and accrued expenses
reflected in the consolidated financial statements equals or approximates their fair values because
of the short-term maturity of those instruments. The carrying value of the Companys short-term and
long-term debt approximates fair value as the debt bears interest at a variable market rate. For
details with respect to the fair values of notes payable, notes receivable and the interest rate
swap, see Notes 3, 4 and 6, respectively.
Earnings (Loss) Per Share
Basic earnings (loss) per share (EPS) are calculated by dividing income (loss) by the
weighted average number of shares of common stock outstanding during the period. Diluted EPS is
calculated by dividing income (loss) by the weighted average number of common shares outstanding,
adjusted to reflect potentially dilutive securities (stock options and SARs settled in stock) using
the treasury stock method, except when the effect would be anti-dilutive. As of December 31, 2009,
2008 and 2007, the Company had
880,615, 1,941,379 and 1,181,035 stock options outstanding,
respectively, that were excluded from the computation of diluted EPS in that they would be
anti-dilutive due to their exercise price exceeding the average market price in 2009 and 2007, or
due to the loss the Company incurred from continuing operations in 2008. EPS for the quarter and
year ended December 31, 2008 have been revised in accordance with
the accounting guidance for earnings per share. The Company had
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
incorrectly included non-vested restricted stock in its basic earnings per
common share calculations for such periods. Such revisions were immaterial.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles in the United States requires management to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Significant items subject to such estimates and assumptions
include the recoverability of property, plant and equipment and other intangible assets; valuation
allowances for receivables, inventories and deferred income tax assets; and accruals for income
taxes and litigation. Actual results could differ from these estimates.
Accounting for Forward Exchange Contracts
The Company historically entered into forward exchange contracts to hedge the effects of
foreign currency on inventory purchases. In 2009 the Company did not enter into any forward
exchange contracts. In 2008 and 2007, the Company accounted for its forward exchange contracts as
an economic hedge, with subsequent changes in the forward exchange contracts fair value recorded
as foreign currency gain (loss), included in other, net in the consolidated statements of
operations.
Share-Based Compensation
The Company recognizes in the financial statements all costs resulting from share-based
payment transactions at their fair values. At December 31, 2009, the Company had share-based
employee compensation plans which are described more fully in Note 16.
The relevant FASB standard requires the cash flows related to tax benefits resulting from tax
deductions in excess of compensation costs recognized for those equity compensation grants (excess
tax benefits) to be classified as financing cash flows. For the year ended December 31, 2009 there
was a tax deficiency of $0.5 million recognized from share-based compensation-costs. For the years
ended December 31, 2008 and 2007, there was no excess tax benefit recognized from share-based
compensation costs because the Company was not in a taxpaying position in the United States in 2008
and 2007.
Subsequent Events
The Company has evaluated subsequent events through the date that the consolidated financial
statements were filed.
Reclassifications
Certain prior year amounts have been reclassified to conform the prior year amounts to the
presentation in the 2009 consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
Recently Issued Accounting Standards
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 168, The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles, a replacement of FASB
Statement No. 162. This statement
modifies the Generally Accepted Accounting Principles (GAAP) hierarchy by establishing only two
levels of GAAP, authoritative and non-authoritative accounting literature. Effective July 2009, the
FASB Accounting Standards Codification (ASC), also known collectively as the Codification, is
considered the single source of authoritative U.S. accounting and reporting standards, except for
additional authoritative rules and interpretive releases issued by the SEC. Non-authoritative
guidance and literature would include, among other things, FASB Concepts Statements, American
Institute of Certified Public Accountants Issue Papers and Technical Practice Aids and accounting
textbooks. The Codification was developed to organize GAAP pronouncements by topic so that users
can more easily access authoritative accounting guidance. It is organized by topic, subtopic,
section, and paragraph, each of which is identified by a numerical designation. This statement
applied beginning in the third quarter of 2009. All accounting references herein have been updated,
and therefore references to Statements of Financial Accounting Standards have been replaced with
ASC or generic references to FASB standards where deemed necessary. The issuance of the
Codification did not change GAAP and therefore its adoption by the Company only affects how
specific references to GAAP literature are disclosed in the notes to the Companys consolidated
financial statements.
ASC 820-10, Fair Value Measurements and
Disclosures, with respect to non-financial assets and liabilities,
was adopted on January
1, 2009. This standard defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. This standard did not have an impact on the
consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Improving
Disclosures about Fair Value Measurements (ASU 2010-06), which amends FASB
ASC 820, Fair Value Measurements and Disclosures to require various
additional disclosures regarding fair value measurements and also clarify certain existing
disclosure requirements. Under ASU 2010-06, the Company will be required to: (1) disclose
separately the amounts of significant transfers between Level 1 and Level 2 of the fair value
hierarchy, (2) disclose activity in Level 3 fair value measurements including transfers into and
out of Level 3 and the reasons for such transfers, and (3) present separately in its reconciliation
of recurring Level 3 measurements information about purchases, sales, issuances and settlements on
a gross basis. ASU 2010-06 does not change any accounting requirements, but is expected to have a
significant effect on the disclosures of entities that measure assets and liabilities at fair
value. The amendments prescribed by ASU 2010-06 will be effective for the Companys fiscal quarter
ending March 31, 2010, except for the requirements described in item (3) above, which will be
effective for the Companys fiscal year beginning January 1, 2011. The Company currently does not
expect the adoption of this ASU to have a material impact on its consolidated financial statements.
The Company will adopt a new FASB standard concerning the determination of the useful life of
intangible assets beginning on January 1, 2010. The Company currently does not
expect
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
the adoption of this standard to have an impact on its consolidated financial statements at
the time of adoption. The new guidance amends the factors that are to be considered in developing
renewal or extension assumptions used to determine the useful life of a recognized intangible
asset. The new guidance is intended to improve the consistency between the useful life of a
recognized intangible asset and the period of expected cash flows originally used to measure the
fair value of the intangible asset under U.S. GAAP.
Note 3Acquisitions
LaJobi
As of April 2, 2008, LaJobi, Inc., a newly-formed and indirect, wholly-owned Delaware
subsidiary of KID (LaJobi), consummated the transactions contemplated by an Asset Purchase
Agreement (the Asset Agreement) with LaJobi Industries, Inc., a New Jersey corporation (Seller)
and each of Lawrence Bivona and Joseph Bivona (collectively, the Stockholders), for the purchase
of substantially all of the assets and specified obligations of the business of the Seller (the
Business). The aggregate purchase price for the Business was equal to $50.0 million (the
$2.5 million deposited in escrow at the closing was released from escrow on October 2, 2009).
In addition, provided that the EBITDA of the Business, as defined in the Asset Agreement (the
LaJobi Earnout EBITDA), has grown at a compound annual growth rate (CAGR) of not less than 4%
during the three years ending December 31, 2010 (the Measurement Date), determined in accordance
with the Asset Agreement, LaJobi will pay to the Stockholders an amount (the LaJobi Earnout
Consideration) equal to a percentage of the Agreed Enterprise Value of LaJobi as of the
Measurement Date (subject to acceleration under certain limited circumstances), with the Agreed
Enterprise Value defined as the product of (i) the LaJobi Earnout EBITDA during the twelve
(12) months ending on the Measurement Date, multiplied by (ii) an applicable multiple (ranging from
5 to 9) depending on the specified levels of CAGR achieved. The LaJobi Earnout Consideration can
range between $0 and a maximum of $15.0 million.
CoCaLo
On April 2, 2008, a newly-formed, wholly-owned Delaware subsidiary of KID, I&J Holdco, Inc.
(the CoCaLo Buyer), consummated the transactions contemplated by the Stock Purchase Agreement
(the Stock Agreement) with each of Renee Pepys Lowe and Stanley Lowe (collectively, the
Sellers), for the purchase of all of the issued and outstanding capital stock of CoCaLo, Inc., a
California corporation (CoCaLo). The aggregate base purchase price payable for CoCaLo was equal
to: (i)$16.0 million; minus (ii) the aggregate debt of CoCaLo outstanding at the closing of the
acquisition (including accrued interest) of $4.0 million; minus (iii) specified transaction
expenses ($0.3 million); plus (iv) a working capital adjustment of $1.5 million paid by the CoCaLo
Buyer. A portion of the purchase price ($1.6 million, which was discounted to $1.4 million for
financial statement purposes) was evidenced by a non-interest bearing promissory note and is being
paid in equal annual installments over a three-year period from the closing date. The first payment
of $533,000 was paid during April 2009.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
In addition, the CoCaLo Buyer will pay to the Sellers the following earnout consideration
amounts (the CoCaLo Earnout Consideration) with respect to CoCaLos performance for the aggregate
three year period ending December 31, 2010: (i) $666,667 will be paid for the achievement of
specified initial performance targets with respect to each of net sales, gross profit and specified
CoCaLo EBITDA (the latter combined with specified Kids Line EBITDA) (the Initial Targets), for a
maximum payment of $2.0 million in the event of achievement of the Initial Targets in all three
categories; and (ii) up to an additional $666,667 will be paid, on a sliding scale basis, for
achievement in excess of the Initial Targets up to specified maximum performance targets in each
category, for a potential additional payment of $2.0 million in the event of achievement of the
maximum targets in all three categories. The CoCaLo Earnout Consideration can range between $0 up
to an aggregate maximum of $4.0 million.
Any LaJobi Earnout Consideration and/or CoCaLo Earnout Consideration will be recorded as
additional goodwill when and if paid or, if earlier, when the amount of the Earnout Consideration
becomes probable and estimable.
Pro Forma Information (Unaudited)
The results of operations of LaJobi and CoCaLo and the fair value of assets acquired and
liabilities assumed are included in the Companys consolidated financial statements beginning on
their acquisition date.
The following unaudited pro forma consolidated results of operations of the Company for the
years ended December 31, 2008 and December 31, 2007 respectively, assumes the acquisitions of
CoCaLo and LaJobi occurred as of January 1 of each period (in thousands).
(Unaudited) | ||||||||
Year Ended December 31, | ||||||||
2008 | 2007 | |||||||
Net sales |
$ | 251,696 | $ | 236,536 | ||||
Net (loss) income |
$ | (110,906 | ) | $ | 8,882 | |||
Basic (loss) income per share: |
||||||||
Continuing operations |
$ | (4.63 | ) | $ | 0.43 | |||
Discontinued operations |
(0.58 | ) | (0.01 | ) | ||||
$ | (5.21 | ) | $ | 0.42 | ||||
Diluted (loss) income per share: |
||||||||
Continuing operations |
$ | (4.63 | ) | $ | 0.43 | |||
Discontinued operations |
(0.58 | ) | (0.01 | ) | ||||
$ | (5.21 | ) | $ | 0.42 | ||||
The above amounts are based upon certain assumptions and estimates, and do not reflect any
benefits from combined operations. The pro forma results have not been audited and do not
necessarily represent results which would have occurred if the acquisitions had taken place on the
basis assumed above, and may not be indicative of the results of future combined operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
Note 4Sale of Gift Business and Discontinued Operations
On December 23, 2008, KID completed the sale of the Gift Business. The aggregate purchase
price payable by TRC was: (i) 199 shares of the Common Stock, par value $0.001 per share, of TRC
(the Buyer Common Shares), representing a 19.9% interest in TRC after consummation of the
transaction that was accounted for at cost; and (ii) a subordinated, secured promissory note issued
by TRC to KID in the original principal amount of $19.0 million (the Seller Note). During the
90-day period following the fifth anniversary of the consummation of the sale of the Gift Business,
KID will have the right to cause TRC to repurchase any Buyer Common Shares then owned by KID, at
its assumed original value (which was $6.0 million for all Buyer Common Shares), as adjusted in the
event that the number of Buyer Common Shares is adjusted, plus interest at an annual rate of 5%,
compounded annually. The consideration received from the Gift Sale was recorded at fair value as of
December 23, 2008 of approximately $19.8 million and was recorded as Note Receivable of
$15.3 million and Investment of $4.5 million on the Companys consolidated balance sheet.
In addition, in connection with the sale of the Gift Business, the Companys newly-formed,
wholly-owned Delaware limited liability company (the Licensor) executed a license agreement (the
License Agreement) with TRC. Pursuant to the License Agreement, TRC will 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 will be paid
quarterly at the close of each three-month period during the term. At any time during the term of
the License Agreement, TRC shall have the option to purchase all of the intellectual property
subject to the License Agreement, consisting generally of the Russ ® and
Applause ® trademarks and trade names (the Retained IP) from the Licensor for
$5.0 million, to the extent that at such time (i) the Seller Note shall have been paid in full
(including all principal and accrued interest with respect thereto), and (ii) there shall be no
continuing default under the License Agreement. If TRC does not purchase the Retained IP by
December 23, 2013 (or nine months thereafter, if applicable), the Licensor will have the option to
require TRC to purchase all of the Retained IP for $5.0 million.
Licensor has not received either the initial, lump sum Royalty payment
or the first quarter Royalty payment due on March 23, 2010.
