UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
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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)
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New Jersey
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22-1815337 |
(State of or other jurisdiction of
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(I.R.S. Employer Identification Number) |
Incorporation or organization) |
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One Meadowlands Plaza, East Rutherford, New Jersey
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07073 |
(Address of principal executive offices)
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(Zip Code) |
Registrants Telephone Number, Including Area Code: (201) 405-2400
Securities registered pursuant to Section 12(b) of the Act:
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Title of each Class
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Name of each exchange
on which registered |
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Common Stock, $0.10 stated value
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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 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 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):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller Reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The 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,
2010 was approximately $119 million.
The number of shares outstanding of each of the Registrants classes of common stock, as of March
30, 2011 was as follows:
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Class
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Number of Shares |
Common Stock, $0.10 stated value
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21,650,245 |
Documents Incorporated by Reference
Certain information called for by Part III is incorporated by reference to the definitive
Proxy Statement for the Companys 2011 Annual Meeting of Stockholders (the 2011 Proxy Statement),
which is intended to be filed not later than 120 days after the end of the fiscal period covered by
this report.
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, and each of its consolidated subsidiaries, and the term
KID refers to the registrant.
General
We are a leading designer, importer, marketer and distributor of branded infant and juvenile
consumer products. Through our four wholly-owned operating subsidiaries Kids Line, LLC (Kids
Line); LaJobi, Inc. (LaJobi); Sassy, Inc. (Sassy); and CoCaLo, Inc. (CoCaLo) we design
and market branded infant and juvenile products in a number of complementary categories including,
among others: infant bedding and related nursery accessories and décor, kitchen and nursery
appliances and food preparation products, bath/spa products and diaper bags (Kids Line®
and CoCaLo®); nursery furniture and related products (LaJobi®); and
developmental toys and feeding, bath and baby care items with features that address the various
stages of an infants early years (Sassy®). In addition to our branded products, we
also market certain categories of products under various licenses, including Carters®,
Disney®, Graco® and Serta®. We generated annual net sales of
approximately $276 million in 2010. See Products below for a discussion of certain new product
categories introduced during 2010.
Our products are sold primarily to retailers in North America, the United Kingdom 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 United Kingdom and Australia.
We also maintain relationships with several independent representatives to service select domestic
and foreign retail customers, as well as international distributors to service certain retail
customers in several foreign countries.
During 2008, 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 LaJobi and CoCaLo; and (ii) as of December 23,
2008, we consummated the sale of our former gift business (the Gift Business). As a result of
the sale of our Gift Business (the Gift Sale), our infant and juvenile business now constitutes
our only segment.
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 current global business strategy.
We maintain our principal executive offices at One Meadowlands Plaza, East Rutherford, New
Jersey 07073. Our wholly-owned subsidiaries are located in the United States, the United Kingdom
and Australia, with distribution centers situated at their various locations. We are also in the
process of establishing wholly-owned subsidiaries in the Peoples Republic of China (PRC), Hong
Kong and Thailand. See Item 2, Properties. Our telephone number is 201-405-2400.
Products
Our infant and juvenile product line currently consists of approximately 6,000 products that
principally focus on children of the age group newborn to three years. We have also recently begun
to expand the age range of our addressable consumer market by developing and marketing certain
products for children of ages three through seven, including toddler bedding and beds as well as
food preparation and kitchen products. 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. As described below, in 2010, Kids Line and CoCaLo products now also
include specified kitchen and nursery appliances, diaper bags and spa/bath products.
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®, Carters® and
Garanimals® brands, consist primarily of developmental toys and feeding, bath and baby
care items with features that address the various stages of an infants early years.
3
In 2010, we introduced several new product categories. For example, Kids Line expanded its
product offerings to include certain kitchen appliances, food preparation products, nursery
appliances and diaper bags. CoCaLo also introduced a line of diaper bags, as well as a line of
spa/bath products. LaJobi introduced a glider chair with a patent-pending nursing step ottoman,
and several new furniture collections. Sassy introduced a patent-pending squirting bath toy
designed to help prevent the growth of mold and several new developmental toys and feeding
products, and expanded into offerings of licensed Carters® and Garanimals®
products.
Most of our infant and juvenile products have selling prices between $1 and $235, with the
exception of LaJobi furniture products, which have selling prices of $10 to $575. Product sales
are highly diverse and no single item represented more than 4% of our consolidated net sales in
2010. The Company currently categorizes its sales in five product categories: Soft Good Basics,
Hard Good Basics, Accessories and Décor, Toys and Entertainment, and Other. Soft Good Basics
includes bedding, blankets and mattresses. Hard Good Basics includes cribs and other nursery
furniture, feeding, food preparation and kitchen 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, 2010,
2009, and 2008:
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Year Ended December 31, |
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2010 |
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2009 |
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2008 |
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Hard Good Basics |
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38.9 |
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33.3 |
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32.0 |
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Soft Good Basics |
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38.1 |
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44.6 |
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41.7 |
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Toys and Entertainment |
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11.8 |
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10.0 |
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12.9 |
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Accessories and Décor |
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10.3 |
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11.2 |
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12.5 |
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Other |
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0.9 |
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0.9 |
% |
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0.9 |
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Total |
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100.0 |
% |
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100.0 |
% |
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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, vendors 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 individuals whose services have been retained by us. See
Note 12 to Notes to Consolidated Financial Statements for a discussion of our East Asia quality
control staff. 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 2010, we utilized numerous manufacturers in Eastern Asia for our continuing operations,
with facilities primarily in the PRC and other Eastern Asia countries. During 2010, approximately
74% 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 generally 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 addition, certain categories of wooden
bedroom furniture imported from the PRC by our LaJobi subsidiary are also subject to anti-dumping
duties. For a discussion of a charge taken in the fourth quarter and year ended December 31, 2010
for anticipated anti-dumping duties (and related interest) and other actions taken by us in
connection with a Focused Assessment of LaJobis import practices, see Item 3, Legal
Proceedings, Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations under the sections captioned Recent Developments, Earnouts with Respect to
Acquisitions, Other Events and Circumstances Pertaining to Liquidity and Debt Financings, and
Note 18 of Notes to Consolidated Financial Statements. We have discontinued the practices that
resulted in the charge for anticipated anti-dumping duties, and we believe that our ability to
procure the affected categories of wooden bedroom furniture will not be materially adversely
affected in future periods.
4
In 2010, the supplier accounting for the greatest dollar volume of the purchases for our
continuing operations accounted for approximately 18% of such purchases, and the five largest
suppliers accounted for approximately 44% 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, as well as Note 17 of Notes to Consolidated Financial Statements for a discussion of
risks attendant to our foreign operations.
We currently utilize the full-time services of approximately 45 individuals in the PRC,
Thailand, Hong Kong and Vietnam who monitor the production process with responsibility for the
quality, safety and prompt delivery of our products, as well as certain compliance and product
development issues. We are in the process of establishing subsidiaries in the PRC and Thailand and
it is anticipated that these entities will directly employ these quality control individuals in the
future. See Note 12 of Notes to Consolidated Financial Statements for a description of the
previous retention of certain of these individuals through a company affiliated with the former
President of LaJobi and various members of his family. Also see Risk Factors Any failure to
fully comply with the laws of various Asian jurisdictions could cause potential liability and have
other adverse effects, Item 3, Legal Proceedings and Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations under the sections entitled Recent
Developments and Earnouts with respect to Acquisitions.
Marketing and Sales
Our products are marketed through our own direct sales force of full-time employees, as well
as 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 2010, we maintained a
direct sales force and distribution network for our operations in the United States, the United
Kingdom and Australia. We also maintain relationships with several independent representatives to
service select domestic and foreign retail customers, as well as international distributors to
service certain retail customers in several foreign countries. Our sales attributable to
foreign-based operations were $9.4 million, $8.5 million and $8.5 million for the years ended
December 31, 2010, 2009, and 2008, respectively. Our consolidated foreign sales from continuing
operations, including export sales from the United States, aggregated $22.9 million, $19.8 million
and $18.8 million for the years ended December 31, 2010, 2009, and 2008, respectively. See Note 17
of Notes to Consolidated Financial Statements for information with respect to revenues from
external customers and total assets for each of the years ending December 2010, 2009, and 2008,
respectively, as well as specified geographic information.
During 2010, we sold infant and juvenile products to approximately 2,000 customers worldwide.
Toys R Us, Inc. and Babies R Us, Inc., in the aggregate, accounted for approximately 48.6%;
Target Corporation (Target) accounted for approximately 9.9%; and Wal-Mart Stores, Inc.
(Walmart) accounted for approximately 9.4% of our consolidated gross sales during 2010. The loss
of any of these customers, the loss of certain other large customers, or a significant reduction in
the volume of business conducted with such 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 of
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, and trade and
consumer advertising, as well as a growing set of internet-based promotional activities. 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 and/or consumers.
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.
5
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 (United Kingdom); 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 previously-affiliated
third party logistics provider. LaJobi also utilizes the services of independent third party
logistics providers in California for a portion of its distribution requirements. See Note 12 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.
Seasonality
We typically do not experience significant seasonal variations in demand for our products,
although we typically do experience slightly higher sales during the second half of the fiscal
year. In 2010, approximately 53% of our net sales were made during the second half of the fiscal
year. 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, and 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 such intellectual property due
to the availability of substitutes our ability to create new designs, and the variety of products
that we sell. 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. See Item 1, Risk Factors Trademark infringement or
other intellectual property claims relating to our products could increase our costs.
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 believe that our
license agreements are important assets for our business. 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. Although we do not believe our
business is dependent on any single license, the Graco® license (which expires on
December 31, 2013, subject to renewals) and the Carters® license (which expires on
December 31, 2012, subject to renewals) are each material to and accounted for a material portion
of the net revenues of LaJobi and Kids Line, respectively, as well as a significant percentage of
the net revenues of the Company, in each case for each of the last three years. In addition, the
Serta® license (which expires on December 31, 2013, subject to renewals)
is material to and accounted for a significant percentage of the net revenues of LaJobi; the
Disney® license (which expires on December 31, 2012, subject to renewals) is material to
and accounted for a significant percentage of the net revenues of Kids Line; and the
Garanimals® license (which expires on December 31, 2012) is material to and accounted
for a significant percentage of the net revenues of Sassy, in each case (other than
Garanimals® which commenced in 2010) for the last three years ended December 31, 2010.