In connection with the preparation of the Companys financial statements for the second
quarter of 2009, a series of impairment indicators emerged in connection with TRC. These indicators
included the impact of current macro-economic factors on TRC, the deterioration of conditions in
the gift market, and other TRC- specific factors, including declining financial performance,
operational and integration challenges and liquidity issues. As a result of these impairment
indicators, the Company tested for impairment its 19.9% investment in TRC and critically evaluated
the collectability of its $15.3 million note receivable. As a result of this review, the Company
determined that its 19.9% investment in TRC as well as the Applause® trade name were other than
temporarily impaired and recorded non-cash charges of approximately $4.5 million and $0.8 million,
respectively, against these assets. The Company also recorded a $10.3 million charge, to reserve
against the difference between the note receivable and deferred revenue liability. The aggregate
impact of the above actions resulted in a non-cash charge to income/ (loss) from continuing
operations in an aggregate amount of $15.6 million in the second quarter of 2009.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
Condensed Financial Information of Discontinued Operations
Condensed results of discontinued operations are as follows (in thousands):
Year Ended December 31, | ||||||||
2008 | 2007 | |||||||
Sales |
$ | 124,035 | $ | 168,107 | ||||
Loss before income taxes |
$ | (17,268 | ) | $ | (1,370 | ) | ||
Gain on sale |
$ | 905 | | |||||
Provision (benefit) for income taxes |
$ | (4,147 | ) | $ | (1,183 | ) | ||
Income (loss) from discontinued operations |
$ | (12,216 | ) | $ | (187 | ) |
Note 5Intangible Assets and Goodwill
Intangible Assets
As of December 31, 2009 and 2008 the components of intangible assets consist of the following
(in thousands):
Weighted Average | December 31, | December 31, | ||||||||
Amortization Period | 2009 | 2008 | ||||||||
Sassy trade name |
Indefinite life | $ | 5,400 | $ | 5,400 | |||||
Applause trade name |
5 years | | 911 | |||||||
Kids Line customer relationships |
20 years | 29,156 | 30,711 | |||||||
Kids Line trade name |
Indefinite life | 5,300 | 5,300 | |||||||
LaJobi trade name |
Indefinite life | 18,600 | 18,600 | |||||||
LaJobi customer relationships |
20 years | 11,589 | 12,224 | |||||||
LaJobi royalty agreements |
5 years | 1,712 | 2,146 | |||||||
CoCaLo trade name |
Indefinite life | 6,100 | 6,100 | |||||||
CoCaLo customer relationships |
20 years | 2,464 | 2,599 | |||||||
CoCaLo foreign trade name |
Indefinite life | 31 | 28 | |||||||
Total intangible assets |
$ | 80,352 | $ | 84,019 | ||||||
Aggregate amortization expense, was $2.8 million, $2.3 million and $0.4 million in 2009, 2008
and 2007, respectively.
Estimated annual amortization expense for each of the fiscal years ending December 31, (in
thousands):
2010
|
$ | 2,761 | ||
2011
|
2,761 | |||
2012
|
2,761 | |||
2013
|
2,726 | |||
2014
|
2,325 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
In accordance with the applicable FASB standard, indefinite-lived intangible assets are no
longer amortized but are reviewed for impairment at least annually, and more frequently if a
triggering event occurs indicating that an impairment may exist. The Companys annual impairment
testing is performed in the fourth quarter of each year (unless specified triggering events warrant
more frequent testing). All intangible assets, both definite-lived and indefinite-lived, were
tested for impairment in the fourth quarter of 2009 and 2008. An impairment of $819,000 for the
Applause® trade name was recorded in the quarter ended June 30, 2009 in connection with the
impairment of the Gift Sale Consideration.
The Companys non-amortizing intangibles (trade names) are tested for impairment as part of
the Companys annual impairment testing of goodwill and other indefinite-lived assets. The Company
tested the non-amortizing intangible trade names recorded on its consolidated balance sheet as of
December 31, 2009, which consisted of: Kids Line®; Sassy®; LaJobi®; and CoCaLo®. Testing for
impairment of indefinite-lived trade names is based on whether the fair value of such trade names
exceeds their carrying value. The Company determines fair value by performing a projected
discounted cash flow analysis based on the Relief-From-Royalty Method for all indefinite-lived
trade names. In the Companys analysis for 2009, it used a five-year projection period, which has
been its prior practice, with long-term growth rates ranging from 4% to 15%, as well as royalty
rates of 5%, 2.6%, 4% and 4% for Kids Line, Sassy, LaJobi and CoCaLo, respectively. For the 2009
testing, the royalty rate used for Sassy was increased from the rate used in 2008 to 2.6%,
due to the increased operating profitability of Sassy-branded
products and the royalty rate used for LaJobi was lowered to 4.0%
due to a decrease in the operating profitability of LaJobi-branded
products, primarily resulting from a change in product mix. For Kids Line and CoCaLo, the royalty rate remained the same as that used in
2008.
With respect to such testing in 2008, the difference between the fair value of the trade names
and their carrying value resulted in an aggregate impairment charge of $3.7 million, which was
related to CoCaLo® ($1.9 million), Sassy® ($1.7 million) and LaJobi® ($0.1 million) in the fourth
quarter of 2008. In addition, the Company also tested for the impairment of its Applause® trade
name, which is a definite-lived intangible asset, as a result of the Gift Sale. With respect to the
Applause® trade name, fair value was based on the terms of its license to TRC and in connection
therewith, an impairment charge of $6.7 million was recorded in the fourth quarter of 2008. In the
Companys analysis for 2008, it used a five-year projection period, which has been its prior
practice, with single digit long-term growth rates, as well as royalty rates of 5%, 2%, 5% and 4%
for Kids Line, Sassy, LaJobi and CoCaLo, respectively. For the 2008 testing, the royalty rate for
Sassy was decreased from the rate used in 2007 due to lower gross profit margins reported and
expected by Sassy and the previously-disclosed anticipated reduction in revenue and cash flows
resulting from the termination of the MAM Agreement. At the time of the assessment of impairment
(the fourth quarter of 2008), combined net revenues of Sassy and Kids Line had declined by
approximately 1% from the prior year, and further softness in sales was anticipated during the
remainder of 2009 with respect to Sassy, primarily as a result of a substantial decrease in net
revenues due to the termination of the MAM Agreement, and with respect to Kids Line, primarily as a
result of anticipated continued revenue softness reflecting worsening economic conditions. However,
the Company applied conservative long-term growth rates thereafter for each of Sassy and Kids Line
based on the following. With respect to Sassy, the Companys assumptions were based on anticipated
new product introductions, a re-branding initiative, new packaging for the product line, and the
expiration at the end of 2009 of certain non-competition
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
restrictions associated with the MAM
Agreement. Although the long-term growth rate for Kids Line branded products in 2009 (as opposed to
licensed products) was reduced from historical growth rates due to anticipated revenue reduction,
we assumed growth in the four years thereafter reflecting planned new product introductions and
expansion. With respect to the Applause® trade name, in connection with the Gift Sale, TRC agreed
to pay an annual royalty for the Applause® and Russ® trademarks and trade names of $1.15 million,
as well as a $5 million purchase price for such intellectual property at the end of five years.
Accordingly, the Company determined that the fair value of the allocated royalty stream of the
Applause® and Russ® trade names, based on a present value analysis, was $913,000 for the Applause®
trade names, resulting in the impairment charge recorded. The Russ® trade names do not have any
value ascribed to them on the Companys financial statements.
The Companys other intangible assets with definite lives (consisting of the Applause® trade
name until its total impairment as of the quarter ended June 30, 2009, customer lists and royalty
agreements) continue to be amortized over their estimated useful lives and are tested if events or
changes in circumstances indicate that an asset may be impaired. In testing for impairment, the
Company compares the carrying value of such assets to the estimated undiscounted future cash flows
anticipated from the use of the assets and their eventual disposition. When the estimated
undiscounted future cash flows are less than their carrying amount, an impairment charge is
recognized in an amount equal to the difference between the assets fair value and its carrying
value. Other than the impairment of the Applause trade name recorded in the second quarter of 2009
with respect to the impairment of the Gift Sale Consideration, no impairments were recorded with
respect to the Companys intangible assets with definite lives during 2009. Based upon current
economic conditions, and in connection with the annual impairment testing of intangibles during the
fourth quarter of 2008, the Company determined that the Kids Line customer relationships would be
amortized over a 20-year period rather than having an indefinite life. In connection therewith, the
Company recorded $389,000 of amortization expense for the three months and year ended December 31,
2008, and $1.6 million of amortization expense for 2009. In addition, as discussed above, an
impairment charge to the Applause® trade name was recorded in the fourth quarter of 2008 as a
result of the Gift Sale and in 2009 as a result of the impairment of the Gift Sale Consideration.
Other than the foregoing, the Company determined that the carrying value of its definite-lived
intangible assets was fully recoverable.
As many of the factors used in assessing fair value are outside the control of management, the
assumptions and estimates used in such assessment may change in future periods, which could require
that we record additional impairment charges to our assets. The Company will continue to monitor
circumstances and events in future periods to determine whether additional asset impairment testing
or recordation is warranted.
Goodwill
The Company completed its annual goodwill assessment for its continuing operations as of
December 31, 2008. The conclusion reached as a result of such testing was that the fair value of
its continuing operations for which goodwill had been allocated, was below its carrying value,
indicating such goodwill may be impaired. As a result of step two of the impairment testing, the
Company recorded a goodwill impairment charge of $130.2 million to write-off all of its goodwill
(which was
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
determined to have no implied value). As a result of the foregoing, no goodwill
assessment testing was required as of December 31, 2009.
Managements determination of the fair value of its continuing operations incorporates
multiple inputs including discounted cash flow calculations, the level of the Companys own share
price and assumptions that market participants would make in valuing such continuing operations.
Other assumptions include levels of economic capital, future business growth, earnings projections,
assets under management and the discount rate utilized. As part of the Companys goodwill analysis
for 2008, the Company compared the fair value of its continuing operations to the market
capitalization of the Company using the December 31, 2008 common stock price. The impairment charge
resulted in part from adverse equity and credit market conditions that caused a sustained decrease
in current market multiples and the Companys stock price, a decrease in valuations of U.S. public
companies and corresponding increased costs of capital created by the weakness in the U.S.
financial markets and decreases in cash flow forecasts for the markets in which the Company
operates. The impairment charge will not result in any current or future cash expenditures.
Changes in the carrying amount of goodwill during the year ended December 31, 2008 are as
follows:
(in thousands) | ||||
Goodwill at December 31, 2007 |
$ | 120,777 | ||
Increase from LaJobi acquisition |
9,425 | |||
Other |
(4 | ) | ||
Impairment |
(130,198 | ) | ||
Goodwill at December 31, 2008 |
$ | | ||
Note 6Financial Instruments
The Company adopted on January 1, 2008,
the FASB
standard, on accounting for fair value measurements and disclosures, for its financial assets and liabilities that
are remeasured and reported at fair value at each reporting period. This standard defines fair
value of assets and liabilities as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date
(an exit price). The statement outlines a valuation framework and creates a fair value hierarchy in
order to increase the consistency and comparability of fair value measurements and the related
disclosures. Under generally accepted accounting principles, certain assets and liabilities must be
measured at fair value, and the standard details the disclosures that are required for items
measured at fair value.
Financial assets and liabilities are measured using inputs from the three levels of the
required fair value hierarchy. The three levels are as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
Level 1Inputs are unadjusted quoted prices in active markets for identical assets or
liabilities. The Company currently has no Level 1 assets or liabilities that are measured at a fair
value on a recurring basis.
Level 2Inputs include quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are not active, inputs
other than quoted prices that are observable for the asset or liability (i.e., interest rates,
yield curves, etc.), and inputs that are derived principally from or corroborated by observable
market data by correlation or other means (market corroborated inputs). Most of the Companys
assets and liabilities fall within Level 2 and include foreign exchange contracts (when applicable)
and interest rate swap agreements. The fair value of foreign currency and interest rate swap
contracts are based on third-party market maker valuation models that discount cash flows resulting
from the differential between the contract rate and the market-based forward rate or curve
capturing volatility and establishing intrinsic and carrying values.
Level 3Unobservable inputs that reflect the Companys assessment about the assumptions that
market participants would use in pricing the asset or liability. The Company currently has no Level
3 assets or liabilities that are measured at a fair value on a recurring basis.
This hierarchy requires the Company to minimize the use of unobservable inputs and to use
observable market data, if available, when determining fair value. Observable inputs are based on
market data obtained from independent sources, while unobservable inputs are based on the Companys
market assumptions. Unobservable inputs require significant management judgment or estimation. In
some cases, the inputs used to measure an asset or liability may fall into different levels of the
fair value hierarchy. In those instances, the fair value measurement is required to be classified
using the lowest level of input that is significant to the fair value measurement. In accordance
with the applicable FASB standard, the Company is not permitted to adjust quoted market prices in
an active market.
In accordance with the fair value hierarchy described above, the following table shows the
fair value of the Companys interest rate swap (See Note 8) as of December 31, 2009 (in thousands):
December | Fair Value Measurements as of December 31, 2009 | |||||||||||||||
31, 2009 | Level 1 | Level 2 | Level 3 | |||||||||||||
Interest rate swap |
$ | (678 | ) | $ | | $ | (678 | ) | $ | |
The fair value of the interest swap of $678,000 and $2,073,000 is included in the Companys
accrued expenses on the balance sheet at December 31, 2009 and 2008, respectively. Changes between
its cost and its fair value resulted in income of approximately $1.4 million for the year ended
December 31, 2009 and expense of approximately $2.1 million for the year ended December 31, 2008,
and such amounts are included in interest expense in the consolidated statements of operations.
Cash and cash equivalents, trade accounts receivable, inventory, income tax receivable, trade
accounts payable, accrued expenses and short-term debt are reflected in the consolidated balance
sheets at carrying value, which approximates fair value due to the short-term nature of these
instruments.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
The carrying value of the Companys term loan borrowings approximates fair value because
interest rates under the term loan borrowings are variable, based on prevailing market rates.
There have been no material changes to the Companys valuation techniques during the year
ended December 31, 2009 as compared to prior years.
Foreign Currency Forward Exchange Contracts
Certain of the Companys subsidiaries periodically entered into foreign currency forward
exchange contracts to hedge inventory purchases, both anticipated and firm commitments, denominated
in currencies other than the United States dollar. These contracts reduce foreign currency risk
caused by changes in exchange rates and are used to offset the currency impact of these inventory
purchases, generally for periods up to 13 months. At December 31, 2009 and 2008, the Company had no
forward contracts.
Concentrations of Credit Risk
As part of its ongoing risk assessment procedures, the Company monitors concentrations of
credit risk associated with financial institutions with which it conducts business. The Company
avoids concentration with any single financial institution.
The Company also monitors the creditworthiness of its customers to which it grants credit
terms in the normal course of business. Toys R Us, Inc. and Babies R Us, Inc. in the aggregate
accounted for approximately 46.9%, 43.8% and 41.9% of the Companys consolidated net sales from
continuing operations for 2009, 2008 and 2007, respectively, and Target accounted for approximately
12.3%, 11.6% and 13.3% of the Companys consolidated net sales from continuing operations for 2009,
2008 and 2007, respectively. The loss of any of these customers, or a significant reduction in the
volume of business conducted with such customers, could have a material adverse impact on the
Company. The Company does not normally require collateral or other security to support credit
sales.
Note 7Property, Plant and Equipment
Property, plant and equipment consists of the following (in thousands):
December 31, | ||||||||
2009 | 2008 | |||||||
Land |
$ | 690 | $ | 690 | ||||
Buildings |
2,155 | 2,150 | ||||||
Machinery and equipment |
5,693 | 5,520 | ||||||
Furniture and fixtures |
984 | 723 | ||||||
Leasehold improvements |
872 | 912 | ||||||
10,394 | 9,995 | |||||||
Less: Accumulated depreciation and
amortization |
(6,143 | ) | (5,529 | ) | ||||
$ | 4,251 | $ | 4,466 | |||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
Depreciation expense from continuing operations was approximately $1.0 million, $0.8 million
and $0.7 million, for the years ended December 31, 2009, 2008 and 2007, respectively.
Note 8Debt
Consolidated long-term debt at December 31, 2009 and December 31, 2008 consisted of the
following (in thousands):
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Term Loan (Credit Agreement) |
$ | 67,000 | $ | 89,200 | ||||
Note Payable (CoCaLo purchase) |
1,025 | 1,498 | ||||||
Total |
68,025 | 90,698 | ||||||
Less current portion |
13,533 | 14,933 | ||||||
Long-term debt |
$ | 54,492 | $ | 75,765 | ||||
The aggregate maturities of long-term debt at December 31, 2009 are as follows (in thousands):
2010 |
$ | 13,533 | ||
2011 |
13,492 | |||
2012 |
13,000 | |||
2013 |
28,000 | |||
2014 |
| |||
Total |
$ | 68,025 | ||
At December 31, 2009 and December 31, 2008, there was approximately $15.1 million and $12.1
million, respectively, borrowed under the Revolving Loan (defined below), which is classified as
short-term debt. At December 31, 2009, Revolving Loan Availability was $31.4 million.
As of December 31, 2009, the applicable interest rate margins were: 4.00% for LIBOR Loans and
3.00% for Base Rate Loans. The weighted average interest rates for the outstanding loans as of
December 31, 2009 were as follows:
At December 31, 2009 | ||||||||
LIBOR Loans | Base Rate Loans | |||||||
Revolving Loan |
4.24 | % | 6.25 | % | ||||
Term Loan |
4.27 | % | 6.25 | % |
Credit Agreement Summary
On March 14, 2006, Kids Line and Sassy entered into a credit agreement as borrowers, on a
joint and several basis, with LaSalle Bank National Association as administrative agent and
arranger (the Agent), the lenders from time to time party thereto, KID as loan party
representative, Sovereign Bank as syndication agent, and Bank of America, N.A. as documentation
agent (as amended on December 22, 2006, the Original Credit Agreement). The commitments under the
Original Credit
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
Agreement consisted of (a) a $35.0 million revolving credit facility (the Original Revolving
Loan), with a subfacility for letters of credit in an amount not to exceed $5.0 million, and (b) a
term loan facility in the original amount of $60 million (the Original Term Loan).
In connection with the purchase of LaJobi and CoCaLo as of April 2, 2008, KID, Kids Line,
Sassy, the CoCaLo Buyer, LaJobi and CoCaLo (via a Joinder Agreement) entered into an Amended and
Restated Credit Agreement (the Credit Agreement) with certain financial institutions party to the
Original Credit Agreement or their assignees (the Lenders), LaSalle Bank National Association, as
Agent and Fronting Bank, Sovereign Bank as Syndication Agent, Wachovia Bank, N.A. as Documentation
Agent and Banc of America Securities LLC as Lead Arranger. Kids Line, Sassy, the CoCaLo Buyer,
LaJobi and CoCaLo are referred to herein collectively as the Borrowers, and the CoCaLo Buyer,
LaJobi and CoCaLo are referred to herein as the New Borrowers. The Credit Agreement amended and
restated the Original Credit Agreement, and added the New Borrowers as parties thereto. The Pledge
Agreement dated as of March 14, 2006 between KID and the Agent (as amended on December 22, 2006)
was also amended and restated as of April 2, 2008 (the Amended and Restated Pledge Agreement), to
provide, among other things, for a pledge of the capital stock of the CoCaLo Buyer by KID. In
connection with the Credit Agreement, 100% of the equity of each Borrower, including each New
Borrower, has been pledged as collateral to the Agent. In addition, the Guaranty and Collateral
Agreement (as defined in the Credit Agreement) was also amended and restated as of April 2, 2008
(the Amended and Restated Guaranty and Collateral Agreement), to add the New Borrowers as parties
and to include substantially all of the existing and future assets and properties of the New
Borrowers as security for the satisfaction of the obligations of all Borrowers, including the New
Borrowers, under the Credit Agreement and the other related loan documents.
The Credit Agreement was amended via a First Amendment to Credit Agreement as of August 13,
2008 to clarify the definition of Covenant EBITDA (defined below). In addition, the Amended and
Restated Pledge Agreement was further amended, in order to, among other things, permit the creation
of RB Trademark Holdco, LLC (IP Sub), and the transfer to KID of various inactive subsidiaries
and the interest in the Shining Stars Website.
As of March 20, 2009, KID and the Borrowers entered into a Second Amendment to Credit
Agreement with the Lenders and the Agent (the Second Amendment). In connection with the
Second Amendment: (i) the Amended and Restated Pledge Agreement and the Amended and Restated
Guaranty and Collateral Agreement were further amended to provide, among other things, for a pledge
to the Agent by KID of the membership interests in IP Sub; and (ii) KID executed a Joinder
Agreement in favor of the Agent, the effect of which was to add KID as a guarantor under the Credit
Agreement and each other Loan Document to which a Guarantor is a party and to include substantially
all of the existing and future assets and properties of KID (subject to specified exceptions) as
security for the satisfaction of the obligations of all the Borrowers under the Credit Agreement,
as amended, and the other related loan documents. In connection with the Second Amendment, the
Company paid the Agent and Lenders aggregate amendment and arrangement fees of 1.25% of the revised
commitments. The scheduled maturity date is April 1, 2013 (subject to customary early termination
provisions).
The following constitute the material changes to the Credit Agreement effected by the Second
Amendment:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
(i) The commitments now consist of: (a) a $50.0 million revolving credit facility (the
Revolving Loan), with a subfacility for letters of credit in an amount not to exceed
$5.0 million, and (b) an $80.0 million term loan facility (the Term Loan).
(ii) The Loans under the Credit Agreement bear interest at a rate per annum equal to the Base
Rate (for Base Rate Loans) or the LIBOR Rate (for LIBOR Loans) at the option of the Borrowers, plus
an applicable margin, in accordance with a pricing grid based on the most recent quarter-end Total
Debt to Covenant EBITDA Ratio. The applicable interest rate margins (to be added to the applicable
interest rate) under the Credit Agreement now range from 2.0%
4.25% for LIBOR Loans and from 1.0% 3.25% for Base Rate Loans, based on a pricing grid set forth in the Second Amendment. The Second
Amendment also amended the Base Rate definition to include a floor of 30 day LIBOR plus 1%.
(iii) The Credit Agreement now contains the following financial covenants: (a) a minimum Fixed
Charge Coverage Ratio of 1.25:1.00 for the fourth quarter of 2009 and the first quarter of 2010 and
1.35:1.00 for each fiscal quarter thereafter; (b) a maximum Total Debt to Covenant EBITDA Ratio of
3.50:1.00 for the fourth quarter of 2009, a step down to 3.25:1.00 for first three quarters of 2010
and, a step down to 2.75:1.00 for the fourth quarter of 2010 and each fiscal quarter thereafter;
and (c) an annual capital expenditure limitation. Covenant EBITDA, as defined in the Second
Amendment, is a non-GAAP financial measure used to determine the Companys compliance with the
minimum Fixed Charge Coverage Ratio and Total Debt to Covenant EBITDA ratio, as well as to
determine Total Debt to Covenant EBITDA for purposes of the relevant interest rate margins
applicable to the Loans under the Credit Agreement, and whether certain dividends and repurchases
can be made if other pre-requisites described in the Second Amendment are met. Covenant EBITDA is
determined on a consolidated basis, and is defined generally as consolidated net income (after
excluding specified non-cash, non-recurring and other specified items), as adjusted for interest
expense; income tax expense; depreciation; amortization; other non-cash charges (gains); specified
costs in connection with each of our senior financing, specified acquisitions, and specified
requirements under the Credit Agreement; non-cash transaction losses (gains) due solely to
fluctuations in currency values; and specified costs in connection with the sale of our Gift
Business. For purposes of the Fixed Charge Coverage Ratio, Covenant EBITDA is further adjusted for
unfinanced capital expenditures; specified cash taxes and distributions pertaining thereto; and
specified cash dividends.
(iv) The Credit Agreement also contains customary affirmative and negative covenants. Upon the
occurrence of an event of default under the Credit Agreement, including a failure to remain in
compliance with all applicable financial covenants, the lenders could elect to declare all amounts
outstanding under the Credit Agreement to be immediately due and payable. In addition, an event of
default under the Credit Agreement could result in a cross-default under certain license agreements
that we maintain. The Borrowers were in compliance with all applicable financial covenants in the
Credit Agreement as of December 31, 2009.
(v) The principal of the Term Loan is being repaid in quarterly installments of $3.25 million
on the last day of each fiscal quarter commencing with the quarter ended March 31, 2009 through
December 31, 2012, and a final payment of $28.0 million due on April 1, 2013.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
(vi) The Borrowers are required to make prepayments of the Term Loan upon the occurrence of
certain transactions, including most asset sales or debt or equity issuances, and extraordinary
receipts. In addition, IP Sub must make mandatory prepayments of 100% of any net cash proceeds of
any asset sale.
(vii) The Second Amendment eliminated all restrictions on the ability of the Borrowers to
distribute cash to KID for the payment of KIDs overhead expenses. However, KID will not be
permitted to pay a dividend to its shareholders unless: (1) the LaJobi and CoCaLo Earnout
Consideration, if any, have been paid in full; (2) before and after giving effect to any such
dividend, (a) no default or event of default exists or would result therefrom, (b) Excess Revolving
Loan Availability will equal or exceed $4.0 million, and (c) before and after giving effect to any
such payment, the applicable financial covenants will be satisfied; and (3) the Total Debt to
Covenant EBITDA Ratio for the two most recently completed fiscal quarters shall have been less than
2.00:1.00. In addition, pursuant to the Second Amendment, KID is not permitted to repurchase or
redeem stock (with certain limited exceptions) unless (1) the LaJobi and CoCaLo Earnout
Consideration, if any, have been paid in full, (2) before and after giving effect to any such
dividend, (a) no default or event of default exists or would result therefrom, (b) Excess Revolving
Loan Availability will equal or exceed $5.0 million, and (c) before and after giving effect to any
such payment, the applicable financial covenants will be satisfied, and (3) the Total Debt to
Covenant EBITDA Ratio for the two most recently completed fiscal quarters shall have been less than
2.00:1.00. Other restrictions on dividends and distributions are set forth in the Credit Agreement,
as amended by the Second Amendment.
(viii) The following fees are now applicable to the Credit Agreement: an agency fee of $35,000
per annum, an annual non-use fee of 0.55% to 0.80% of the unused amounts under the Revolving Loan,
as well as other customary fees as are set forth in the Credit Agreement, as amended.
Other provisions of the Credit Agreement, as amended, include the following:
(i) | The definition of Borrowing Base is 85% of eligible receivables plus the lesser of (x) $25.0 million and (y) 55% of eligible inventory. | ||
(ii) | Payment of the amounts outstanding under the promissory note under the Stock Agreement is prohibited if before and after giving effect to any such repayment, a default or event of default would exist. | ||
(iii) | Payment of either of the LaJobi or CoCaLo Earnout Consideration is prohibited if before and after giving effect to any such repayment, (a) a default or event of default would exist, (b) Excess Revolving Loan Availability will not equal or exceed $9.0 million, or (c) before and after giving effect to any such repayment, the financial covenants under the Credit Agreement will not be satisfied (the Earnout Conditions). | ||
(iv) | The Credit Agreement contains specified events of default related to the LaJobi and CoCaLo Earnout Consideration (including the failure to deliver to the Agent specified certifications and calculations within a specified time period, the reasonable determination by the Agent that any Earnout Conditions will not be satisfied as of the |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
applicable payment date, if any, material information provided to the Agent with respect to the Earnout Conditions shall be incorrect in any material respect and remain unremedied prior to the relevant payment date, or any Earnout Consideration payments are paid at any time that the Earnout Conditions are not satisfied). | |||
(v) | The Borrowers are required to maintain in effect Hedge Agreements that protect against potential fluctuations in interest rates with respect to a minimum of 50% of the outstanding amount of the Term Loan. Pursuant to the requirement to maintain Hedge Agreements on May 2, 2008, the Borrowers entered into an interest rate swap agreement with a notional amount of $70 million as a risk management tool to lock the interest cash outflows on the floating rate debt. However, because we did not meet the criteria for hedge accounting under generally accepted accounting principles for this instrument, changes in the fair value of the interest rate swap will be remeasured through the statement of operations each period. Changes between its cost and its fair value as of December 31, 2009 resulted in income of approximately $1.4 million for the year ended December 31, 2009 and expense of approximately $2.1 million for the year ended December 31, 2008, and such amounts are included in interest expense in the consolidated statements of operations. |
Financing costs associated with the amended revolver and term loans, are deferred and are
amortized over the contractual term of the debt. As a result of the amendment, based upon the FASB
standard for deferred financing costs, the Company recorded a non-cash charge to results of
operations of approximately $0.4 million for the write off of deferred financing costs in the year
ended December 31, 2009.
Note 9Accrued Expenses
Accrued expenses consist of the following (in thousands):
December 31, | ||||||||
2009 | 2008 | |||||||
Payroll and incentive compensation |
$ | 3,952 | $ | 3,366 | ||||
Other (a) |
4,732 | 9,883 | ||||||
Total |
$ | 8,684 | $ | 13,249 | ||||
(a) | No individual item exceeds five percent of current liabilities. |
Note 10Severance and Related Costs
During 2009, the Company recorded a charge of $0.9 million in selling, general and
administrative expense for severance related to the departure of two executives. During 2007, the
Company recorded a charge of $2.9 million in selling, general and administrative expense for
severance related to the departure of the Companys former Chief Executive Officer.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
Note 11Income Taxes
The Company and its domestic subsidiaries file a consolidated Federal income tax return.