While historically we have been able to renew the license agreements that we wish to continue on
terms acceptable to us, the loss of any of the foregoing and/or other significant license
agreements could have a material adverse effect on our results of operations, at least until such
time, if ever, that appropriate replacements can be secured and related products marketed on
commercially acceptable terms. See Item 1A, Risk Factors Competition for licenses could
increase our licensing costs or limit our ability to market products and The loss of any
significant license could adversely affect our business.
6
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 The Russ
Companies (TRC), the purchaser of the Gift Business (Buyer). 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, and the Licensor has
the option to require TRC to purchase all of the Retained IP for $5.0 million, each under specified
circumstances. Under 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 was due and 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. TRC has not paid the initial lump sum Royalty payment and, to
date, only the quarterly Royalty payment due on March 23, 2010 has been received, which was
recorded as other income in the first quarter of 2010. KID and TRC are continuing their
discussions with respect to among other things, payments due to Licensor under the License
Agreement. See Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations under the section entitled Other Events and Circumstances Pertaining to Liquidity for
a discussion of the
Royalty defaults and ongoing discussions with respect thereto and other arrangements with TRC.
A detailed description of the Gift Sale can be found in the Companys Current Report on Form 8-K
filed on December 29, 2008.
Employees
As of December 31, 2010, we employed approximately 304 persons. In addition, we currently
utilize the full-time services of approximately 45 individuals in the PRC, Thailand, Hong Kong and
Vietnam. See, Business Design and Production, Risk Factors Any failure to fully comply
with the laws of various Asian jurisdictions could cause potential liability and have other adverse
effects and Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations under Recent Events. We consider our employee
relations to be good. Most of our employees are not covered by a collective bargaining agreement,
although approximately 22 Sassy employees, representing approximately 7% of our total employees,
were represented by a collective bargaining agreement as of December 31, 2010. In our Annual Report
on Form 10-K for the year ended December 31, 2009, we inadvertently disclosed that we employed
approximately 340 persons, which disclosure incorrectly included approximately 40 quality control
individuals that we retained in Asia, for such year.
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, or that rapidly changing
safety standards will not render unsaleable products that complied with previously applicable
safety standards. 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
obtained free of charge by writing to us at Kid Brands, Inc., One Meadowlands Plaza, East
Rutherford, New Jersey 07073, Attention: Corporate Secretary. The contents of our websites are not
incorporated into this filing.
7
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, prospects, financial condition, results of operations or cash flows could be
materially and adversely affected. In such cases, the trading price of our common stock could
decline, and you could lose part or all of your investment.
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, labor or other costs or fluctuations in
foreign currency exchange rates), excess inventory, obsolescence charges, changes in shipment
volume or freight rates, 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, pressure from major
retailers, primarily as a result of continued challenging economic conditions, to offer additional
mark-downs and other credits or price concessions to clear existing inventory and secure new
product placements, have and may continue to negatively impact our margins. Economic conditions,
such as rising fuel prices and currency exchange fluctuations, may also adversely impact our
margins.
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. Cotton
prices dramatically increased during 2010, impacting fabric availability and costs. 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 have and could adversely affect our gross
margins and our operations.
In addition, for the fourth quarter and year ended December 31, 2010, we recorded a charge in
the amount of approximately $6,860,000 (which includes approximately $340,000 of interest) for
import duties that we currently anticipate will be owed by our LaJobi subsidiary to U.S. Customs
and Border Protection (U.S. Customs), with respect to incorrect import duties applied on certain
wooden furniture imported from the PRC. The charge was recorded in cost of sales (other than the
interest portion, which was recorded in interest expense), and adversely affected gross margins and
net income for the relevant periods. This accrual results from an ongoing investigation into, among
other things, LaJobis import practices, initiated at the direction of the Board of Directors, and
supervised by a Special Committee of three non-management members of the Board, following the
discovery of certain potential issues in our preparation for the commencement of a Focused
Assessment of LaJobis import practices by U.S. Customs. As the Focused Assessment is still
pending, it is possible that the actual amount of duty owed for the period covered thereby will be
higher upon its completion and, in any event, additional interest will continue to accrue on the
amounts we currently anticipate we will owe until payment is made. In addition, we may be assessed
by U.S. Customs a penalty of up to 100% of any customs duty owed, as well as possibly being subject
to fines, penalties or other measures from U.S. Customs or other governmental authorities. Any amounts owed in excess
of the accrual recorded for the fourth quarter and full year ended December 31, 2010 will adversely
affect our gross margin and net income for the period(s) in which such amounts are recorded and
could have a material adverse affect on our results of operations. In addition, there can be no
assurance that our licensors, vendors and/or retail partners will not take adverse action under
applicable agreements with the Company (or otherwise) as a result of the matters described above.
See Item 3, Legal Proceedings, Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations under the sections entitled Recent Developments, Earnouts
with respect to Acquisitions and Debt Financings and Note 18 of Notes to Consolidated Financial Statements, for a discussion of the
Focused Assessment, the internal investigation and other actions taken by us in connection
therewith. We have discontinued the practices that resulted in the charge for anticipated
anti-dumping duty, and we believe that our ability to procure the affected categories of wooden
bedroom furniture will not be materially adversely affected in future periods.
8
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), Target Corporation and Wal-Mart Stores, Inc. accounted
for approximately 48.6%, 9.9% and 9.4%, respectively, of our consolidated gross sales for the 2010
calendar year. While the consolidation of our customer base may provide certain benefits to us,
such as potentially more efficient product distribution and other decreased costs of sales and
distribution, we typically do not have long-term contracts with our customers and our agreements
with these customers do not require them to purchase any specific number or amount of our products.
As a result, agreements with respect to pricing, returns, cooperative advertising or special
promotions or allowances, among other things, are subject to periodic negotiation with each
customer. No assurance can be given that these or other customers will continue to do business with
us or that they will maintain their historical levels of business, and the loss of one or more 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.
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.
9
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.
The state of the economy may impact our business.
Our business and results of operations are affected by international, national and regional
economic conditions. The United States and many other international economies experienced a major
recession in recent periods, with continuing effects for our industry. The end-users of our
products are individual consumers. A hesitant recovery in the U.S economy, high unemployment,
volatile capital markets, depressed housing prices and tight consumer lending practices have
resulted in considerable negative pressure on consumer spending and consumer confidence, which we
believe has resulted in lower birth rates and could result in reduced demand for our products. In
the event that current economic conditions worsen, current and potential consumers of our products
may be inclined to delay their purchases, and further tightening of credit markets may restrict our
customers (both direct and indirect) ability and willingness to make purchases. In addition,
continuing adverse global economic conditions in our markets could result in increased price
competition for our products, increased risk of excess and obsolete inventories, increased risk in
the collectability of accounts receivable from our direct customers, increased risk in potential
reserves for doubtful accounts and write-offs of accounts receivable, delays in signing or failing
to sign direct customer contracts or signing customer agreements at reduced purchase levels, and
limitations in the capital resources available to us and others with whom we conduct business. 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.
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, or the FHSA, and the Consumer Product Safety Improvement Act, or the
CPSIA, which empower the Consumer Product Safety Commission, or 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 and are expected to further significantly increase the
regulatory requirements governing the manufacture and sale of infant and juvenile 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, or that rapidly changing safety standards
will not render unsaleable products that complied with previously-applicable safety standards. 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, we
may incur significant costs in complying with recall requirements, and our financial results could
be materially adversely affected. Furthermore, concerns about potential liability or potential
future changes in product safety regulations may lead us to recall voluntarily or otherwise
discontinue selling selected products.
Recalls, post-manufacture repairs of our products, or product liability claims could also 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 or take other actions that may adversely
impact infant and juvenile 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 or a refusal to sell certain products.
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 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.
10
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. See Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations under the sections entitled Recent Developments and Earnouts with respect to
Acquisitions for a discussion of the termination of the employment of Lawrence Bivona, the former
President of LaJobi, effective March 14, 2011.
We are currently party to litigation that could be costly to defend and distracting to
management.
As of the date of this report, a purported class action lawsuit has been filed on behalf of persons
who allegedly purchased our common stock between March 26, 2010 and March 15, 2011. The lawsuit
names us and certain of our current officers and certain of our current and former directors, as
defendants. The complaint alleges one claim for relief pursuant to Section 10(b) of the Securities
Exchange Act of 1934, as amended (the Exchange Act), and Rule 10b-5 promulgated thereunder, and a
second claim pursuant to Section 20(a) of the Exchange Act, claiming generally that we and/or the
other defendants issued materially false and misleading statements during the relevant time period
regarding compliance with customs laws, our financial reports and internal controls. The complaint
does not state the size of the class or quantify the amount of damages sought. Additional litigation may be
initiated against us based on the alleged items at issue in the complaint described above. We
cannot predict the outcome of the existing lawsuit or the likelihood that further proceedings will
be instituted against us. The cost of defending against the existing lawsuit or any future lawsuits or
proceedings may be high, and these legal proceedings may also result in the diversion of our
managements time and attention away from our business. In the event that there is an adverse
ruling in any legal proceeding, we may be required to make payments to third parties that could
harm our business or financial results.
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.
Competition for licenses could increase our licensing costs or limit our ability to market
products.
We market a significant portion of our products through licenses with other parties. Sales of
licensed products represented 38% of our net sales in fiscal year 2010. 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.
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.
11
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. See Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations under the section captioned Debt Financings, as
well as Note 8 of Notes to Consolidated Financial Statements, for a discussion of a waiver and
amendment to our credit agreement required to address, among other things, an unmatured event of
default with respect to a breach of a financial covenant resulting from the charge to cost of sales
and interest expense recorded in the fourth quarter and year ended December 31, 2010 in connection
with the internal investigation of Lajobis import practices and business and staffing practices in
Asia described in Item 3, Legal Proceedings, below.