The U.S. and foreign components of income (loss) from continuing operations before income tax
provision (benefit) are as follows (in thousands):
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
United States |
$ | 3,414 | $ | (129,500 | ) | $ | 11,649 | |||||
Foreign |
1,129 | 1,129 | 1,573 | |||||||||
$ | 4,543 | $ | (128,371 | ) | $ | 13,222 | ||||||
Income tax provision (benefit) from continuing operations consists of the following (in
thousands):
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Current |
||||||||||||
Federal |
$ | (3,522 | ) | $ | (1,844 | ) | $ | 3,269 | ||||
Foreign |
447 | 555 | 651 | |||||||||
State |
322 | 612 | 1,157 | |||||||||
$ | (2,753 | ) | $ | (677 | ) | $ | 5,077 | |||||
Deferred |
||||||||||||
Federal |
(2,996 | ) | (23,845 | ) | (801 | ) | ||||||
State |
(1,413 | ) | (4,509 | ) | (149 | ) | ||||||
(4,409 | ) | (28,354 | ) | (950 | ) | |||||||
$ | (7,162 | ) | $ | (29,031 | ) | $ | 4,127 | |||||
The current tax benefit is primarily related to a decrease in tax reserves associated with the
expiration of the statute of limitations in various jurisdictions
during 2009. This benefit was partially offset by
federal income tax expense on domestic operations, foreign tax expense on profitable operations in
Australia and state tax expense on profitable operations for Kids Line and LaJobi.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
A reconciliation of the provision (benefit) for income taxes on continuing operations with
amounts computed at the statutory Federal rate is shown below (in thousands):
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Income tax provision (benefit) at U.S. Federal statutory rate |
$ | 1,545 | $ | (44,930 | ) | $ | 4,628 | |||||
State income tax, net of Federal tax benefit |
(720 | ) | (2,533 | ) | 655 | |||||||
Foreign rate differences |
63 | 160 | 101 | |||||||||
Change in valuation allowance affecting income tax expense |
(3,886 | ) | 19,275 | | ||||||||
Change in unrecognized tax benefits |
(5,112 | ) | (3,812 | ) | (1,337 | ) | ||||||
Changes in federal rate used |
1,099 | | | |||||||||
Other, net |
(151 | ) | 2,809 | 80 | ||||||||
$ | (7,162 | ) | $ | (29,031 | ) | $ | 4,127 | |||||
The components of the deferred tax asset and the valuation allowance, resulting from temporary
differences between accounting for financial and tax reporting purposes, were as follows (in
thousands):
December 31, | ||||||||
2009 | 2008 | |||||||
Assets (Liabilities) |
||||||||
Deferred tax assets: |
||||||||
Inventories |
$ | 1,449 | $ | 971 | ||||
Accruals / reserves |
1,314 | 563 | ||||||
Investment impairments and unrealized losses |
6,130 | | ||||||
Foreign tax credit carry forward |
11,859 | 13,889 | ||||||
Charitable contributions carry forwards |
285 | 191 | ||||||
State net operating loss carry forwards |
1,024 | 1,288 | ||||||
Foreign net operating loss carry forwards |
361 | 498 | ||||||
Intangible assets |
35,436 | 40,416 | ||||||
Depreciation |
12 | 11 | ||||||
Other |
1,161 | 690 | ||||||
Gross deferred tax asset |
59,031 | 58,517 | ||||||
Less: valuation allowance |
(24,334 | ) | (28,220 | ) | ||||
Net deferred tax asset |
34,697 | 30,297 | ||||||
Deferred tax liabilities: |
||||||||
Unrepatriated earnings of foreign subsidiaries |
(354 | ) | (225 | ) | ||||
Other |
(743 | ) | (172 | ) | ||||
Gross deferred tax liability |
(1,097 | ) | (397 | ) | ||||
Total net deferred tax asset (liability) |
$ | 33,600 | $ | 29,900 | ||||
At December 31, 2009 and 2008, the Company has provided total valuation allowances of
$24.3 million and $28.2 million, respectively, on those deferred tax assets for which management
has determined that it is more likely than not that such deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible and other factors.
The valuation allowance decreased by $3.9 million in 2009 primarily related to the reduction in the
deferred tax asset for intangible assets. The valuation allowance increased by $10.3 million in
2008 primarily related to
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
the impairment charge of approximately $21.5 million on the Kids Line, Sassy, LaJobi, CoCaLo
and Applause intangible assets, an increase in valuation allowance of approximately $3.7 million
related to foreign tax credit carry forwards, offset by a reduction in the valuation allowances of
foreign net operating loss carry forwards related to the foreign operations of the gift business
which were sold of approximately $6.4 million, a reduction of approximately $7.5 million on other
tax deductible reserves as a result of the sale of the gift business, and a reduction of
approximately $0.9 million related to state net operating loss carry forwards.
Provisions are made for estimated United States and foreign income taxes, less available tax
credits and deductions, which may be incurred on the remittance of foreign subsidiaries
undistributed earnings. At December 31, 2009 and 2008, the Company has recorded a deferred tax
liability of $0.4 million and $0.2 million, respectively, related to the repatriation of its
foreign subsidiaries undistributed earnings that are not treated as permanently reinvested due to
the Companys recent history of repatriation of these earnings. The liability decreased during 2008
due to the sale of the Gift Business. The Company has sufficient foreign tax credit carry forwards
to offset this deferred tax liability.
The Company has state net operating loss carry forwards of $11.5 million which
expire in 2016-2029, and foreign net operating loss carry forwards of $1.3 million which
are indefinite in nature. The Company has foreign tax credits carry forwards of $11.9 million which
expire in 2014-2019.
To evaluate a tax position, the Company must first determine whether it is more likely than
not that the tax position will be sustained upon examination based on its technical merits. If a
tax position meets such recognition threshold it is then measured at the largest amount of benefit
that is greater than 50 percent likely of being realized upon settlement with a taxing authority to
determine the amount of benefit to recognize in the financial statements. The liability for
unrecognized tax benefits is classified as non-current unless the liability is expected to be
settled in cash within 12 months of the reporting date. The Company did not make any additional
adjustments to its 2007 opening balance sheet related to the implementation of these new
principles, other than to reclassify the portion of its tax liabilities to non-current which the
Company did not anticipate would settle, or for which the statute of limitations would not close in
the next twelve months, and the Company did not make any adjustments to its opening retained
earnings related to the implementation of these new principles.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows
(in thousands):
2009 | 2008 | |||||||
Balance at January 1 |
$ | 9,582 | $ | 13,394 | ||||
Increases related to prior year tax positions |
174 | | ||||||
Decreases related to prior year tax positions |
(661 | ) | | |||||
Reductions due to lapsed statute of limitations |
(4,625 | ) | (3,812 | ) | ||||
Balance at December 31 |
$ | 4,470 | $ | 9,582 | ||||
The above table includes interest and penalties of $0.1 million as of December 31, 2009, and
interest and penalties of $0.1 million as of December 31, 2008. The Company has elected to record
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
interest and penalties as an income tax expense. Included in the liability for unrecorded tax
benefits as of December 31, 2009 are $0.7 million of unrecognized tax benefits that if recognized
would impact the effective tax rate. Also included in the liability for unrecorded tax benefits as
of December 31, 2009 are $3.8 million of unrecognized tax benefits that, if recognized, would be
offset by foreign tax credit carry forwards. The Company has adjusted its valuation allowances on
this item to recognize this benefit. The Company anticipates that the unrecorded tax benefits at
December 31, 2009 could decrease by approximately $3.8 million within the next twelve months as a
result of the expiration of the statute of limitations.
The Company files federal and state income tax returns, as applicable, in the United States,
Australia, the European Union and the United Kingdom. The Company is not presently undergoing any
significant tax audits in any of these jurisdictions. As of December 31, 2009, a summary of the tax
years that remain subject to examination in the Companys major jurisdictions are:
United Statesfederal
|
2006 and forward | |
United Statesstates
|
2004 and forward | |
Foreign
|
2002 and forward |
Note 12Weighted Average Common Shares
During 2009, the Company adopted a FASB standard which requires the
Company to include specified participating securities in the two-class method of computing earnings
per share (EPS). Under the two-class method, EPS is computed by dividing earnings allocated to
common stockholders by the weighted-average number of common shares outstanding for the period. In
determining the number of common shares, earnings are allocated to both common shares
and participating securities based on the respective number of weighted-average shares outstanding
for the period. Participating securities include restricted stock and unvested restricted stock awards where, like the
Companys restricted stock awards, such awards carry a right to receive non-forfeitable dividends,
if declared. The requirements of this accounting standard were effective for the Company as of
January 1, 2009. As a result, the Companys EPS for the first and second quarter of 2009 were
restated to reflect the impact of the adoption of this standard and the effects of such restatement
were immaterial.
EPS for the quarter and year ended December 31, 2008 have also been restated,
as the Company had incorrectly included unvested restricted
stock in its basic earnings per common share calculations for such periods, which
was not the appropriate treatment for such periods. The effects of such restatement were
immaterial.
With respect to RSUs, as the right to receive dividends or dividend equivalents is contingent
upon vesting or exercise, in accordance with the accounting standard, we do not include unvested
RSUs in the calculation of basic earnings per share. To the extent such RSUs are settled in stock,
such stock will be included in the calculation of basic earnings per share upon such settlement.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
The weighted average common shares outstanding included in the computation of basic and
diluted net earnings (loss) per share is set forth below (in thousands):
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Weighted average common shares outstanding |
21,371 | 21,302 | 21,130 | |||||||||
Dilutive effect of common shares issuable upon
exercise of stock options and SARs (settled in
stock) |
161 | | 85 | |||||||||
Weighted average common shares
outstanding assuming dilution |
21,532 | 21,302 | 21,215 | |||||||||
As of December 31, 2009, 2008 and 2007, the Company had 880,615, 1,941,379 and 1,181,035 stock
options outstanding, respectively, that were excluded from the computation of diluted EPS because
they would be anti-dilutive due to their exercise price exceeding the average market price in 2009
and 2007, and due to the loss the Company incurred from continuing operations in 2008.
As of December 31, 2009 and 2008, the Company had 278,000 and 118,000 stock appreciation
rights (SARs) outstanding, respectively, that were excluded from the computation of diluted EPS
because they would be anti-dilutive due to their exercise price exceeding the average market price
in 2009 and 2008. There were no SARs issued or outstanding in 2007.
Note 13Related Party Transactions
Lawrence Bivona, the President of LaJobi, along with various family members, established L&J
Industries, in Asia. The purpose of the entity is to provide quality control services to LaJobi
for goods being shipped from Asian ports. The Company has used this service since April 2008. For
the years ended December 31, 2009 and 2008, the Company incurred costs, recorded in cost of goods
sold, aggregating approximately $1.0 million and $0.7 million, respectively, related to the
services provided. Such costs were based on the actual, direct costs incurred by L&J Industries for
such individuals. CoCaLo contracts for warehousing and distribution services from a company that,
until October 15, 2009, had a partner that was the estate of the father of, and is managed by the
spouse of, Renee Pepys Lowe, an executive officer of the Company. As of 2010, this company is owned
by unrelated parties but the spouse of Renee Pepys Lowe is still a manager of the business. For
the years ended December 31, 2009 and 2008, CoCaLo paid approximately $2.2 million and $1.5
million, respectively, to such company for these services. In addition, CoCaLo rented certain
office space from the same company at a rental cost for the years ended December 31, 2009 and 2008
of approximately $137,000 each year. These expenses were recorded in selling, general and
administrative expense. The lease for the office space expired December 31, 2009 and was not
renewed.
In connection with the sale of the Gift Business, KID entered into a transition services
agreement (the TSA), pursuant to which, for periods of time and consideration specified in the
TSA, the Company and TRC will provide certain specified transitional services to each other. For
the twelve months ended December 31, 2009, the Company accrued $75,000 pursuant to the TSA, not
including
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
payments made by the Australian and U.K. subsidiaries of Kids Line for the sublease of certain
office and warehouse space, which amounts are payable to TRC, or payments by Sassy to a TRC
subsidiary for the use of certain employees in the Peoples Republic of China.
From April 1, 2009 to October 13, 2009, Raphael Benaroya was retained by the Company to
perform an expanded role as Chairman of the Board. During such period, Mr. Benaroya was paid
approximately $175,000, which amount was in lieu of regular director and committee fees.
Note 14Leases
At December 31, 2009, the Company and its subsidiaries were obligated under operating lease
agreements (principally for buildings and other leased facilities) for remaining lease terms
ranging from 6 months to 7.6 years.
Rent expense for continuing operations for the years ended December 31, 2009, 2008 and 2007
amounted to approximately $2.9 million, $2.4 million and $1.4 million, respectively.
The approximate aggregate minimum future rental payments as of December 31, 2009 under
operating leases are as follows (in thousands):
2010 |
$ | 2,380 | ||
2011 |
2,049 | |||
2012 |
1,945 | |||
2013 |
2,012 | |||
2014 |
941 | |||
Thereafter |
2,500 | |||
Total |
$ | 11,827 | ||
The Company has capital leases for equipment and software. The future payments under these
capital leases are approximately $7,000 in 2010 and $1,000 in 2011.
Note 15Stock Repurchase Program
In March 1990, the Board of Directors authorized KID to repurchase an aggregate of 7,000,000
shares of its common stock. As of December 31, 2009 a total of 5,643,284 shares had been
repurchased pursuant to this program. During the twelve month periods ended December 31, 2009, 2008
and 2007, the Company did not repurchase any shares pursuant to this program or otherwise. During
the years ended December 31, 2009, 2008 and 2007 the Company issued from treasury stock 30,977,
169,175 and 208,147 shares, respectively, that were purchased under the stock repurchase program in
prior years.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
Note 16Shareholders Equity
Share-Based Compensation
Equity Plans
As of December 31, 2009, the Company maintained (i) its Equity Incentive Plan (the EI Plan),
which is a successor to the Companys 2004 Stock Option, Restricted and Non-Restricted Stock Plan
(the 2004 Option Plan, and together with the EI Plan, the Plans) and (ii) the 2009 Employee
Stock Purchase Plan (the 2009 ESPP), which was a successor to the Companys 2004 Employee Stock
Purchase Plan (the 2004 ESPP). The EI Plan and the 2009 ESPP were each approved by the Companys
shareholders on July 10, 2008. In addition, the Company may issue equity awards outside of the
Plans discussed above. As of December 31, 2009, there were 20,000 stock options outstanding that
were granted outside the Plans. The exercise or measurement price for equity awards issued under
the Plans or otherwise is generally equal to the closing price of the Companys common stock on the
New York Stock Exchange as of the date the award is granted. Generally, equity awards under the
Plans (or otherwise) vest over a period ranging from three to five years from the grant date as
provided in the award agreement governing the specific grant. Options and stock appreciation rights
generally expire 10 years from the date of grant. Shares in respect of equity awards are issued
from authorized shares reserved for such issuance or treasury shares.
The EI Plan, which became effective July 10, 2008 (at which time no further awards could be
made under the 2004 Option Plan), provides for awards in any one or a combination of: (a) Stock
Options, (b) Stock Appreciation Rights, (c) Restricted Stock, (d) Stock Units, (e) Non-Restricted
Stock, and/or (f) Dividend Equivalent Rights. Any award under the EI Plan may, as determined by the
committee administering the EI Plan (the Plan Committee) in its sole discretion, constitute a
Performance-Based Award (an award that qualifies for the performance-based compensation exemption
of Section 162(m) of the Internal Revenue Code of 1986, as amended). All awards granted under the
EI Plan will be evidenced by a written agreement between the Company and each participant (which
need not be identical with respect to each grant or participant) that will provide the terms and
conditions, not inconsistent with the requirements of the EI Plan, associated with such awards, as
determined by the Plan Committee in its sole discretion. A total of 1,500,000 shares of Common
Stock have been reserved for issuance under the EI Plan. In the event all or a portion of an award
is forfeited, terminated or cancelled, expires, is settled for cash, or otherwise does not result
in the issuance of all or a portion of the shares of Common Stock subject to the award in
connection with the exercise or settlement of such award (Unissued Shares), such Unissued Shares
will in each case again be available for awards under the EI Plan pursuant to a formula set forth
in the EI Plan. The preceding sentence applies to any awards outstanding on July 10, 2008 under the
2004 Option Plan, up to a maximum of an additional 1,750,000 shares of Common Stock. At December
31, 2009, 1,432,946 shares were available for issuance under the EI Plan.
The 2009 ESPP became effective on January 1, 2009. A total of 200,000 shares of Common Stock
have been reserved for issuance under the 2009 ESPP. At December 31, 2009, 122,096 shares were
available for issuance under the 2009 ESPP, after giving effect to the 77,904 shares issued
thereunder with respect to the 2009 plan year.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
Impact on Net Income
The components of share-based compensation expense for each of 2009, 2008 and 2007 follow:
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Stock option expense |
$ | 690,000 | $ | 810,000 | $ | 37,000 | ||||||
Restricted stock expense |
525,000 | 686,000 | 32,000 | |||||||||
Restricted stock unit expense |
20,000 | 4,000 | | |||||||||
SAR expense |
219,000 | | | |||||||||
ESPP expense |
151,000 | 135,000 | 117,000 | |||||||||
Total share-based payment expense |
$ | 1,605,000 | $ | 1,635,000 | $ | 186,000 | ||||||
The Company records share-based compensation expense in the statements of operations within
the same categories that payroll expense is recorded in selling general and administrative expense.
No share-based compensation expense was capitalized in inventory or any other assets for the years
ended December 31, 2009, 2008 and 2007.
Stock Options
Stock options are rights to purchase the Companys Common Stock in the future at a
predetermined per share exercise price (generally the closing price for such stock on the New York
Stock Exchange on the date of grant). Stock Options may be either: Incentive Stock options (stock
options which comply with Section 422 of the Code), or Nonqualified Stock Options (stock options
which are not Incentive Stock Options).
As of December 31, 2009, the total remaining unrecognized compensation cost related to
non-vested stock options, net of forfeitures, was approximately $2.0 million, and is expected to be
recognized over a weighted-average period of 3.1 years.
The fair value of options granted under stock option plans or otherwise is estimated on the
date of grant using a Black-Scholes-Merton options pricing model using the assumptions discussed
below. Expected volatilities are calculated based on the historical volatility of the Companys
stock. The expected term of options granted is derived from the vesting period of the award, as
well as historical exercise behavior, and represents the period of time that options granted are
expected to be outstanding. Management monitors stock option exercises and employee termination
patterns to estimate forfeitures rates within the valuation model. Separate groups of employees,
directors and officers that have similar historical exercise behavior are considered separately for
valuation purposes. The risk-free interest rate is based on the Treasury note interest rate in
effect on the date of grant for the expected term of the stock option. The assumptions used to
estimate the fair value of the stock options granted during the years ended December 31, 2009, 2008
and 2007 were as follows:
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | ||||||
Risk-free interest rate |
2.45 | % | 3.06 | % | 3.48 | % | ||||||
Volatility |
80.0 | % | 40.5 | % | 39.0 | % | ||||||
Expected term (years) |
5.00 | 5.0 | 4.4 | |||||||||
Weighted-average fair value of options granted |
$ | 4.32 | $ | 4.53 | $ | 6.00 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
Activity regarding outstanding options for 2009, 2008 and 2007 is as follows:
All Stock Options Outstanding | ||||||||
Weighted Average | ||||||||
Shares | Exercise Price | |||||||
Options Outstanding as of December 31, 2007 |
1,775,417 | $ | 18.20 | |||||
Options Granted |
256,000 | 11.50 | ||||||
Options Forfeited/Cancelled* |
(90,038 | ) | 18.42 | |||||
Options Outstanding as of December 31, 2008 |
1,941,379 | 17.31 | ||||||
Options Granted |
105,000 | 6.63 | ||||||
Options Forfeited/Cancelled* |
(1,165,764 | ) | 19.49 | |||||
Options Outstanding as of December 31, 2009 |
880,615 | $ | 13.14 | |||||
Option price range at December 31, 2009 |
$ | 6.63-$34.05 |
* | See disclosure below regarding forfeitures. |
There was no aggregate intrinsic value on the unvested and vested outstanding options at
December 31, 2009 and 2008. The aggregate intrinsic value is the total pretax value of in-the-money
options, which is the difference between the fair value at the measurement date and the exercise
price of each option. The intrinsic value of stock options exercised for the years ended
December 31, 2009, 2008 and 2007 was $0, $0 and $1,022,000, respectively. The weighted average fair
value of stock options vested for the years ended December 31, 2009, 2008 and 2007, was $2,351,234,
$2,066,008 and $6,940,902, respectively.
The following table summarizes information about fixed-price stock options outstanding at
December 31, 2009:
Options Outstanding | Options Exercisable | |||||||||||||||||||||||
Number | Weighted Average | Weighted | Number | Weighted | ||||||||||||||||||||
Outstanding | Remaining | Average | Exercisable | Average | ||||||||||||||||||||
Exercise Prices | at 12/31/09 | Contractual Life | Exercise Price | at 12/31/09 | Exercise Price | |||||||||||||||||||
$ | 34.05 | 975 | 4 Years | $ | 34.05 | 975 | $ | 34.05 | ||||||||||||||||
13.05 | 115,000 | 5 Years | 13.05 | 115,000 | 13.05 | |||||||||||||||||||
13.06 | 15,000 | 5 Years | 13.06 | 15,000 | 13.06 | |||||||||||||||||||
11.52 | 20,000 | 5 Years | 11.52 | 20,000 | 11.52 | |||||||||||||||||||
15.05 | 60,000 | 6 Years | 15.05 | 36,000 | 15.05 | |||||||||||||||||||
14.90 | 10,000 | 7 Years | 14.90 | 4,000 | 14.90 | |||||||||||||||||||
16.77 | 178,640 | 7 Years | 16.77 | 79,040 | 16.77 | |||||||||||||||||||
16.05 | 120,000 | 7 Years | 16.05 | 60,000 | 16.05 | |||||||||||||||||||
14.83 | 100,000 | 8 Years | 14.83 | 20,000 | 14.83 | |||||||||||||||||||
13.65 | 51,000 | 8.25 Years | 13.65 | 10,200 | 13.65 | |||||||||||||||||||
7.28 | 105,000 | 9.5 Years | 7.28 | 21,000 | 7.28 | |||||||||||||||||||
6.63 | 105,000 | 9.75 Years | 6.63 | | 6.63 | |||||||||||||||||||
880,615 | $ | 13.14 | 381,215 | $ | 14.27 | |||||||||||||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
The weighted average remaining life of the outstanding options as of December 31, 2009,
2008 and 2007 is 7.3 years, 5.9 years and 7.2 years, respectively.
A summary of the Companys non-vested stock options at December 31, 2009 and changes during
2009 is as follows:
Weighted Average | ||||||||
Grant | ||||||||
Options | Date Fair Value | |||||||
Non-vested stock options |
||||||||
Non-vested at December 31, 2008 |
672,837 | $ | 12.69 | |||||
Granted |
105,000 | $ | 6.63 | |||||
Vested |
(158,784 | ) | $ | 14.81 | ||||
Forfeited/cancelled* |
(119,653 | ) | $ | 16.58 | ||||
Non-vested options at December 31, 2009 |
499,400 | $ | 12.28 | |||||
* | See disclosure below regarding forfeitures. |
Restricted Stock
Restricted Stock is Common Stock that is subject to restrictions, including risks of
forfeiture, determined by the Plan Committee in its sole discretion, for so long as such Common
Stock remains subject to any such restrictions. A holder of restricted stock has all rights of a
shareholder with respect to such stock, including the right to vote and to receive dividends
thereon, except as otherwise provided in the award agreement relating to such award. Restricted
Stock Awards are equity classified within the Consolidated Balance Sheets.
During the years ended December 31, 2009, 2008 and 2007, there were 0, 7,900 and 170,675
shares of restricted stock, respectively, issued under the EI Plan or the 2004 Option Plan, as
applicable. At December 31, 2009, 2008 and 2007, there were 56,980, 168,300 and 0 shares of
restricted stock outstanding, respectively. These restricted stock grants have vesting periods
ranging from three to five years, with fair values (per share) at date of grant ranging from $13.65
to $16.77. Compensation expense is determined for the issuance of restricted stock by amortizing
over the requisite service period, or the vesting period, the aggregate fair value of the
restricted stock awarded based on the closing price of the Companys Common Stock effective on the
date the award is made.
As of December 31, 2009, the total remaining unrecognized compensation cost related to
issuances of restricted stock was approximately $0.8 million, and is expected to be recognized over
a weighted-average period of 2.2 years.
Restricted Stock Units
A Restricted Stock Unit (RSU) is a notional account representing a participants conditional
right to receive at a future date one (1) share of Common Stock or its equivalent in value. Shares
of Common Stock issued in settlement of an RSU may be issued with or without other consideration as
determined by the Plan Committee in its sole discretion. RSUs may be settled in the sole discretion
of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
the Plan Committee: (i) by the distribution of shares of Common Stock equal to the grantees
RSUs, (ii) by a lump sum payment of an amount in cash equal to the fair value of the shares of
Common Stock which would otherwise be distributed to the grantee, or (iii) by a combination of cash
and Common Stock. The RSUs issued under the EI Plan during 2008 and 2009 vest (and will be settled)
ratably over a 5-year period commencing from the date of grant and are equity classified in the
Consolidated Balance Sheets. There were an aggregate of 30,000 RSUs issued to two officers of the
Company during 2009.
The fair value of each RSU grant is estimated on the grant date. For RSUs granted under the EI
Plan, the fair value is set using the closing price of the Companys Common Stock on the New York
Stock Exchange on the date of grant. Compensation expense for RSUs is recognized ratably over the
vesting period, based upon the market price of the shares underlying the awards on the date of
grant.
The following table summarizes information about RSU transactions (there were no issuances of
RSUs prior to 2008, as the 2004 Option Plan did not contemplate such awards):
Weighted | ||||||||
Restricted | Average | |||||||
Stock | Grant-Date | |||||||
Units | Fair Value | |||||||
Non-vested at December 31, 2007 |
| | ||||||
Granted |
13,900 | $ | $6.43 | |||||
Vested |
| | ||||||
Forfeited/cancelled |
| | ||||||
Non-vested at December 31, 2008 |
13,900 | $ | $6.43 | |||||
Granted |
30,000 | $ | 4.79 | |||||
Vested |
(2,780 | ) | $ | $6.43 | ||||
Forfeited/cancelled |
| | ||||||
Non-vested at December 31, 2009 |
41,120 | $ | 5.23 | |||||
As of December 31, 2009, there was approximately $197,000 of unrecognized compensation
cost related to unvested RSUs. That cost is expected to be recognized over a weighted-average
period of 4.5 years.
Stock Appreciation Rights
A Stock Appreciation Right (a SAR) is a right to receive a payment in cash, Common Stock or
a combination thereof, as determined by the Plan Committee, in an amount or value equal to the
excess of: (i) the fair value, or other specified valuation (which may not exceed fair value), of a
specified number of shares of Common Stock on the date the right is exercised, over (ii) the fair
value or other specified amount (which may not be less than fair value) of such shares of Common
Stock on the date the right is granted; provided, however, that if a SAR is granted in tandem with
or in substitution for a stock option, the designated fair value for purposes of the foregoing
clause (ii) will be the fair value on the date such stock option was granted. No SARs will be
exercisable later than ten (10) years after the date of grant. The SARs issued under the EI Plan
vest ratably over a period ranging from zero to five years, at an exercise price equal to the
closing price of the Companys Common Stock
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
on the New York Stock Exchange on the date of grant, and unless terminated earlier, expire on
the tenth anniversary of the date of grant. There were 724,943 and 118,000 SARs granted during the
years ended December 31, 2009 and 2008, respectively. SARs are accounted for at fair value at the
date of grant in the consolidated income statement, are generally amortized on a straight line
basis over the vesting term, and are equity-classified in the consolidated balance sheets.