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.
Increases in interest rates may increase our interest expense and adversely affect our
profitability and cash flows.
The loans under our credit agreement bear interest, at our option, at a base rate or at LIBOR,
plus applicable margins, which vary between 2.0% and 4.25% on LIBOR borrowings and 1.0% and 3.25%
on base rate borrowings (base rate borrowings include a floor of 30 day LIBOR plus 1%). At
December 31, 2010, the applicable margins were 2.75% for LIBOR borrowings and 1.75% for base rate
borrowings. Increases in the interest rate under our credit agreement will increase our interest
expense, which could harm our profitability and cash flow.
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 were 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 can be arranged. Such measures could
include deferring capital expenditures, and reducing or eliminating discretionary uses of cash.
12
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 sale of the
Companys gift business to TRC, 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 as to TRCs solvency, we cannot assure you what weight, if any, would be
accorded thereto by a court. An adverse determination with respect to any such claim could have a
material adverse effect on our 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 sale of our gift business to TRC. We remain contingently
liable to third parties for some obligations of the gift business, such as a real estate lease
assumed by TRC in the transaction, and may remain contingently liable for certain contracts and
other obligations that have not been novated, in either case if TRC fails to meet its obligations.
The real estate lease referred to above was terminated in December 2010 and, while we have been
informed that TRC and the landlord have agreed to allow TRC to occupy the premises under certain
conditions, we remain contingently liable for certain amounts that were due and outstanding on the
termination date should they remain unpaid and no accommodation is secured from the landlord. Our
financial condition and results of operations could be adversely affected if we receive any such
third-party claims.
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.
All of our products are manufactured by unaffiliated companies, most of which are in the Far
East, principally in the PRC. Approximately 74% of our dollar volume of purchases for our
operations in 2010 were attributable to manufacturers in the PRC. The supplier accounting for the
greatest dollar volume of purchases for our continuing operations accounted for approximately 18%
and the five largest suppliers accounted for approximately 44% in the aggregate during 2010. 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, 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 (some of which are discussed in the immediately preceding risk
factor and below), including:
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economic and political instability; |
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restrictive actions by foreign governments; |
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changing international political relations; |
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labor availability and cost; |
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changes in laws, including tax or labor laws, or changes in regulations, treaties and policies; |
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changes in shipping costs and availability of sufficient cargo capacity; |
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changes in the availability and cost of raw materials; |
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greater difficulty enforcing intellectual property rights and weaker laws protecting intellectual property rights; |
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changes in import duties or import or export restrictions (including changes that could be imposed retroactively); |
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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; |
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complications in complying with the laws and policies of the United States affecting the importation of goods,
including duties, quotas and taxes (See Gross margin could be adversely affected by several factors above); |
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complications in complying with trade and foreign tax laws; and |
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the effects of terrorist activity, armed conflict and epidemics. |
13
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 or expansion of certain social programs
in the PRC or otherwise will likely increase the cost of doing business for certain of our
manufacturers, which would likely increase our manufacturing costs.
With most of our manufacturers located in the Far East, we must commit to production in
advance of customer orders. If we fail to forecast customer or consumer demand accurately, we may
encounter difficulties in filling customer orders on a timely basis or in liquidating excess
inventories. Another recent development affecting many companies importing goods from the PRC is
that it has become increasingly difficult to secure cargo capacity on a timely basis and at
contracted prices. This may signal a trend of higher ocean freight transportation prices in coming
periods. Any of these results could have a material adverse effect on our business, financial
condition and results of operations.
Historically, labor in the PRC has been readily available at relatively low cost as compared
to labor costs in North America. The PRC has experienced rapid social, political and economic
change in recent years. There is no assurance labor will continue to be available in the PRC at
costs consistent with historical levels or that changes in labor or other laws will not be enacted
which would have a material adverse effect on product costs in the PRC. If our suppliers suffer
labor shortages, this may result in future supply delays and disruptions and drive a substantial
increase in labor costs.
Any failure to fully comply with the laws of various Asian jurisdictions could cause potential
liability and have other adverse effects.
Lawrence Bivona, the former President of LaJobi, Inc., along with various family members,
established L&J Industries in Asia to provide quality control, compliance and certain other
services to LaJobi for goods being shipped by LaJobi from Asian ports. Pursuant to the terms of a
transition services agreement entered into in connection with the acquisition of LaJobi, commencing
in April 2008, we utilized the full time services of approximately 28 employees of L&J Industries
for such services. We ceased making direct payments to L&J Industries in June 2010, when we became
aware that L&J Industries has ceased operations. However, we continued to pay for the services of
approximately 26 of the former employees of L&J Industries (based in Hong Kong, China, Vietnam and
Thailand), including through an individual based in Hong Kong. Companies retaining the services of
individuals in these jurisdictions are subject to a variety of foreign laws. The Company believes
that the payment and other practices with respect to quality control, compliance and certain other
services in Hong Kong, China, Vietnam and Thailand violated civil laws and potentially violated criminal
laws in these jurisdictions; however, the Company currently does not believe that any such
violations will have a material adverse effect on the Company, although there can be no assurance that this will be the case.
LaJobi has since discontinued the above-described manner of paying individuals providing such
services in the PRC and Hong Kong, and has taken corrective action by establishing interim
arrangements which it believes are currently in compliance with applicable requirements in such
jurisdictions, and is in the process of establishing subsidiaries in the PRC
through which the Company intends to directly employ the quality control individuals in these
jurisdictions in the future. With respect to Thailand and Vietnam, we are investigating appropriate
corrective interim arrangements, and are in the process of establishing a subsidiary in Thailand
through which the Company intends to directly employ the quality control individuals in these
jurisdictions in the future. Although we believe that once these subsidiaries are fully
established, the Company will be in compliance with applicable laws of the relevant Asian countries, no
assurance can be given that applicable governmental authorities will concur with such a view and
will not impose taxes or penalties or other measures with respect to staffing practices prior
thereto.
The Board is continuing to review the extent to which LaJobis payment and other practices for the
above-described services in Asia may have breached other laws, whether any
penalties or other measures may be assessed against LaJobi, the Company or any related personnel as
a result, and what remedial actions may be advisable or required. In addition, there can be no
assurance that our licensors, vendors and/or retail partners will not take adverse action under
applicable agreements with us (or otherwise) as a result of such potential compliance issues.
Because the investigation is ongoing, there can be no assurance as to how the resulting consequences, if any,
may impact our internal controls, business, reputation, results of operations or financial condition.
14
We may have difficulty establishing adequate management, legal and financial controls in the
PRC and other Asian countries.
The PRC and certain other Asian jurisdictions have historically had fewer or less
developed management and financial reporting concepts and practices, as well as modern banking,
computer, and other control systems. We may experience difficulty in hiring and/or retaining a
sufficient number of qualified individuals in such jurisdictions. As a result, we may experience
difficulty in establishing management, legal, and financial controls, collecting financial data and
preparing financial statements, books of account, and corporate records and instituting business
practices that meet business standards such as those in the United States.
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.
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.
If our products are copied or knocked-off, our sales of these products may be materially
reduced and our profitability may be negatively affected.
Occasionally in the infant and juvenile industry, successful products are knocked-off or
copied by competitors. While we strive to protect our intellectual property, we cannot guarantee
that knock-offs will not occur or that they will not have a significant effect on our business. The
costs incurred in protecting our intellectual property rights could be significant, and there is no
assurance that we will be able to successfully protect our rights (see preceding risk factor).
Significant changes in the ability to transfer capital across borders could have a significant
adverse effect on our results of operations and financial condition.
Government action may restrict our ability to transfer capital across borders in the countries
where we conduct business or have invested capital. Significant changes in our ability to transfer
our capital across borders could have a significant adverse effect on our business and results of
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:
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possible failure to maintain customer, licensor and other relationships after the closing of the transaction of
the acquired company; |
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the acquired business may experience losses which could adversely affect our profitability; |
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unanticipated costs relating to the integration of acquired businesses may increase our expenses; |
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difficulties in achieving planned cost-savings and synergies may increase our expenses or decrease our net sales; |
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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 |
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possible failure to obtain any necessary consents to the transfer of licenses or other agreements of the
acquired company. |
15
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.
Disruptions in our current information technology systems or difficulties in implementing our
new information technology system 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 commenced the implementation in December 2009 of a new
consolidated information technology system for the Company, which we believe will provide greater
efficiencies and greater reporting capabilities than those provided by the current separate systems
in place across our individual infant and juvenile companies. In connection with such
implementation (which now includes functionality enhancements beyond the original project concept),
we anticipate incurring total costs of approximately $3.3 million, of which $1.3 million has been
incurred as of December 31, 2010. We anticipate that the balance of the costs will be incurred in
2011 and the first half of 2012. As a result of this implementation 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.
Changes in our effective tax rate, or changes in tax laws and regulations 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:
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adjustments to estimated taxes upon finalization of various tax returns; |
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increases in expenses not deductible for tax purposes; |
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changes in available tax credits; |
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changes in share-based compensation expense; |
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changes in the valuation of our deferred tax assets and liabilities; |
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changes in accounting standards or tax laws and regulations, or interpretations thereof; |
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the jurisdictions in which profits are determined to be earned and taxed; |
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the resolution of issues arising from uncertain positions and tax audits with various tax authorities; and |
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penalties and/or interest expense that we may be required to recognize on liabilities associated with
uncertain tax positions. |
We are subject to taxation in various jurisdictions around the world. In preparing our
financial statements, we calculate our effective income tax rate based on current tax laws and
regulations and the estimated taxable income within each of these jurisdictions. Our effective
income tax rate, however, may be higher due to numerous factors, including those enumerated above.
A significantly higher effective income tax rate could have an adverse effect on our business,
results of operations and liquidity.
Officials in some of the jurisdictions in which we do business, including the United States,
have proposed, or announced that they are reviewing tax increases and other revenue raising laws
and regulations. Any resulting changes in tax laws or regulations could impose new restrictions,
costs or prohibitions on our current practices and reduce our net income and adversely affect our
cash flows.
16
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 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 and financial condition, and may make it more difficult to attract and retain officers
and directors.
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. Additionally, we have not yet fully determined the potential
financial and compliance impact of the Dodd Frank Wall Street Reform and Consumer Protection Act
which was enacted in July 2010. As a public entity, the Company expects these new rules and
regulations to increase compliance costs as we evaluate the implications of new rules and respond
to new requirements. Delays or a failure to comply with the new laws, rules and regulations could
result in enforcement actions, the assessment of other penalties and civil suits. These laws and
regulations make it more expensive for us under indemnities provided by the Company to our officers
and directors. In addition, these new rules and regulations may make it more difficult and
expensive to obtain director and officer liability insurance in the future and we may be required
to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same
or similar coverage. As a result, it may be more difficult for us to attract and retain qualified
persons to serve as directors or as executive officers.
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:
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changes in financial estimates of our net sales and operating results; |
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buy/sell recommendations by securities analysts; |
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the timing of announcements by us or our competitors concerning significant product
developments, acquisitions, financial performance or other matters; |
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fluctuation in our quarterly operating results; |
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other economic or external factors; |
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our failure to meet the performance estimates of securities analysts or investors; |
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substantial sales of our common stock or the registration of substantial shares for sale; or |
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general stock market conditions. |
You may be unable to sell your stock at or above your purchase price.
A limited number of our shareholders can exert significant influence over us.
As reported in a Schedule 13D filed with SEC various investment funds and accounts managed by
Prentice Capital Management, LP (Prentice) beneficially own approximately 20.4% of the
outstanding shares of our common stock. Prentice currently has the right to nominate two members
of our Board of Directors. This share ownership would permit Prentice and other large shareholders
to exert significant influence over the outcome of shareholder votes, including votes concerning
the election of directors, by-law amendments, possible mergers, corporate control contests and
other significant corporate transactions.
17
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.
The recently enacted United States federal legislation on healthcare reform and proposed
amendments thereto could impact the healthcare benefits required to be provided by us and cause our
compensation costs to increase, potentially reducing our net income and adversely affecting our
cash flows.
The United States federal healthcare legislation enacted in 2010 and proposed amendments
thereto contain provisions which could materially impact the future healthcare costs of the
Company. While the legislations ultimate impact is not yet known, it is possible that these
changes could significantly increase our compensation costs which would reduce our net income and
adversely affect our cash flows.
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:
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advance notice procedures for nominations of candidates for
election as directors and for stockholder proposals to be
considered at stockholders meetings; |
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the absence of cumulative voting in the election of directors; |
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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 |
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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 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.
18
We have granted stock options, stock appreciation rights 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 December 31, 2010, options to purchase approximately 704,175 shares of our common stock
were outstanding, 425,975 of which are currently vested; 1,111,513 stock appreciation rights were
outstanding, 222,683 of which are currently vested; and 174,730 unvested 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
is higher than 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. If the market price of our common stock is higher than the exercise price of outstanding
vested stock appreciation rights, holders of those securities may exercise their rights and sell
the common stock acquired (to the extent such stock appreciation rights are settled in common
stock) 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 (or if (i) vested stock appreciation rights are
exercised and settled in common stock, or (ii) vested restricted stock units are settled in common
stock), our common stockholders will incur dilution. The exercise price of all common stock options
and stock appreciation rights is subject to adjustment upon stock dividends, splits and
combinations, as well as anti-dilution adjustments as set forth in the relevant award agreement.
See Note 15 of Notes to Consolidated Financial Statements.
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.
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ITEM 1B. |
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UNRESOLVED STAFF COMMENTS |
Not applicable.
Our corporate headquarters are located in East Rutherford, New Jersey (prior to January
24, 2011, our corporate headquarters were located in Wayne, New Jersey under a sublease from TRC).
We lease additional office and distribution facilities located in South Gate, California, and
Cranbury, New Jersey. We also lease office space in, Bannockburn, Illinois, Los Angeles,
California and Irvine, California. We continue to sublease office space and distribution
facilities from TRC in Eastleigh, Hampshire, England, and Sydney, Australia.
We own an office and distribution facility used by Sassy located at 2305 Breton
Industrial Park Drive, S.E., Kentwood, Michigan. 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, including a mortgage on the real property underlying this
facility. 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, 2010, we were obligated under operating
lease agreements (principally for buildings and other leased facilities) for remaining lease terms
ranging from 1 year to 7.2 years, although our subleases with TRC may be terminated on six month
notice by TRC. See Item 7 Managements Discussion and Analysis of Financial Condition and Results
of Operations under the sections entitled Contractual Obligations and Off-Balance Sheet
Arrangements, and Note 18 of Notes to the Consolidated Financial Statements, for a description of
our contingent liability with respect to a lease assumed by TRC in connection with the sale of the
Gift Business. Also see Item 7 Managements Discussion and Analysis of Financial Condition and
Results of Operations under the section entitled Off-Balance Sheet Arrangements and Item 9B
Other Information for a description of our contingent liability with respect to a sublease
entered into by Kids Line, LLC in Los Angeles, California, and a related letter of credit.
19
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ITEM 3. |
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LEGAL PROCEEDINGS |
In late December 2010, our LaJobi subsidiary was selected by U.S. Customs for a Focused
Assessment of its import practices and procedures, which Focused Assessment commenced on January
19, 2011. In preparing for the Focused Assessment, which is ongoing, we found certain potential
issues with respect to LaJobis import practices. As a result, our Board of Directors initiated an
investigation, supervised by a Special Committee of three non-management members of the Board. The
Boards investigation found instances at LaJobi in which incorrect import duties were applied on
certain wooden furniture imported from vendors in the PRC, resulting in a violation of anti-dumping
regulations. On the basis of the investigation, the
Board concluded that there was misconduct involved on the part of certain LaJobi employees in
connection with the incorrect payment of duties, including misidentifying the manufacturer and
shipper of products. As a result, effective March 14, 2011, LaJobis President, Lawrence Bivona,
and LaJobis Managing Director of operations were both terminated from employment. Promptly upon
becoming aware of such issues and related misconduct, the Company voluntarily disclosed its
findings to the SEC on an informal basis and is cooperating with the Staff of the SEC as it reviews
this matter.
Upon completion of the investigation into LaJobis import practices, we currently expect to
complete a voluntary prior disclosure to U.S. Customs identifying certain underpayments of import
duty, and remit payment of customs duty not paid, with interest thereon. Accordingly, for the
fourth quarter and year ended December 31, 2010, we recorded a charge in the amount of
approximately $6,860,000 (which includes approximately $340,000 of interest) for import duties we
anticipate will be owed to U.S. Customs by LaJobi in respect of such underpayments. This charge was
recorded in cost of sales (other than the interest portion, which was recorded in interest
expense), and adversely affected gross margins and net income for the affected periods. It is
possible that the actual amount of duty owed with respect to the Focused Assessment will be higher
upon completion thereof, and in any event, additional interest will continue to accrue on the
amounts we currently anticipate we will owe until payment is made. In addition, we may be assessed
by U.S. Customs a penalty of up to 100% of any customs duty owed, as well as possibly being subject
to fines, penalties or other measures from U.S. Customs or other governmental authorities. Any amounts owed in excess
of the accrual recorded for 2010 will adversely affect our gross margin and net income for the
period(s) in which such amounts may be recorded and could have a material adverse affect on our
results of operations. We have discontinued the practices that resulted in the charge for
anticipated anti-dumping duty, and we believe that our ability to procure the affected categories
of wooden bedroom furniture will not be materially adversely affected in future periods. We are
committed to working closely with U.S. Customs to address issues relating to incorrect import
duties, and have also initiated certain enhancements to our processes and procedures in areas where
underpayments were found, and will be reviewing these and possibly other remedial measures. In
addition, there can be no assurance that our licensors, vendors and/or retail partners will not
take adverse action under applicable agreements with the Company (or otherwise) as a result of the
matters described above. See Item 1A, Risk Factors Any failure to comply with the laws of various Asian jurisdictions could cause potential liability and have other adverse effects and Item 7, Managements Discussion and Analysis of Financial Condition
and Results of Operations under the sections entitled Recent Developments, Earnouts with
respect to Acquisitions and Debt Financings, as well as Note 18 of Notes to Consolidated Financial
Statements, for further discussion of this matter, including its impact on the LaJobi Earnout
Consideration (and related finders fee), which we believe are no longer payable.
On March 22, 2011, a complaint was filed in the United States District Court, District of
New Jersey, encaptioned Shah Rahman v. Kid Brands, et al. (the Complaint). The
Complaint is brought by one plaintiff on behalf of a putative class of all those who purchased or
otherwise acquired the common stock of the Company between March 26, 2010 and March 15, 2011. In
addition to the Company, Bruce G. Crain, our President, Chief Executive Officer and a member of our
board of directors, Guy A. Paglinco, our Vice President and Chief Financial Officer, Raphael
Benaroya, Mario Ciampi, Frederick J. Horowitz, Salvatore Salibello and Michael Zimmerman, each
members of our board of directors, as well as Lauren Krueger and John Schaefer, each a former
member of our board of directors, were named as defendants.
The Complaint alleges one claim for relief pursuant to Section 10(b) of
the Securities Exchange Act of 1934, as amended (the Exchange Act), and Rule10b-5 promulgated
thereunder, and a second claim pursuant to Section 20(a) of the Exchange Act, claiming generally
that we and/or the other defendants issued materially false and misleading statements during the
relevant time period regarding compliance with customs laws, our financial reports and internal
controls. The complaint does not state the size of the class or quantify the amount of damages
sought.
20
We intend to defend this action (and
any similar actions that may be filed in the future) vigorously, and we have notified our insurance companies
of the existence of the
Complaint. See Risk Factors We are currently party to litigation that could be costly to
defend and distracting to management.
In addition to the proceedings described above, in the ordinary course of our 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.