The fair value of SARs is estimated on the date of grant using a Black-Scholes-Merton options
pricing model using the assumptions discussed below. Expected volatilities are calculated based on
the historical volatility of the Companys stock. The expected term of SARs granted is derived from
the vesting period of the award, as well as historical exercise behavior, and represents the period
of time that SARs granted are expected to be outstanding. Management will monitor SAR exercises and
employee termination patterns to estimate forfeitures rates within the valuation model. Separate
groups of employees, directors and officers that have similar historical exercise behavior are
considered separately for valuation purposes. The risk-free interest rate is based on the Treasury
note interest rate in effect on the date of grant for the expected term of the SAR. The assumptions
used to estimate the fair value of the SARs granted during the years ended December 31, 2009 and
2008 were as follows:
Year Ended December 31, | ||||||||
2009 | 2008 | |||||||
Dividend yield |
| % | | % | ||||
Risk-free interest rate |
1.57 | % | 2.45 | % | ||||
Volatility |
86.6 | % | 43.4 | % | ||||
Expected term (years) |
3.95 | 5 | ||||||
Weighted-average fair value of SARs granted |
$ | 1.31 | $ | 2.64 |
The following summarizes all SAR activity during 2008 and 2009 (there were no issuances of
SARs prior to 2008, as the 2004 Option Plan did not contemplate such awards):
Weighted-Average Grant | ||||||||
Shares | Date Value Per Share | |||||||
Non-vested, December 31, 2007 |
| | ||||||
Granted |
118,000 | $ | 6.43 | |||||
Vested |
| | ||||||
Forfeited |
| | ||||||
Non-vested, December 31, 2008 |
118,000 | $ | 6.43 | |||||
Granted |
724,943 | $ | 2.21 | |||||
Vested |
(138,543 | ) | $ | 2.22 | ||||
Forfeited* |
(125,000 | ) | $ | 1.53 | ||||
Non-vested, December 31, 2009 |
579,400 | $ | 3.21 | |||||
* | See disclosure below regarding forfeitures. |
As of December 31, 2009, there was approximately $830,000 of unrecognized compensation cost
related to non-vested SARs. That cost is expected to be recognized over a weighted-average period
of 4.3 years.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
The aggregate intrinsic value on the non-vested and vested outstanding SARs at December 31,
2009 and 2008 was $1,273,000 and $0, respectively. The aggregate intrinsic value is the total
pretax value of in-the-money SARs, which is the difference between the fair value at the
measurement date and the exercise price of each SAR. There were no SARs exercised for the years
ended December 31, 2009 and 2008. The weighted average fair value of SARs vested for the years
ended December 31, 2009 and 2008, was $308,000, and $0, respectively.
All of the forfeited Options/SARs described in the charts set forth above resulted from the
termination of the employment of the respective grantees and the resulting forfeiture of non-vested
and/or vested but unexercised Options/SARs. Pursuant to the Companys equity compensation plans,
upon the termination of employment of a grantee, such grantees outstanding unexercised
Options/SARs are typically cancelled and deemed terminated as of the date of termination; provided,
that if the termination is not for cause, all vested Options/SARs generally remain outstanding for
a period ranging from 30 to 90 days, and then expire to the extent not exercised.
Employee Stock Purchase Plan
Under the 2009 ESPP, eligible employees are provided the opportunity to purchase the Companys
common stock at a discount. Pursuant to the 2009 ESPP, options are granted to participants as of
the first trading day of each plan year, which is the calendar year, and may be exercised as of the
last trading day of each plan year, to purchase from the Company the number of shares of common
stock that may be purchased at the relevant purchase price with the aggregate amount contributed by
each participant. In each plan year, an eligible employee may elect to participate in the 2009 ESPP
by filing a payroll deduction authorization form for up to 10% (in whole percentages) of his or her
compensation. No employee shall have the right to purchase Company common stock under the 2009 ESPP
that has a fair value in excess of $25,000 in any plan year. The purchase price is the lesser of
85% of the closing market price of the Companys common stock on either the first trading day or
the last trading day of the plan year. If an employee does not elect to exercise his or her option,
the total amount credited to his or her account during that plan year is returned to such employee
without interest, and his or her option expires. At December 31, 2009, 122,096 shares were
available for issuance under the 2009 ESPP, after giving effect to the 77,904 shares issued
thereunder with respect to the 2009 plan year. During the year ended December 31, 2009, there were
64 enrolled participants in the 2009 ESPP.
Employee Stock Purchase Plan | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Exercise Price |
$ | 2.95 | $ | 2.52 | $ | 13.04 | ||||||
Shares Purchased |
77,904 | 31,317 | 26,029 |
The fair value of each option granted under the 2009 ESPP and 2004 ESPP is estimated on the
date of grant using the Black-Scholes-Merton option-pricing model with the following assumptions:
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | ||||||
Risk-free interest rate |
.40 | % | 3.17 | % | 4.98 | % | ||||||
Volatility |
129 | % | 34.4 | % | 36.7 | % | ||||||
Expected term (years) |
1.0 | 1.0 | 1.0 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
Expected volatilities are calculated based on the historical volatility of the Companys
stock. The risk-free interest rate is based on the U.S. Treasury yield with a term that is
consistent with the expected life of the options. The expected life of options under each of the
2009 ESPP and 2004 ESPP is one year, or the equivalent of the annual plan year.
Note 17401(k) Plan
The Company and its U.S. subsidiaries maintain 401(k) Plans to which employees may, up to
certain prescribed limits, contribute a portion of their compensation, and a portion of these
contributions is matched by the Company. The provision for contributions charged to continuing
operations for the years ended December 31, 2009, 2008 and 2007 was approximately $0.3 million,
$0.3 million and $0.8 million, respectively.
Note 18 Concentrations of Risk
The following table represents net sales of the Company by geographic area (in thousands):
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Net domestic sales |
$ | 235,390 | $ | 220,685 | $ | 156,547 | ||||||
Net foreign sales (Australia and United Kingdom)* |
8,546 | 8,509 | 6,519 | |||||||||
Total net sales |
$ | 243,936 | $ | 229,194 | $ | 163,066 | ||||||
Income (loss) from continuing operations |
||||||||||||
Domestic income (loss) |
$ | 11,022 | $ | (99,914 | ) | $ | 8,174 | |||||
Foreign
income (Australia and United Kingdom) |
683 | 574 | 921 | |||||||||
Total income (loss)from continuing operations |
$ | 11,705 | $ | (99,340 | ) | $ | 9,095 | |||||
Domestic
assets |
$ | 203,155 | $ | 232,780 | ||||||||
Foreign assets (Australia and United Kingdom) |
3,723 | 2,654 | ||||||||||
Total assets |
$ | 206,878 | $ | 235,434 | ||||||||
* | Excludes export sales from the United States |
The
Company categorizes its sales in five product categories: Functional Soft Goods,
Functional Hard Goods, Accessories and Décor, Toys and Entertainment and Other. Functional Soft
Goods includes bedding, blankets, mattresses and sleep positioners; Functional Hard Goods
includes cribs and other nursery furniture, feeding products, baby gear and organizers;
Accessories and Décor includes hampers, lamps, rugs and décor; Toys and Entertainment includes
developmental toys, bath toys and mobiles; Other includes all other products that do not fit in the
above four categories. The Companys consolidated net sales by product category, as a percentage
of total consolidated net sales, for the years ended December 31, 2009, 2008 and 2007 were as
follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Functional Soft Goods |
44.6 | % | 41.7 | % | 45.7 | % | ||||||
Functional Hard Goods |
33.3 | % | 32.0 | % | 17.3 | % | ||||||
Accessories and Décor |
11.2 | % | 12.5 | % | 15.3 | % | ||||||
Toys and Entertainment |
10.0 | % | 12.9 | % | 20.8 | % | ||||||
Other |
0.9 | % | 0.9 | % | 0.9 | % | ||||||
Total |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
During 2009, 2008 and 2007, approximately 67%, 59% and 82%, respectively of the Companys
dollar volume of purchases was attributable to manufacturing in the Peoples Republic of China
(PRC). The PRC currently enjoys permanent normal trade relations (PNTR) status under U.S.
tariff laws, which provides a favorable category of U.S. import duties. The loss of such PNTR
status would result in a substantial increase in the import duty for products manufactured for the
Company in the PRC and imported into the United States and would result in increased costs for the
Company.
In 2009, 2008 and 2007, the suppliers accounting for the greatest dollar volume of the
Companys purchases accounted for approximately 20%, 23% and 35%, respectively of such purchases
and the five largest suppliers accounted for approximately 46%, 49% and 67%, respectively in the
aggregate.
See Note 6 above for information regarding dependence on certain large customers.
Note 19Litigation, Commitments and Contingencies
In the ordinary course of its business, the Company is party to various copyright, patent and
trademark infringement, unfair competition, breach of contract, customs, employment, product
liability, product recall and other legal actions incidental to its business. In the opinion of
management, the amount of ultimate liability with respect to such actions that are currently
pending will not materially adversely affect the consolidated results of operations, financial
condition or cash flows of the Company.
The Company enters into various license and distribution agreements relating to trademarks,
copyrights, designs, and products which enable the Company to market items compatible with its
product line. Most of these agreements are for two to five year terms with extensions if agreed to
by both parties. Several of these agreements require prepayments of certain minimum guaranteed
royalty amounts. The amount of minimum guaranteed royalty payments with respect to all license
agreements pursuant to their original terms aggregates approximately $17.4 million, of which
approximately $10.0 million remained unpaid at December 31, 2009. Royalty expense for the years
ended December 31, 2009, 2008 and 2007 was $6.4 million, $5.2 million and $3.4 million,
respectively.
In connection with the sale of the Gift Business, KID and U.S. Gift (the Companys subsidiary
at the time) sent a notice of termination, effective December 23, 2010, with respect to the lease
(the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
Lease) originally entered into by KID (and subsequently assigned to U.S. Gift) of a facility
in South Brunswick, New Jersey. Although this Lease has become the obligation of TRC (through its
ownership of U.S. Gift), KID remains obligated for the payments due thereunder (to the extent they
are not paid by U.S. Gift) until the termination of the Lease becomes effective (i.e., for a
maximum potential remaining obligation of approximately $2.7 million). It is our understanding that
U.S. Gift has failed to pay certain amounts due under the Lease and that TRC, U.S. Gift and the
landlord have initiated discussions with respect thereto. No payments have been made by KID in
connection with the Lease since the sale of the Gift Business, but there can be no assurance that
payments will not be required of KID with respect thereto to the extent U.S. Gift continues to fail
to make such payments and no accommodation is secured from the landlord. The amount of payments
required by KID, if any, cannot be ascertained at this time. To the extent KID is required to make
any payments to the landlord in respect of the Lease, it intends to seek reimbursement from TRC
under the purchase agreement governing the sale of our former Gift Business. However, we cannot
assure that we will be able to recover any such amounts in a timely manner, or at all.
The purchase agreement pertaining to the sale of the Gift Business contains various
indemnification, reimbursement and similar obligations. In addition, KID may remain obligated with
respect to certain contracts and other obligations that were not novated in connection with their
transfer. No payments have been made by KID in connection with the foregoing as of December 31,
2009, but there can be no assurance that payments will not be required of KID in the future.
As of December 31, 2009 the Company had obligations under certain letters of credit that
contingently require the Company to make payments to guaranteed parties aggregating $0.1 million
upon the occurrence of specified events.
Pursuant to the Asset Agreement and the Stock Agreement, the Company may be required to pay
earnout consideration amounts, ranging from (i) $0.0 to $15.0 million in respect of the LaJobi
acquisition and (ii) $0.0 to $4.0 million in respect of the CoCaLo acquisition. See Note 2.
Note 20Quarterly Financial Information (Unaudited)
The following quarterly financial data for the four quarters ended December 31, 2009 and 2008
are derived from unaudited financial statements and include all adjustments which are, in the
opinion of management, of a normal recurring nature and necessary for a fair presentation of the
results for the interim periods presented. Each of the quarters has been restated to present the
operations of the Gift Segment as a discontinued operation.
The quarter ended June 30, 2009 includes an impairment charge and a valuation reserve on a
note receivable from TRC totaling $15.6 million related to the sale of the Gift Business in 2008.
The quarter ended December 31, 2008 includes impairments to goodwill and intangibles of $140.6
million.
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KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (CONTINUED)
For Quarters Ended | ||||||||||||||||
2009 | March 31 | June 30 | September 30 | December 31 | ||||||||||||
(Dollars in Thousands, Except Per Share Data) | ||||||||||||||||
Net sales |
$ | 56,278 | $ | 59,966 | $ | 60,085 | $ | 67,607 | ||||||||
Gross profit |
16,615 | 18,953 | 18,472 | 21,155 | ||||||||||||
Income (loss) from continuing operations |
4,386 | (8,055 | ) | 6,403 | 8,258 | |||||||||||
Income (loss) from discontinued operations |
| | | | ||||||||||||
Net income (loss) |
$ | 1,336 | $ | (5,689 | ) | $ | 2,868 | $ | 13,190 | |||||||
Basic Earnings per Common Share: |
||||||||||||||||
Income (loss) from continuing operations |
$ | 0.06 | $ | (0.26 | ) | $ | 0.13 | $ | 0.62 | |||||||
Income (loss) from discontinued operations |
| | | | ||||||||||||
Net income (loss) per common share |
$ | 0.06 | $ | (0.26 | ) | $ | 0.13 | $ | 0.62 | |||||||
Diluted Earnings per Common Share: |
||||||||||||||||
Income (loss) from continuing operations |
$ | 0.06 | $ | (0.26 | ) | $ | 0.13 | $ | 0.61 | |||||||
Income (loss) from discontinued operations |
| | | | ||||||||||||
Net income (loss) per common share |
$ | 0.06 | $ | (0.26 | ) | $ | 0.13 | $ | 0.61 | |||||||
For Quarters Ended | ||||||||||||||||
2008 | March 31 | June 30 | September 30 | December 31 | ||||||||||||
(Dollars in Thousands, Except Per Share Data) | ||||||||||||||||
Net sales |
$ | 41,612 | $ | 62,231 | $ | 69,803 | $ | 55,548 | ||||||||
Gross profit |
15,155 | 19,997 | 22,611 | 10,961 | ||||||||||||
Income (loss) from continuing operations |
3,160 | 2,627 | 5,991 | (111,118 | ) | |||||||||||
Loss from discontinued operations |
(1,160 | ) | (14,766 | ) | 2,214 | 1,496 | ||||||||||
Net (loss) income |
$ | 2,000 | $ | (12,139 | ) | $ | 8,205 | $ | (109,622 | ) | ||||||
Basic Earnings per Common Share: |
||||||||||||||||
Income (loss) from continuing operations |
$ | 0.15 | $ | 0.12 | $ | 0.29 | $ | (5.21 | ) | |||||||
Income (loss) from discontinued operations |
(0.06 | ) | (0.69 | ) | 0.10 | 0.07 | ||||||||||
Net income (loss) per common share |
$ | 0.09 | $ | (0.57 | ) | $ | 0.39 | $ | (5.14 | ) | ||||||
Diluted Earnings per Common Share: |
||||||||||||||||
Income (loss) from continuing operations |
$ | 0.15 | $ | 0.12 | $ | 0.29 | $ | (5.21 | ) | |||||||
(Loss) income from discontinued operations |
(0.06 | ) | (0.69 | ) | 0.10 | 0.07 | ||||||||||
Net income (loss) per common share |
$ | 0.09 | $ | (0.57 | ) | $ | 0.39 | $ | (5.14 | ) | ||||||
Earnings per share are computed independently for each of the quarters presented and the
cumulative amount may not agree to annual earnings per share.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) or
15d-15(e)) that are designed to ensure that information required to be disclosed in our reports
filed or submitted pursuant to the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms, and that information required to be disclosed in our Exchange Act
reports is accumulated and communicated to our management, including our principal executive
officer and principal financial officer, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of management, including our principal
executive officer and principal financial officer, we carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and procedures pursuant to
paragraph (b) of Exchange Act Rules 13a-15 or 15d-15 as of December 31, 2009. Based upon our
evaluation, our principal executive officer and principal financial officer have concluded that our
disclosure controls and procedures are effective as of December 31, 2009.