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ITEM 4. |
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REMOVED AND RESERVED |
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides information with respect to our executive officers as of March
31, 2011. All officers are elected by the Board of Directors and may be removed with or without
cause by the Board. Currently, 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, David Sabin, President of Kids Line, LLC and CoCaLo, Inc.; and
Richard F. Schaub, Jr., President of LaJobi, Inc. and Sassy, Inc.; are each deemed to be executive
officers.
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NAME* |
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AGE |
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POSITION WITH THE COMPANY |
Bruce G. Crain(1) |
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50 |
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President and Chief Executive Officer |
Marc S. Goldfarb |
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47 |
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Senior Vice President, General Counsel and Corporate Secretary |
Guy A. Paglinco |
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53 |
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Vice President and Chief Financial Officer |
David C. Sabin |
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61 |
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President of Kids Line, LLC and CoCaLo, Inc. |
Richard F. Schaub, Jr. |
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51 |
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President of LaJobi, Inc. and Sassy, Inc. |
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(1) |
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Member of our Board of Directors |
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* |
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Lawrence Bivona served as President of LaJobi, Inc. until March 14, 2011, at which time his
employment with the Company terminated. See Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations under the sections entitled
Recent Developments. |
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. 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 President Corporate 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 to 2006, and Corporate Controller from 1998 to 2004.
David C. Sabin joined the Company as Executive Vice President of Kids Line in December
2009, and effective January 1, 2010, assumed the position of President of Kids Line and, effective
September 2010, also assumed the additional position of President of CoCaLo, Inc. From 1988 to
2006, Mr. Sabin was a founder and Chairman of Salton, Inc., a designer, marketer and distributor of
branded small appliances, home décor and personal care products under well-recognized brands such
as Salton®, George Forman®,
Westinghouse® and Toastmaster®. From 2008 to 2009 Mr.
Sabin 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.
21
Richard F. Schaub, Jr. joined the Company as President of Sassy, Inc., in February 2010,
and effective March 14, 2011, assumed the additional position of President of LaJobi, Inc. 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.
PART II
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ITEM 5. |
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MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES |
At March 30, 2011, our Common Stock was held by approximately 430 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:
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2010 |
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2009 |
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HIGH |
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LOW |
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HIGH |
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LOW |
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First Quarter |
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$ |
8.89 |
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$ |
4.65 |
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$ |
4.56 |
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$ |
0.88 |
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Second Quarter |
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10.35 |
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7.01 |
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4.76 |
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1.31 |
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Third Quarter |
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9.05 |
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6.70 |
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6.63 |
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3.05 |
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Fourth Quarter |
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10.26 |
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8.43 |
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6.79 |
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3.64 |
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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, 2010, with the S&P 500 Index and an index composed of other publicly
traded companies that we consider to be our peers based on the lines of business in which such
companies operate (the Peer Group. The graph assumes an investment of $100 on December 31, 2005,
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.
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.
22
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/05 |
|
|
12/06 |
|
|
12/07 |
|
|
12/08 |
|
|
12/09 |
|
|
12/10 |
|
Kid Brands, Inc |
|
|
100.00 |
|
|
|
135.29 |
|
|
|
143.26 |
|
|
|
26.01 |
|
|
|
38.35 |
|
|
|
74.87 |
|
S&P 500 |
|
|
100.00 |
|
|
|
115.80 |
|
|
|
122.16 |
|
|
|
76.96 |
|
|
|
97.33 |
|
|
|
111.99 |
|
Peer Group |
|
|
100.00 |
|
|
|
120.65 |
|
|
|
102.44 |
|
|
|
64.56 |
|
|
|
90.55 |
|
|
|
114.56 |
|
23
|
|
|
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 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 does include the fair values of the consideration received from such sale. The Balance
Sheet data presented for the years ended December 31, 2007 and 2006 included in the table below has
not been restated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,* |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in Thousands, Except Per Share Data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
275,777 |
|
|
$ |
243,936 |
|
|
$ |
229,194 |
|
|
$ |
163,066 |
|
|
$ |
147,100 |
|
Cost of Sales |
|
|
199,483 |
|
|
|
168,741 |
|
|
|
160,470 |
|
|
|
111,361 |
|
|
|
84,338 |
|
Income (Loss) from continuing operations |
|
|
22,355 |
|
|
|
10,992 |
|
|
|
(118,986 |
) |
|
|
16,915 |
|
|
|
34,077 |
|
Income (Loss) before Provision (Benefit) for Income
Taxes |
|
|
18,464 |
|
|
|
4,543 |
|
|
|
(128,371 |
) |
|
|
13,222 |
|
|
|
24,429 |
|
Income Tax (Benefit) Provision |
|
|
(16,208 |
) |
|
|
(7,162 |
) |
|
|
(29,031 |
) |
|
|
4,127 |
|
|
|
10,363 |
|
Income (Loss) from continuing operations |
|
|
34,672 |
|
|
|
11,705 |
|
|
|
(99,340 |
) |
|
|
9,095 |
|
|
|
14,066 |
|
Income (Loss) from discontinued operations, net of tax |
|
|
|
|
|
|
|
|
|
|
(12,216 |
) |
|
|
(187 |
) |
|
|
(23,502 |
) |
Net Income (Loss) |
|
|
34,672 |
|
|
|
11,705 |
|
|
|
(111,556 |
) |
|
|
8,908 |
|
|
|
(9,436 |
) |
Basic Earnings (Loss) Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from continuing operations |
|
|
1.61 |
|
|
|
0.55 |
|
|
|
(4.66 |
) |
|
|
0.43 |
|
|
|
0.67 |
|
Income (Loss) from discontinued operations |
|
|
|
|
|
|
|
|
|
|
(0.57 |
) |
|
|
(0.01 |
) |
|
|
(1.12 |
) |
Net Earnings (Loss) per common share |
|
|
1.61 |
|
|
|
0.55 |
|
|
|
(5.23 |
) |
|
|
0.42 |
|
|
|
(0.45 |
) |
Diluted Income (Loss) Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from continuing operations |
|
|
1.59 |
|
|
|
0.54 |
|
|
|
(4.66 |
) |
|
|
0.43 |
|
|
|
0.67 |
|
Income (Loss) from discontinued operations |
|
|
|
|
|
|
|
|
|
|
(0.57 |
) |
|
|
(0.01 |
) |
|
|
(1.12 |
) |
Net Earnings (Loss) per common share |
|
|
1.59 |
|
|
|
0.54 |
|
|
|
(5.23 |
) |
|
|
0.42 |
|
|
|
(0.45 |
) |
Dividends Per Share |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working Capital |
|
$ |
43,209 |
|
|
$ |
28,982 |
|
|
$ |
25,046 |
|
|
$ |
63,133 |
|
|
$ |
45,872 |
|
Property, Plant and Equipment, net |
|
|
5,030 |
|
|
|
4,251 |
|
|
|
4,466 |
|
|
|
13,093 |
|
|
|
13,993 |
|
Total Assets |
|
|
242,496 |
|
|
|
206,878 |
|
|
|
235,434 |
|
|
|
340,123 |
|
|
|
303,767 |
|
Debt |
|
|
73,121 |
|
|
|
83,125 |
|
|
|
102,812 |
|
|
|
66,844 |
|
|
|
54,332 |
|
Shareholders Equity |
|
|
127,982 |
|
|
|
91,094 |
|
|
|
77,876 |
|
|
|
204,639 |
|
|
|
190,664 |
|
|
|
|
* |
|
The above results include LaJobi and CoCaLo since their acquisitions on April 2, 2008. |
24
|
|
|
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 of approximately $276 million in 2010. We
operate in one segment: the infant and juvenile business.
Our infant and juvenile business which currently consists of the following operating
subsidiaries: 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 and décor, kitchen and nursery appliances and food
preparation products, diaper bags and bath/spa products (Kids Line® and CoCaLo®); nursery furniture
and related products (LaJobi®); and developmental toys and feeding, bath and baby care items with
features that address the various stages of an infants early years (Sassy®). In addition to our
branded products, we also market certain categories of products under various licenses, including
Carters®, Disney®, Graco® and Serta®. Our products are sold primarily to retailers in North
America, the United Kingdom 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 United Kingdom and Australia. We also maintain relationships with several independent
representatives to service select domestic and foreign retail customers, as well as international
distributors to service certain retail customers in several foreign countries. International
sales, defined as sales outside of the United States, including export sales, constituted 8.3%,
8.1% and 8.2% of our net sales for the years ended December 31, 2010, 2009 and 2008, respectively.
One of our strategies is to increase our international sales, both in absolute terms and as a
percentage of total sales, as we seek to expand our presence outside of the United States. See
Recent Developments below for a discussion of new products introductions in 2010.
Aside from funds provided by our senior credit facility, revenues from the sale of products
have historically been the major source of cash for the Company, and cost of goods sold and payroll
expenses have been the largest uses of cash. As a result, operating cash flows primarily depend on
the amount of revenue generated and the timing of collections, as well as the quality of 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.
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 incurred by these third party 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 has occurred in past periods, or higher rates of inflation in the country of
origin, would increase our expenses, and therefore, adversely affect our profitability.
Conversely, a small portion of our revenues is generated by our subsidiaries in Australia and the
United Kingdom and is 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. See Item 1A, Risk Factors Currency exchange rate fluctuations could
increase our expenses.
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 years ended December 31, 2010, 2009 and 2008, the
costs of warehousing, outbound handling costs and outbound shipping costs were $7.2 million, $7.0
million, and $8.8 million, respectively. In addition, the majority of outbound shipping costs are
paid by our customers, as many of our customers pick up their goods at our distribution centers.
25
If our suppliers experience increased raw material, labor or other costs, and pass along such
cost increases to us through higher prices for finished goods, our cost of sales would increase.
Many of our suppliers are currently experiencing
significant cost pressures related to labor rates, raw material costs and currency inflation,
which has and, we believe, will continue to put pressure on our gross margins, at least for the
foreseeable future. To the extent we are unable to pass such price increases along to our
customers or otherwise reduce our cost of goods, our gross profit margins would decrease. Our
gross profit margins have also been impacted in recent periods by: (i) a shift in product mix
toward lower margin products, including increased sales of licensed products, which typically
generate lower margins as a result of required royalty payments (which are recorded in cost of
goods sold); (ii) our acquisition of LaJobi, which continues to experience significant sales growth
but which also typically generates lower gross margins due to the nature of the furniture category,
on average, than our other business units; (iii) increased pressure from major retailers, largely
as a result of prevailing economic conditions, to offer additional mark downs and other pricing
accommodations to clear existing inventory and secure new product placement; and (iv) increased
freight cost and raw material costs. We believe that our future gross margins will continue to be
under pressure as a result of the items listed above, and such pressures may be more acute over the
next several quarters as a result of anticipated product cost increases. See Recent Developments
below for a description of an accrual for anticipated customs duty and interest payment
requirements related to certain wooden furniture imported by our LaJobi subsidiary from the PRC,
which accrual has further impacted our gross margins and net income for the fourth quarter and year
ended December 31, 2010.
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,
re-engineering of certain existing products to reduce manufacturing costs and, where possible,
price increases. Particularly in the mass market, our ability to increase prices or resist
requests for mark-downs and/or other allowances is limited by market and competitive factors, and,
while we have implemented selective price increases and will likely continue to seek to do so, we
have generally focused on maintaining (or increasing) shelf space at retailers and, as a result,
our market share.
Recent Developments
In 2010, we introduced several new product categories. For example, Kids Line expanded its
product offerings to include certain kitchen appliances, food preparation products, nursery
appliances and diaper bags. CoCaLo also introduced a line of diaper bags, as well as a line of
spa/bath products. LaJobi introduced a glider chair with a patent-pending nursing step ottoman,
and several new furniture collections. Sassy introduced a patent-pending squirting bath toy
designed to help prevent the growth of mold and several new developmental toys and feeding
products, and expanded into offerings of licensed Carters® and Garanimals® products.
Our LaJobi subsidiary has been selected by U.S. Customs for a Focused Assessment of its
import practices and procedures, which Focused Assessment commenced January 19, 2011. In
preparing for the Focused Assessment, which is ongoing, we found certain potential issues with
respect to LaJobis import practices. As a result, our Board of Directors initiated an
investigation, supervised by a Special Committee of three non-management members of the Board. The
Boards investigation found instances at LaJobi in which incorrect import duties were applied on
certain wooden furniture imported from vendors in the PRC, resulting in a violation of anti-dumping
regulations. On the basis of their investigation, the
Board concluded that there was misconduct involved on the part of certain LaJobi employees in
connection with the incorrect payment of duties, including misidentifying the manufacturer and
shipper of products. As a result, effective March 14, 2011, LaJobis President, Lawrence Bivona,
and LaJobis Managing Director of operations were both terminated from employment. Promptly upon
becoming aware of such issues and related misconduct, the Company voluntarily disclosed its
findings to the SEC on an informal basis and is cooperating with the Staff of the SEC as it reviews
this matter. The investigation by the Board is continuing, and is also focused on certain of
LaJobis business and staffing practices in Asia, as described below.
Upon completion of our investigation, we currently expect to complete a voluntary prior
disclosure to U.S. Customs identifying certain underpayments of import duty, and remit payment of
customs duty not paid, with interest thereon. Accordingly, for the fourth quarter and year ended
December 31, 2010, we recorded a charge in the amount of $6,860,000 (which includes approximately
$340,000 of interest) for import duties we anticipate will be owed to U.S. Customs by LaJobi in
respect of such underpayments. This charge was recorded in cost of sales (other than the interest
portion, which was recorded in interest expense), and adversely affected gross margins and net
income for the affected periods. It is possible that the actual amount of duty owed with respect
to the Focused Assessment and related investigation will be higher upon completion thereof, and in
any event, additional interest will continue to accrue on the amounts we currently anticipate we
will owe until payment is made. In addition, we may be assessed by U.S. Customs a penalty of up to
100% of any customs duty owed, as well as possibly being subject to fines, penalties or other
measures from U.S. Customs or other governmental authorities. Any amounts owed in excess of the accrual recorded for
the fourth quarter and full year ended December 31, 2010 will adversely affect our gross margin and
net income for the period(s) in which such amounts may be recorded and could have a material
adverse affect on our results of operations. We have discontinued the practices that resulted in
the
26
charge for anticipated anti-dumping duty, and we believe that our ability to procure the
affected categories of wooden bedroom furniture will not be materially adversely affected in future
periods. We are committed to working closely with U.S. Customs to address issues relating to
incorrect import duties and have also initiated certain enhancements to our processes and
procedures in areas where underpayments were found, and will be reviewing these and possibly other
remedial measures. In addition, there can be no assurance that our licensors,
vendors and/or retail partners will not take adverse action under applicable agreement with
the Company (or otherwise) as a result of the matters described above. See Item 3, Legal
Proceedings Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations under the sections entitled Earnouts with respect to Acquisitions and Debt Financings, as well as Note 18 of Notes to
Consolidated Financial Statements, for further discussion of this matter, including its impact on
the LaJobi Earnout Consideration (and related finders fee), which we believe are no longer
payable.
We anticipate that cash flow from operations and anticipated availability under the Credit
Agreement will be sufficient to funds any customs duty, interest and potential penalties thereon,
and potential LaJobi Earnout Consideration and related finders fee, if any, and will be permitted
under the terms of the Credit Agreement and related documentation, although there can be no
assurance that this will be the case. See Debt Financings below and Item 9B, Other Information
for a discussion of a waiver and amendment executed to address, among other things, various
defaults resulting from the charge recorded in the fourth quarter and year ended December 31, 2010
and other circumstances discovered as a result of the internal investigation of LaJobis import and
other practices described above and below.
The Boards pending investigation into LaJobis import practices also encompasses certain of
LaJobis business and staffing practices in Asia and the accuracy of public disclosure made by the
Company with respect thereto. Based on such investigation to date, the Company has determined
that the Company incorrectly described certain payments as being made by LaJobi entirely to L&J
Industries (a company established by Lawrence Bivona, the former President of LaJobi, and various
members of his family, to provide quality control, compliance and other services to LaJobi for
goods shipped from Asian ports) in its quarterly reports during 2010. In particular, the Companys
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2010, June 30, 2010 and September
30, 2010, reported that payments of $311,000, $200,000 and $300,000, respectively, were
made by LaJobi to L&J Industries for such services. However, while the reported amounts were
correct, during such periods, all or a portion of such payments were actually made by LaJobi to individuals
in Hong Kong, China, Vietnam and Thailand providing such services, including through an individual
based in Hong Kong, rather than to L&J Industries. LaJobi ceased making payments to L&J Industries
altogether in June 2010, when it became aware that L&J Industries has ceased operations.
LaJobi has since discontinued the above-described manner of paying individuals providing such
services in the PRC and Hong Kong, and has taken corrective action by establishing interim
arrangements which it believes are currently in compliance with applicable requirements in such
jurisdictions, and is in the process of establishing subsidiaries in the PRC through which the
Company intends to directly employ the quality control individuals in these jurisdictions in the
future. With respect to Thailand and Vietnam, we are investigating appropriate corrective interim
arrangements, and are in the process of establishing a subsidiary in Thailand through which the
Company intends to directly employ the quality control individuals in these jurisdictions in the
future. Although we believe that once these subsidiaries are fully established, the Company will
be in compliance with applicable laws of the relevant Asian countries, no assurance can be given that
applicable governmental authorities will concur with such a view and will not impose taxes or
penalties or other measures with respect to staffing practices prior thereto.
The Company believes that the payment and other practices with respect to quality control, compliance and certain other
services in Hong Kong, China, Vietnam and Thailand violated civil laws and potentially violated criminal laws in
these jurisdictions; however, the Company currently does not believe that any such violations will have a material
adverse effect on the Company, although there can be no assurance that this will be the case.
The Board is continuing to review the extent to which LaJobis payment practices for the
above-described services in Asia may have breached other laws, whether any
penalties or other measures may be assessed against LaJobi, the Company or any related
personnel as a result, and what remedial actions may be advisable or required. In addition, there
can be no assurance that our licensors, vendors and/or retail partners will not take adverse action
under applicable agreements with us (or otherwise) as a result of such potential compliance issues.
Because the investigation is ongoing, there can be no assurance as to how the resulting
consequences, if any, may impact our internal controls, business, reputation, results of operations
or financial condition. Also see Item 1A, Risk Factors Any failure to comply with
the laws of various Asian jurisdictions could cause potential liability and have other adverse
affects.
27
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. A detailed discussion and analysis of our annual Goodwill assessment and other impairment
charges as of December 31, 2008, and our conclusions with respect thereto can be found in Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operation, as well as
the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the
year ended December 31, 2009 (the 2009 10-K). As all of our goodwill was impaired in 2008, no
annual goodwill assessment was necessitated in 2010 or 2009.
Our other indefinite-lived intangible assets are reviewed for impairment at least annually,
and more frequently if a triggering event occurs indicating that an impairment may exist. The
Companys annual impairment testing is performed in the fourth quarter of each year (unless
specified triggering events warrant more frequent testing). All intangible assets, both
definite-lived and indefinite-lived, were tested for impairment in the fourth quarter of each of
2010 and 2009. 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, the buyer of our former Gift Business, which resulted in the Company recording certain
non-cash impairment charges and a valuation reserve aggregating $15.6 million against the
consideration received in the Gift Sale and the Applause® trade name in the amount of $0.8 million
(discussed in detail below in the section captioned Disposition of Liquidity and Capital
Resources). Other than this $0.8 million charge, there was no impairment of the Companys
intangible assets (either definite-lived or indefinite-lived) during either 2010 or 2009. See
Critical Accounting Policies below and in Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations of our 2009 10-K for a discussion of impairment
charges incurred in 2008 and our evaluation of the useful life of our Kids Line customer
relationships.
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 addition, estimating sales
prices, establishing markdown percentages and evaluating the condition of our inventories all
require judgments and estimates, which may also impact the inventory valuation. However, we
believe that, based on our prior experience of managing and evaluating the recoverability of our
slow moving, excess, damaged and obsolete inventory in response to market conditions, including
decreased sales in specific product lines, our established reserves are materially adequate. If
actual market conditions and product sales were less favorable than we have projected, however,
additional inventory reserves may be necessary in future periods.