Managements Annual Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) or
15d-15(f). Internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted accounting principles.
Internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with U.S. generally accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and directors of the
Company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Companys assets that could have a material
effect on the financial statements.
Management recognizes that the Companys internal control over financial reporting cannot
prevent or detect all errors and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control systems objectives
will be met.
Under the supervision and with the participation of the Companys management, including its
principal executive officer and principal financial officer, management evaluated the
effectiveness, as
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of December 31, 2009, of the Companys internal control over financial reporting. In making
this evaluation, management used the framework set forth in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO Framework).
Based on its evaluation under the COSO Framework, management has concluded that the Companys
internal control over financial reporting was effective as of December 31, 2009.
KPMG LLP, the independent registered public accounting firm that audited our 2009 consolidated
financial statements included in this Annual Report on Form 10-K, has issued an attestation report
on our internal control over financial reporting. Their report, which is included in Item 8 herein,
expresses an unqualified opinion on the effectiveness of the Companys internal control over
financial reporting as of December 31, 2009.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 or 15d-15 that
occurred during our most recently completed fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERANCE
Information required by this Item 10 under Items 401 and 405 of Regulation S-K of the Exchange
Act (other than with respect to executive officers), appears under the captions ELECTION OF
DIRECTORS and SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE, respectively, of the 2010
Proxy Statement, which are each incorporated herein by reference. Information relating to executive
officers is included under the caption Executive Officers of the Registrant in Part I of this
Annual Report on Form 10-K.
Audit Committee
The Company maintains a separately designated standing Audit Committee established in accordance
with Section 3(a) 58(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act).
The Audit Committee currently consists of Salvatore Salibello (Chair), Frederick J. Horowitz and
John Schaefer.
Audit Committee Financial Expert
The Board of Directors has affirmatively determined that the Chair of the Audit Committee,
Mr. Salibello, is an audit committee financial expert, as that term is defined in Item 407(d)(5)
of
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Regulation S-K of the Exchange Act, and is independent for purposes of current listing
standards of the New York Stock Exchange.
Code of Ethics for Senior Financial Officers
The Company has adopted a Code of Ethics for Senior Financial Officers that applies to its
principal executive officer, principal financial officer, and principal accounting officer or
controller (the SFO Code). The SFO Code can be found on the Companys website located at
www.kidbrandsinc.com, by clicking onto the Investor Relations tab, and then onto the Corporate
Governance tab, and then on the Code of Ethics for Principal Executive Officer and Senior
Financial Officers link. Such SFO code will be provided, without charge, to any person who makes a
written request therefore to the Company at 1800 Valley Road, Wayne, New Jersey 07470, Attention:
Chief Financial Officer. The Company will post any amendments to the SFO Code, as well as the
details of any waivers to the SFO Code that are required to be disclosed by the rules of the
Securities and Exchange Commission, on our website within four business days of the date of any
such amendment or waiver.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item 11 under Items 402 and 407 (e)(4) and (e)(5) of
Regulation S-K of the Exchange Act appears under the caption EXECUTIVE COMPENSATION of the 2010
Proxy Statement, which is incorporated herein by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Information required by this Item 12 under Item 403 of Regulation S-K of the Exchange Act
appears under the captions SECURITY OWNERSHIP OF MANAGEMENT and SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS of the 2010 Proxy Statement, which are each incorporated herein by reference
thereto.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information, as of December 31, 2009, regarding compensation
plans (including individual compensation arrangements) under which equity securities of the Company
are authorized for issuance.
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Number of | ||||||||||||
securities | ||||||||||||
Number of | remaining available | |||||||||||
securities to be | Weighted-average | for future issuance | ||||||||||
issued upon | exercise | under equity | ||||||||||
exercise of | price of | compensation plans | ||||||||||
outstanding | outstanding | (excluding | ||||||||||
options, warrants | options, warrants | securities reflected | ||||||||||
and rights | and rights | in column (a) | ||||||||||
Plan Category | (a) | (b) | (c) | |||||||||
Equity
compensation plans
approved by
security holders(1) |
1,440,015 | (2) | $ | 9.11 | 1,432,946 | (3) | ||||||
Equity compensation
plans not approved
by security holders |
20,000 | (4) | $ | 16.05 | 0 | |||||||
Total |
1,460,015 | $ | 9.20 | 1,432,946 | ||||||||
(1) | The plans are the Companys: Equity Incentive Plan (EIP); 2004 Stock Option, Restricted and Non-Restricted Stock Plan (2004 Option Plan); and 2009 Employee Stock Purchase Plan (2009 ESPP). | |
(2) | Includes securities to be issued upon the exercise of stock options issued under the EIP and the 2004 Option Plan, and, to the extent settled in common stock, upon the exercise of stock appreciation rights issued under the EIP (such stock appreciation rights may be settled in stock, cash, or a combination of both as determined by the Compensation Committee in its sole discretion), in each case outstanding as of December 31, 2009. Excludes a total of 423,250 Stock Appreciation Rights issued after December 31, 2009. Does not include a total of 41,120 Restricted Stock Units granted under the EIP as of December 31, 2009 and 147,250 Restricted Stock Units granted under the EIP after December 31, 2009, which in each case are not subject to an exercise price and may also be settled in stock, cash, or a combination of both as determined by the Compensation Committee in its sole discretion. | |
(3) | The EIP was approved by the shareholders of the Company at the Annual Meeting of Shareholders on July 10, 2008. On such date, the EIP became effective and the 2004 Option Plan terminated (and no further awards could be made thereunder). A total of 1,432,946 shares of Common Stock remained available as of December 31, 2009 that may be subject to, delivered in connection with, and/or available for awards under the EIP (which awards may be in the form of stock options, stock appreciation rights, restricted stock, stock units, non-restricted stock, dividend equivalent rights or any combination of the foregoing). Note that in connection with the grant of a stock option or other award (other than a full value award, as defined in the EIP), the number of shares of Common Stock available for issuance under the EIP will be reduced by the number of shares in respect of which such option or other-than full-value award is granted or denominated. If full value awards are granted, each full value award will reduce the total number of shares available for issuance under the EIP by 1.45 shares of Common Stock for each share of Common Stock in respect of which such full value award is granted. In the event all or a portion of an award is forfeited, terminated or cancelled, expires, is settled for cash, or otherwise does not result in the issuance of all or a portion of the shares of Common Stock subject to the award in connection with the exercise or settlement of such award (Unissued Shares), such Unissued Shares will in each case again be available for awards under the EIP, provided that to the extent any such expired, canceled, forfeited or otherwise terminated award (or portion thereof) was a full value award, the number of shares of Common Stock that may again be the subject of options or other awards granted under the EIP shall increase by 1.45 shares of Common Stock for each share of Common Stock in respect of which such full value award was granted. The preceding sentence applies to any awards outstanding on the effective date of the EIP under the 2004 Option Plan, up to a maximum of an additional 1,750,000 shares. Includes 423,250 Stock Appreciation Rights and 147,250 Restricted Stock Units issued in 2010. On July 10, 2008, the shareholders of the Company approved the 2009 ESPP, which became effective as of January 1, 2009. As of such date, an aggregate of 200,000 shares of Common Stock became available for issuance under such plan. At December 31, 2009, 122,096 shares were available for issuance under the 2009 ESPP, after giving effect to the 77,904 shares issued thereunder with respect to the 2009 plan year. | |
(4) | Includes 20,000 shares issuable under stock options granted to Mr. Bruce G. Crain outside of the 2004 Option Plan (due to grant limitations therein) in accordance with the terms of his employment agreement, as amended (the Crain Employment Agreement), as material inducement to Mr. Crain becoming President and Chief Executive Officer of the Company. These options (the Crain Options) have an exercise price of $16.05 per share, vest ratably over a five year period commencing on December 4, 2008, and are generally exercisable until December 4, 2017. If the employment of Mr. Crain is terminated |
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by the Company for Cause or by Mr. Crain without Good Reason (each as defined in the Crain Agreement), the unvested portion of the Crain Option will be cancelled, and any unexercised, vested portion shall remain exercisable for the shorter of 90 days following the date of termination and the remainder of their term. If the Company terminates the employment of Mr. Crain without Cause or he terminates his employment for Good Reason, the Crain Option will become immediately vested to the same extent as if Mr. Crain had completed an additional two years of service after the date of termination, and shall remain exercisable for the shorter of 90 days following the date of termination and the remainder of their term. If the employment of Mr. Crain is terminated by the Company as a result of his death or Disability (as defined in the Crain Agreement), the Crain Option will become immediately vested to the same extent as if Mr. Crain had completed an additional two years of service after the date of termination, and shall remain exercisable for the shorter of one year following the date of termination and the remainder of their term. In the event of a Change of Control (as defined in the Crain Agreement), whether or not termination of employment occurs, the Crain Option will become immediately vested. If the Company terminates Mr. Crains employment without Cause and a Change in Control occurs within six months of the date of such termination, the portion of the Crain Option that remains unvested shall become vested and exercisable on the date of such Change in Control, and any unexercised portion of the Crain Option shall remain exercisable for the shorter of one year following the date of the Change of Control and the remainder of their term. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information required by this Item 13 under Items 404 and 407(a) of Regulation S-K of the
Exchange Act appears under the captions TRANSACTIONS WITH RELATED PERSONS, CORPORATE
GOVERANCEI. INDEPENDENCE DETERMINATIONS of the 2010 Proxy Statement, which is incorporated
herein by reference thereto.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this Item 14 appears under the captions Independent
Registered Public Accounting Firm, Audit Fees, Audit-Related Fees, Tax Fees, All Other Fees and Audit Committee
Pre-Approval Policies and Procedures of the 2010 Proxy Statement, which are each incorporated
herein by reference thereto.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Documents filed as part of this Report.
Documents filed as part of this Report.
1. | Financial Statements: | |
Report of Independent Registered Public Accounting Firm | ||
Consolidated Balance Sheets at December 31, 2009 and 2008 | ||
Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007 | ||
Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) for the years ended December 31, 2009, 2008 and 2007 | ||
Consolidated Statements of Cash Flows for the years December 31, 2009, 2008 and 2007 | ||
Notes to Consolidated Financial Statements | ||
2. | Financial Statement Schedule: | |
Schedule IIValuation and Qualifying AccountsYears Ended December 31, 2009, 2008 and 2007 |
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Other schedules are omitted because they are either not applicable or not required or the
information is presented in the Consolidated Financial Statements or Notes thereto.
3.