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; |
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(ii) |
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increasing our existing product penetration (selling more products to existing
customer locations); |
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(iii) |
|
increasing our existing store or online penetration (selling to more store
locations within each large, national retail customer or their associated websites);
and |
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(iv) |
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expanding and diversifying our distribution channels, with particular emphasis
on sales into international markets and non-traditional infant and juvenile retailers; |
28
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growing through licensing, distribution or other strategic alliances, including pursuing
acquisition opportunities in businesses complementary to ours; |
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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 |
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continuing effort to manage costs within each of our businesses. |
With respect to our current strategies, during 2010: (i) we believe we increased market share
as a result of our investments in our brands and design-led products; (ii) each of our business
units launched new products both within our core businesses and in adjacent product categories (see
Recent Developments above for a discussion of certain new product introductions during 2010);
(iii) each business unit entered into new and/or expanded existing doors and channels, as
exemplified by the significant expansion of our business with Walmart, particularly at our LaJobi
and Sassy subsidiaries; (iv) we transitioned to a single senior leadership team at these
businesses, while retaining the separate brand identities of the Kids Line and CoCaLo brands; and
(v) we continued to manage expenses and working capital, allowing us to use our cash flow to
further pay down debt and reduce the interest rates applicable to loans under our credit facility.
As discussed 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 to adverse equity and credit market conditions that caused, among other things, a sustained
decrease in our stock price and a challenging retail environment. As a result of the continued
challenging retail environment, we anticipate future sales and/or margins will be lower than what
was historically forecasted, negatively impacting our prior cash flow forecasts; however, the
acquisitions of LaJobi and CoCaLo have partially mitigated the impact of such lower forecasts (see
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations of
our 2009 10-K). 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 or 2010; 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.
General Economic Conditions as They Impact Our Business
Our business, financial condition and results of operations have and may continue to be
affected by various economic factors. Periods of economic uncertainty, such as the recession
experienced in 2008 and much of 2009, can lead to reduced consumer and business spending, including
by our customers, and the purchasers of their products, as well as reduced consumer confidence,
which we believe has resulted in lower birth rates. Reduced access to credit has and may continue
to adversely affect the ability of consumers to purchase our products from retailers, as well as
the ability of our customers to pay us. If such conditions are experienced in future periods, our
industry, business and results of operations may be negatively impacted. Continuing adverse global
economic conditions in our markets may result in, among other things (i) reduced demand for our
products; (ii) increased price competition for our products; and/or (iii) increased risk in the
collectability of cash from our customers. See item 1A, Risk Factors The state of the
economy may impact our business.
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
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.
Basis of Presentation
As a result of the Gift Sale as of December 23, 2008, the Consolidated Statement of Operations
for the year ended December 31, 2008 (and the discussion below) presents such business as
discontinued operations. 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.
29
Results of Operations
Year ended December 31, 2010, compared to year ended December 31, 2009
Net sales for the year ended December 31, 2010 increased 13.1% to $275.6 million,
compared to $243.9 million for the year ended December 31, 2009. This increase was primarily the
result of organic top-line growth at LaJobi, Sassy and CoCaLo. The strong growth at LaJobi was
driven primarily by the performance of its Graco® licensed products and recent crib placements at
Walmart stores, while Sassys increase was driven primarily by its licensed Garanimals® product
line (at Walmart), and CoCaLos increase was due to the continued strong performance of several
top-selling collections.
Gross profit was $76.3 million, or 27.7% of net sales, for the year ended December 31,
2010, as compared to $75.2 million, or 30.8% of net sales, for the year ended December 31, 2009. In
absolute terms, gross profit increased as a result of the increase in net sales. Gross profit
margins, however, decreased as a result of: (i) a charge in the amount of approximately $6.5
million recorded in cost of sales in the fourth quarter and year ended December 31, 2010 with
respect to anticipated anti-dumping duty payment requirements, as discussed in Recent
Developments above; (ii) strong sales growth at LaJobi, which tends to generate lower gross
margins due to the nature of the furniture category; (iii) a continued shift in product mix toward
more opening price point and other lower margin products, including continued strength in sales of
licensed products, which tend to have lower margins as a result of royalties recorded in cost of
goods sold; (iv) a charge recorded by Sassy of approximately $670,000 related to the discontinuance
of its sleep positioner product line; (v) incremental promotional allowances; and (vi) increased
freight and product costs.
Selling, general and administrative expense was $53.9 million, or 19.6% of net sales, for the
year ended December 31, 2010 compared to $48.6 million, or 19.9% of net sales, for the year ended
December 31, 2009. Selling, general and administrative expense decreased as a percentage of sales
primarily as a result of expense leverage due to sales growth. In absolute terms, the increase in
SG&A costs was a function of increased variable costs as a result of higher net sales and
investments in personnel and additional product development, marketing and operational resources,
as well as a severance charge recorded during the quarter ended September 30, 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, the buyer of the
Gift Business. These indicators included 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 that impacted
TRC during the first half of 2009. 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 from TRC. As a result of this review, the Company determined that its
19.9% investment in TRC as well as the Applause® trade name (licensed to TRC) 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 impact of
these actions resulted in a non-cash charge to income/(loss) from operations in an aggregate amount
of $15.6 million for the three months ended June 30, 2009 and reduced to zero the net carrying
value of the Gift Sale consideration.
Other expense for the year ended December 31, 2010 was $3.9 million, as compared to $6.4
million for the year ended December 31, 2009. This decrease of approximately $2.5 million was
primarily due to lower borrowing; lower borrowing costs; and royalty income of approximately $0.3
million received from TRC during the first quarter of 2010 in connection with the license of
specified intellectual property to TRC, partially offset by approximately $0.3 million in interest
costs related to the anticipated LaJobi customs duty payment requirements of LaJobi, Inc.,
discussed in Recent Developments above. In addition, the prior year period included a write-off
of $0.4 million in deferred financing costs associated with an amendment to the Credit Agreement
that did not recur in 2010, partially offset by a favorable change of $0.7 million in the fair
market value of an interest rate swap agreement, which was not a factor in the 2010 period.
Income before income tax benefit was $18.5 million for the year ended December 31, 2010 as
compared to an income before income tax benefit of $4.5 million for the year ended December 31,
2009. The benefit for income tax for the year ended December 31, 2010 was $16.2 million on
profit before tax of $18.5 million. The difference between the effective tax rate for the year
ended December 31, 2010 and the U.S. federal tax rate primarily relates to a reduction in the
valuation allowance related to intangible amortization and foreign tax credit carry forwards, a
reduction in the reserve for tax contingencies, and state tax credits generated. The benefit for
income tax for the year ended December 31, 2009 was $7.2 million on income before tax of $4.5
million. The difference between the effective tax rate for the year ended December 31, 2009 and
the U.S. federal tax rate primarily relates to the lapse of the statute of limitations on 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.
30
As a result of the foregoing, net income for the year ended December 31, 2010 was $34.7
million, or $1.59 per diluted share, compared to net income of $11.7 million, or $0.54 per diluted
share, for the year ended December 31, 2009.
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 a
distribution agreement with MAM Babyartikel GmbH, 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
improved 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 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.
31
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.
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 twelve months. Any significant future business or product acquisitions, earnout
payments (if any), or other unanticipated expenses (including customs duty assessments and related
interest and/or penalties) in excess of current estimates may require additional debt or equity
financing. See Recent Developments, Debt Financing and Note 18 to Notes to Consolidated Financial Statements.
The proceeds of our bank facility have historically been used to fund acquisitions, and cash
flows from operations are 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 paying down debt), we typically do
not actively utilize our revolving credit facility to fund operations.
We anticipate that cash flow from operations and anticipated availability under the Credit
Agreement will be sufficient to funds any customs duty, interest and potential penalties thereon,
and potential LaJobi Earnout Consideration and related finders fee, if any, and will be permitted
under the terms of the Credit Agreement and related documentation, although there can be no
assurance that this will be the case. See Debt Financings below and Item 9B, Other Information
for a discussion of a waiver and amendment executed to address, among other things, various
defaults resulting from the charge recorded in the fourth quarter and year ended December 31, 2010
and other circumstances discovered as a result of the internal investigation of LaJobis import and
other practices described in Recent Developments above.
As of December 31, 2010, the Company had cash and cash equivalents of $1.1 million compared to
$1.6 million at December 31, 2009. This decrease of $0.5 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 $11.4 million for the year ended
December 31, 2010, compared to net cash provided by operating activities of approximately $20.6
million for the year ended December 31, 2009. Operating activities reflected net income of $34.7
million in 2010, as compared to a net income of $11.7 million in 2009 which included the write-down
of the Gift Sale consideration of $15.6 million. Cash provided by operations for the year ended
December 31, 2010 also includes a $13.1 million increase in accounts payable and accrued expenses
resulting from an increase in inventory, offset by a net increase in accounts receivable of $12.2
million, resulting primarily from increased sales and a change in payment terms with a major
customer and inventory of $11.8 million, resulting from a build up of inventory related to the
anticipation of factories closing for the Chinese New Year holiday and new programs.
Net cash used in investing activities was $1.8 million for the year ended December 31, 2010,
as compared to $0.8 million for the year ended December 31, 2009. Net cash used in investing
activities in 2010 and 2009 was primarily related to capital expenditures with respect to a new
consolidated information technology system. In connection with such implementation (which includes
additional functionality enhancements from the original project concept), we anticipate incurring
aggregate costs of approximately $3.3 million, of which $1.3 million has been incurred as of
December 31, 2010 of which $0.9 million has been capitalized to date, and anticipate the balance of
the costs to be incurred in 2011 and the first half of 2012, all of which has been and is intended
to continue to be financed with borrowing under our Revolving Loan.
Net cash used in financing activities was $10.0 million for 2010 compared to net cash used in
financing activities of $21.8 million in 2009. The net cash used in both periods primarily
reflects the payment of long-term debt under the Credit Agreement.