|
Exhibits: | |
(Listed by numbers corresponding to Item 601 of Regulation S-K) | ||
2.1
|
Asset Purchase Agreement by and among RBSACQ, Inc. and Sassy, Inc. and its shareholders dated July 26, 2002. In accordance with Section 601(b)(2) of Regulation S-K, the registrant agrees to furnish supplementally any omitted schedules to the Commission upon request.(1) | |
2.2
|
Membership Interest Purchase Agreement among Kids Line, LLC, Kid Brands, Inc. and the various sellers party hereto dated as of December 15, 2005 In accordance with Section 601(b)(2) of Regulation S-K, the registrant agrees to furnish supplementally any omitted schedules to the Commission upon request.(2) | |
2.3
|
Asset Purchase Agreement, dated as of April 1, 2008, among LaJobi, Inc., LaJobi Industries, Inc. and each of Lawrence Bivona and Joseph Bivona. In accordance with Section 601(b)(2) of Regulation S-K, the registrant agrees to furnish supplementally any omitted schedules to the Commission upon request.(3) | |
2.4
|
Stock Purchase Agreement, dated as of April 1, 2008, among I&J Holdco. Inc. and Renee Pepys Lowe and Stanley Lowe. In accordance with Section 601(b)(2) of Regulation S-K, the registrant agrees to furnish supplementally any omitted schedules to the Commission upon request. (3) | |
2.5
|
Purchase Agreement, dated as of December 23, 2008, among Kid Brands, Inc. and The Russ Companies, Inc. In accordance with Section 601(b)(2) of Regulation S-K, the registrant agrees to furnish supplementally any omitted schedules to the Commission upon request. (4) | |
3.1
|
(a) Restated Certificate of Incorporation of the Company and amendment thereto.(5) | |
(b)
|
Certificate of Amendment to Restated Certificate of Incorporation of the Company filed April 30, 1987.(5) | |
(c)
|
Certificate of Amendment to Restated Certificate of Incorporation of the Company filed September 22, 2009.(5) | |
3.2
|
Second and Amended and Restated By-Laws of the Registrant.(7) | |
4.1
|
Form of Common Stock Certificate.(5) Stock certificates bearing the name Kid Brands, Inc. will not affect the validity or transferability of currently outstanding stock certificates bearing the name Russ Berrie and Company, Inc., and shareholders with such certificates need not surrender for exchange any such certificates. The rights of shareholders holding certificated shares bearing the name Russ Berrie and Company, Inc. and the number of shares represented by those certificates remain unchanged. | |
4.2
|
Amended and Restated Credit Agreement, dated as of April 2, 2008, among Kid Brands, Inc., Kids Line, LLC, Sassy, Inc., I & J Holdco, Inc., LaJobi, Inc., CoCaLo, Inc. (via a Joinder Agreement), the financial institutions party thereto or their assignees (the Lenders), LaSalle Bank National Association, as Administrative Agent for the Lenders and as Fronting Bank, Sovereign Bank as Syndication Agent, Wachovia Bank, N.A. as Documentation Agent and Banc of America Securities LLC as Lead Arranger. (9) | |
4.3
|
Amended and Restated Guaranty and Collateral Agreement, dated as of April 2, 2008, entered into among Kids Line, LLC, Sassy, Inc., I&J Holdco, Inc., LaJobi Inc. and CoCaLo, Inc. (via a Joinder Agreement) in favor of LaSalle Bank National Association, as Administrative Agent. (9) | |
4.4
|
First Amendment to Credit Agreement, dated as of August 13, 2008, among Kids Line, LLC, Sassy, Inc., LaJobi, Inc., I&J Holdco, Inc., CoCaLo, Inc., Kid Brands, Inc., the lenders party thereto and LaSalle Bank National Association. (10) | |
4.5
|
Second Amendment to Amended and Restated Credit Agreement, dated as of March 20, 2009, among Kid Brands, Inc., Kids Line, LLC, Sassy, Inc., I&J Holdco, Inc., LaJobi, Inc. and CoCaLo, Inc., the financial institutions party thereto or their assignees (the Lenders), and Bank of America, N.A., successor by merger to LaSalle Bank National Association, as Administrative Agent for the Lenders. (11) | |
4.6
|
First Amendment to Amended and Restated Pledge Agreement and Amended and Restated Guaranty and Collateral Agreement, dated as of March 20, 2009, among Kid Brands, Inc., and Bank of America, N.A., successor by merger to LaSalle Bank National Association, as Administrative Agent. (11) | |
4.7
|
Joinder Agreement, dated as of March 20, 2009, by Kid Brands, Inc., in favor of Bank of America, N.A., successor by merger to LaSalle Bank National Association, as Administrative Agent. (11) |
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4.8
|
Investor Rights Agreement, dated as of August 10, 2006, among the Company and the investors listed on the signature pages thereto.(23) | |
10.1
|
Lease Agreement, dated April 1, 1981, between Tri-State Realty and Investment Company and Kid Brands, Inc. (12) | |
10.2
|
Lease, dated December 28, 1983, between Russell Berrie and Kid Brands, Inc.(12) | |
10.3
|
Kid Brands, Inc. 2004 Stock Option Plan, Restricted and Non-Restricted Stock Plan*(13) | |
10.4
|
Kid Brands, Inc. 2004 Employee Stock Purchase Plan*(13) | |
10.5
|
Amendment to and extension of lease agreement dated May 7, 2003 by and between Kid Brands, Inc. and Tri-State Realty and Investment Company(14) | |
10.6
|
Second Amendment to lease dated November 18, 2003 by and between Kid Brands, Inc. and Estate of Russell Berrie.(14) | |
10.7
|
Amendment to Kid Brands, Inc. Change In Control Severance Plan*(14) | |
10.8
|
Order of U.S. Bankruptcy Court Central District of California San Fernando Division, dated October 15, 2004, authorizing and approving sale of Applause trademark and certain related assets free and clear of all encumbrances and other interests pursuant to Section 363 of the Bankruptcy Code(17) | |
10.9
|
Amended and Restated Trademark Purchase Agreement, dated as of September 21, 2004, by and between Applause, LLC and the Company, as amended by the First Amendment thereto. (17) | |
10.10
|
Form of Stock Option Agreement with respect to 2004 Stock Option Restricted and Non-Restricted Stock Plan*(18) | |
10.11
|
Form of Stock Option Agreement for Non-Employee Directors with respect to 2004 Stock Option Restricted and Non-Restricted Stock Plan*(18) | |
10.12
|
Form of Restricted Stock Agreement with respect to 2004 Stock Option Restricted and Non-Restricted Stock Plan*(18) | |
10.13
|
Incentive Compensation Program adopted on March 11, 2005*(19) | |
10.14
|
Employment Agreement dated July 27, 2005, effective August 1, 2005, between Kid Brands, Inc. and Mr. Anthony Cappiello*(20) | |
10.15
|
Employment Agreement dated September 26, 2005, between Kid Brands, Inc. and Marc S. Goldfarb.*(21) | |
10.16
|
Amended and Restated 2004 Employee Stock Purchase Plan effective January 3, 2006.*(22) | |
10.17
|
Amended and Restated VP Severance Policy for Domestic Vice Presidents (and Above)*(24) | |
10.18
|
Employment Agreement, dated as of December 4, 2007, between the Company and Bruce G. Crain*.(25) | |
10.19
|
Bruce G. Crain Incentive Compensation Letter.* (10) | |
10.20
|
Stockholders Agreement, dated as of December 23, 2008, among Kid Brands, Inc., The Russ Companies, Inc. and Encore Investors II, Inc. (4) | |
10.21
|
License Agreement, dated as of December 23, 2008, among RB Trademark Holdco, LLC and The Russ Companies, Inc. (4) | |
10.22
|
Licensor Agreement, dated as of December 23, 2008, among RB Trademark Holdco, LLC, Wells Fargo Bank, National Association, and The Russ Companies, Inc. (4) | |
10.23
|
Transition Services Agreement, dated as of December 23, 2008, between Kid Brands, Inc. and The Russ Companies, Inc. (4) | |
10.24
|
Secured Promissory Note, dated December 23, 2008, in the original principal amount of $19.0 million from The Russ Companies, Inc. for the benefit of Kid Brands, Inc. (4) | |
10.25
|
Guaranty, dated as of December 23, 2008, among The Encore Group, Inc., the other guarantors specified therein and Kid Brands, Inc. (4) | |
10.26
|
Subordinated Security Agreement, dated as of December 23, 2008, among The Russ Companies, Inc., The Encore Group, Inc., the other parties specified therein and Kid Brands, Inc. (4) | |
10.27
|
Intercreditor Agreement, dated as of December 23, 2008, between Kid Brands, Inc. and Wells Fargo Bank, National Association, and acknowledged by The Russ Companies, Inc. (4) | |
10.28
|
Amended and Restated Change in Control Severance Plan*(4) |
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10.29
|
Second Amended and Restated VP Severance Policy for Domestic Vice Presidents (and Above)*(8) | |
10.30
|
Equity Incentive Plan* (26) | |
10.31
|
2009 Employee Stock Purchase Plan* (26) | |
10.32
|
Employment Agreement, dated as of April 2, 2008, between LaJobi, Inc. and Lawrence Bivona*(8) | |
10.33
|
Employment Agreement, dated as of April 2, 2008, between CoCaLo, Inc. and Renee Pepys Lowe*(8) | |
10.34
|
Employment Agreement, dated as of June 25, 2008, between Sassy, Inc. and Fritz Hirsch*(8) | |
10.35
|
Letter, dated as of April 22, 2009, between the Compensation Committee of the Board of Directors and Mr. Benaroya* (27) | |
10.36
|
Form of Equity Incentive Plan Stock Option Agreement*(6) | |
10.37
|
Form of Equity Incentive Plan Restricted Stock Agreement*(6) | |
10.38
|
Form of Equity Incentive Plan Stock Appreciation Right Agreement*(6) | |
10.39
|
Form of Equity Incentive Plan Restricted Stock Unit Agreement*(6) | |
10.40
|
Employment Agreement, dated as of December 7, 2009, between Kid Brands, Inc. (on behalf of Kids Line, LLC) and David Sabin* | |
10.41
|
Employment Agreement, dated as of February 17, 2010, between Kid Brands, Inc. (on behalf of Sassy, Inc.) and Richard F. Schaub, Jr.* | |
21.1
|
List of Subsidiaries | |
23
|
Consent of Independent Registered Public Accounting Firm | |
31.1
|
Certification of CEO required by Section 302 of the Sarbanes Oxley Act of 2002 | |
31.2
|
Certification of CFO required by Section 302 of the Sarbanes Oxley Act of 2002 | |
32.1
|
Certification of CEO required by Section 906 of the Sarbanes Oxley Act of 2002 | |
32.2
|
Certification of CFO required by Section 906 of the Sarbanes Oxley Act of 2002 | |
*
|
Represent management contracts or compensatory plans or arrangements. | |
(1)
|
Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 2002. | |
(2)
|
Incorporated by reference to Current Report on Form 8-K filed on December 22, 2004. | |
(3)
|
Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2007. | |
(4)
|
Incorporated by reference to Current Report on Form 8-K filed on December 29, 2008. | |
(5)
|
Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2009. | |
(6)
|
Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2009. | |
(7)
|
Incorporated by reference to Current Report on Form 8-K filed on January 7, 2008. | |
(8)
|
Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2008. | |
(9)
|
Incorporated by reference to Current Report on Form 8-K filed on April 8, 2008. | |
(10)
|
Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 2008. | |
(11)
|
Incorporated by reference to Current Report on Form 8-K filed on March 23, 2009. | |
(12)
|
Incorporated by reference to Registration Statement No. 2-88797 on Form S-1 filed on February 2, 1984. | |
(13)
|
Incorporated by reference to the Companys definitive Proxy Statement filed on April 4, 2003. | |
(14)
|
Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2003. | |
(15)
|
Intentionally Omitted | |
(16)
|
Intentionally Omitted | |
(17)
|
Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 2004. | |
(18)
|
Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2004. | |
(19)
|
Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 | |
(20)
|
Incorporated by reference to Current Report on Form 8-K filed on August 2, 2005. | |
(21)
|
Incorporated by reference to Current Report on Form 8-K filed on September 29, 2005. | |
(22)
|
Incorporated by reference to Current Report on Form 8-K filed on December 30, 2005. |
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Table of Contents
(23)
|
Incorporated by reference to Current Report on Form 8-K filed on August 14, 2006. | |
(24)
|
Incorporated by reference to Current Report on Form 8-K filed on July 17, 2007. | |
(25)
|
Incorporated by reference to Current Report on Form 8-K filed on December 7, 2007. | |
(26)
|
Incorporated by reference to the Companys definitive Proxy Statement filed on June 13, 2008. | |
(27)
|
Incorporated by reference to the Annual Report on Form 10K/A for the year ended December 31, 2008. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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) | ||||||
March 26,
2010
|
By: | /s/ GUY A. PAGLINCO
|
||||
Date
|
Vice President | |||||
Chief Financial Officer | ||||||
(Principal Financial Officer and | ||||||
Principal Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ BRUCE G. CRAIN
|
March 26, 2010
|
|||
Bruce G. Crain, Chief Executive Officer and Director |
Date | |||
(Principle Executive Officer)
|
||||
/s/ RAPHAEL BENAROYA
|
March 26, 2010
|
|||
Raphael Benaroya, Chairman and Director
|
Date | |||
/s/ MARIO CIAMPI
|
March 26, 2010
|
|||
Mario Ciampi, Director
|
Date | |||
/s/ FREDERICK J. HOROWITZ
|
March 26, 2010
|
|||
Frederick J. Horowitz, Director
|
Date | |||
/s/ LAUREN KRUEGER
|
March 26, 2010
|
|||
Lauren Krueger, Director
|
Date | |||
/s/ SALVATORE SALIBELLO
|
March 26, 2010
|
|||
Salvatore Salibello, Director
|
Date | |||
/s/ JOHN SCHAEFER
|
March 26 , 2010
|
|||
John Schaefer, Director
|
Date | |||
/s/ MICHAEL ZIMMERMAN
|
March 26, 2010
|
|||
Michael Zimmerman, Director
|
Date |
102
Table of Contents
Exhibit Index
Exhibit | ||
Numbers | ||
10.40
|
Employment Agreement, dated as of December 7, 2009, between Kid Brands, Inc. (on behalf of Kids Line, LLC) and David Sabin* | |
10.41
|
Employment Agreement, dated as of February 17, 2010, between Kid Brands, Inc. (on behalf of Sassy, Inc.) and Richard F. Schaub, Jr.* | |
21.1
|
List of Subsidiaries | |
23
|
Consent of Independent Registered Public Accounting Firm | |
31.1
|
Certification of CEO required by Section 302 of the Sarbanes Oxley Act of 2002 | |
31.2
|
Certification of CFO required by Section 302 of the Sarbanes Oxley Act of 2002 | |
32.1
|
Certification of CEO required by Section 906 of the Sarbanes Oxley Act of 2002 | |
32.2
|
Certification of CFO required by Section 906 of the Sarbanes Oxley Act of 2002 | |
* | Represent management contracts or compensatory plans or arrangements. |
103
Table of Contents
KID BRANDS, INC. AND SUBSIDIARIES
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
Column A | Column B | Column C | Column D | Column E | Column F | |||||||||||||||
Balance at | Balance | |||||||||||||||||||
Beginning | Charged to | Sale of Gift | at End | |||||||||||||||||
Description | of Period | Expenses | Deductions | Business (a) | of Period | |||||||||||||||
Allowance for accounts receivable: |
||||||||||||||||||||
Year ended December 31, 2007 |
$ | 2,865 | $ | 11,420 | $ | 9,555 | $ | | $ | 4,730 | ||||||||||
Year ended December 31, 2008 |
4,730 | 16,238 | 14,639 | 2,044 | 4,285 | |||||||||||||||
Year ended December 31, 2009 |
4,285 | 31,121 | 28,305 | | 7,101 | |||||||||||||||
Allowance for inventory: |
||||||||||||||||||||
Year ended December 31, 2007 |
$ | 8,250 | $ | 5,533 | $ | 7,473 | $ | | $ | 6,310 | ||||||||||
Year ended December 31, 2008 |
6,310 | 1,933 | 20 | 5,739 | 2,484 | |||||||||||||||
Year ended December 31, 2009 |
2,484 | 1,209 | 1,770 | | 1,923 |
a) | - Reflects the sale of the Gift business. |
104