As of December 31, 2010, and 2009, working capital was $43.2 million and $29.0 million,
respectively. The increase in working capital primarily results from (i) income from operations of
$34.7 million; (ii) an increase in inventory of $11.8 million (see reasons above); (iii) a net
increase in accounts receivable of $12.2 million, due to increased sales; and (iv) an increase in
current deferred taxes of $3.8 million, partially offset by an increase in accounts payable and
accrued expenses of $13.1 million (see reasons above).
32
Earnout with respect to Acquisitions
A portion of the consideration of our April 2008 acquisitions of each of LaJobi and CoCaLo
included contingent earnout consideration based upon the achievement of certain performance
milestones. With respect to LaJobi, if the EBITDA of the Business, as defined in the agreement
governing the purchase (the LaJobi Earnout EBITDA) had grown at a compound annual growth rate
(CAGR) of not less than 4% during the three years ended December 31, 2010 (the Measurement
Date), determined in accordance with the agreement governing the purchase, LaJobi would pay to the
relevant sellers an amount (the LaJobi Earnout Consideration) equal to a percentage of the Agreed
Enterprise Value of LaJobi as of the Measurement Date (subject to acceleration under certain
limited circumstances), with the Agreed Enterprise Value defined as the product of (i) the LaJobi
Earnout EBITDA during the twelve (12) months ending on the Measurement Date, multiplied by (ii) an
applicable multiple (ranging from 5 to 9) depending on the specified levels of CAGR achieved. The
LaJobi Earnout Consideration could have ranged between $0 and a maximum of $15.0 million. In
addition, we agreed to pay 1% of the Agreed Enterprise Value to a financial institution (which had
been previously paid a finders fee in connection with the LaJobi purchase), payable in the same
manner and at the same time that any LaJobi Earnout Consideration is paid.
As a result of the accrual recorded in the fourth quarter and year ended December 31,
2010 for anticipated customs duty (and interest thereon) owed by LaJobi to U.S. Customs (see Recent Developments below), and the facts and circumstances
discovered in our preparation for the Focused Assessment and in our related investigation into
LaJobis import practices described in Recent Developments above (including misconduct on the
part of certain employees at LaJobi), we have concluded that no LaJobi Earnout Consideration (and
therefore no finders fee) is payable. Accordingly, we have not recorded any amounts related
thereto in our financial statements for the fourth quarter and year ended December 31, 2010.
The Company previously disclosed a potential earnout payment of approximately $12 to $15
million in the aggregate relating to its acquisitions of LaJobi and CoCaLo, substantially all of
which was estimated to relate to LaJobi. There can be no assurance, however, that the LaJobi
seller will not take a position different from ours and assert a claim for the payment of some
LaJobi Earnout Consideration. There can be no assurance that we will prevail in any such dispute,
although we believe that, in any event, we would have additional claims that we could assert
against the LaJobi seller for misconduct. We anticipate that cash flow from operations and
anticipated availability under the Credit Agreement will be sufficient to fund any customs duty,
interest and potential penalties thereon, and any potential LaJobi Earnout Consideration and
related finders fee, if any, and will be permitted under the terms of the Credit Agreement and
related documentation, but there can be no assurance that this will be the case. See Debt
Financings below for a discussion of a waiver and amendment executed to address, among other
things, various defaults resulting from the charge recorded in the fourth quarter and year ended
December 31, 2010 and other circumstances discovered as a result of the internal investigation of
Lajobis import and other practices described elsewhere herein.
With respect to CoCaLo, we were obligated to pay to the relevant sellers the following
earnout consideration amounts (the CoCaLo Earnout Consideration) with respect to CoCaLos
performance for the aggregate three year period ending December 31, 2010: (i) $666,667 to be paid
for the achievement of specified initial performance targets with respect to each of net sales,
gross profit and specified CoCaLo EBITDA (the latter combined with specified Kids Line EBITDA) (the
Initial Targets), for a maximum payment of $2.0 million in the event of achievement of the
Initial Targets in all three categories; and (ii) up to an additional $666,667 to be paid, on a
sliding scale basis, for achievement in excess of the Initial Targets up to specified maximum
performance targets in each category, for a potential additional payment of $2.0 million in the
event of achievement of the maximum targets in all three categories. As the relevant performance
targets were not satisfied, no CoCaLo Earnout Consideration is payable.
Disposition
On December 23, 2008, KID completed the sale of the Gift Business to 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 (impairments of
such consideration are discussed below).
33
In connection with the Gift Sale, KID entered into a transition services agreement,
pursuant to which the Company and TRC provided certain specified services to each other and
pursuant to which TRC continues to provide certain services to the Company, including the sublease
of certain office and warehouse space. As of January 24, 2011, KID terminated its sublease from
TRC of its corporate headquarters, which are now located at One Meadowlands Plaza in East
Rutherford, New Jersey. The Company continues to sublease space from TRC or its affiliates in the
United Kingdom and Australia.
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. TRC has not paid the initial lump sum Royalty payment. The Company
received $287,500 in respect of the Royalty payment due March 23, 2010, which was recorded as other
income in the first quarter of 2010, but has not received any payment to date in respect of the
Royalty payments that were due on June 23, 2010, September 23, 2010 or December 23, 2010, and
therefore recorded no income during any such periods related to such Royalties.
KID and TRC continue to discuss a potential restructuring of: (i) the consideration received
by KID for its former Gift Business; (ii) payments due to Licensor under the License Agreement; and
(iii) ongoing arrangements between the parties and their respective affiliates. Such discussions
currently contemplate, among other things, the payment by TRC of certain amounts in exchange for
the cancellation of all or substantially all of the Gift Business consideration and the acquisition
by TRC of the Retained IP. The amounts potentially to be paid by TRC are anticipated to be
substantially less than the face value of the Gift Business consideration. As is discussed below,
the Company has written off or fully reserved against all such consideration, and, accordingly, any
payments received in exchange therefor would be recorded as income, if and when received. There
can be no assurance, however, that any defaulted payments under the License Agreement referred to
above will be made, that any future payments due under the License Agreement will be made in a
timely manner, or at all, that any ongoing discussions will result in any definitive agreement, or
that the terms of any definitive agreement will be consistent with those described above. In
October 2010, Bruce Crain (our CEO) and Mario Ciampi, each a member of our Board of Directors,
resigned from the board of directors of TRC.
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 its ability to collect on its $15.3 million note receivable from TRC. 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 actions resulted in a non-cash charge
to income/ (loss) from continuing operations in an aggregate amount of $15.6 million in the second
quarter of 2009, representing full impairment of the Gift Sale Consideration.
34
Debt Financings
Consolidated long-term debt at December 31, 2010 and 2009, consisted of the following (in
thousands):
|
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|
|
|
|
|
|
|
|
December 31, |
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|
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2010 |
|
|
2009 |
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Term Loan (Credit Agreement) |
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$ |
54,000 |
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|
$ |
67,000 |
|
Note Payable (CoCaLo purchase) |
|
|
526 |
|
|
|
1,025 |
|
|
|
|
|
|
|
|
Total |
|
|
54,526 |
|
|
|
68,025 |
|
Less current portion |
|
|
13,526 |
|
|
|
13,533 |
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
41,000 |
|
|
$ |
54,492 |
|
|
|
|
|
|
|
|
At December 31, 2010 and 2009, there was approximately $18.6 million and $15.1 million,
respectively, borrowed under the Revolving Loan (defined below), which is classified as short-term
debt. At December 31, 2010 and 2009, Revolving Loan Availability was $28.3 million and $31.4
million, respectively.
As of December 31, 2010, the applicable interest rate margins were 2.75% for LIBOR Loans and
1.75% for Base Rate Loans. The weighted average interest rates for the outstanding loans as of
December 31, 2010, were as follows:
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010 |
|
|
|
LIBOR Loans |
|
|
Base Rate Loans |
|
Revolving Loan |
|
|
3.01 |
% |
|
|
5.00 |
% |
Term Loan |
|
|
3.05 |
% |
|
|
5.00 |
% |
Credit Agreement Summary
KID, its operating subsidiaries, and I&J Holdco, Inc. (such subsidiaries and I&J Holdco.,
Inc., the Borrowers) maintain a credit facility (the Credit Agreement) with certain financial
institutions (the Lenders), including Bank of America, N.A. (as successor by merger to 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. The
credit facility provides for: (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). The total borrowing capacity is based on a borrowing
base, which is defined as 85% of eligible receivables plus the lesser of (x) $25.0 million and (y)
55% of eligible inventory. The scheduled maturity date of the facility is April 1, 2013 (subject
to customary early termination provisions).
The Loans under the Credit Agreement bear interest, at the Companys option, at a base
rate or at LIBOR, plus applicable margins based on the most recent quarter-end Total Debt to
Covenant EBITDA Ratio. Applicable margins vary between 2.0% and 4.25% on LIBOR borrowings and 1.0%
and 3.25% on base rate borrowings (base rate borrowings include a floor of 30 day LIBOR plus 1%).
At December 31, 2010, the applicable margins were 2.75% for LIBOR borrowings and 1.75% for base
rate borrowings. The principal of the Term Loan is required to be repaid in quarterly installments
of $3.25 million through December 31, 2012, and a final payment of $28.0 million due on April 1,
2013. The Term Loan is also required to be prepaid upon the occurrence, and with the proceeds, of
certain transactions, including most asset sales or debt or equity issuances, and extraordinary
receipts. The Company is also required to pay an agency fee of $35,000 per annum, an annual
non-use fee of 0.55% to 0.80% of the unused amounts under the Revolving Loan, as well as other
customary fees as are set forth in the Credit Agreement.
Under the terms of the Credit Agreement, the Company is required to comply with the following
financial covenants: (a) a minimum Fixed Charge Coverage Ratio of 1.35:1.00 for the fourth quarter
of 2010 and each fiscal quarter thereafter; (b) a maximum Total Debt to Covenant EBITDA Ratio of
2.75:1.00 for the fourth quarter of 2010 and each fiscal quarter thereafter; and (c) an annual
capital expenditure limitation.
35
Due to the facts and circumstances discovered in connection with our ongoing internal
investigation of LaJobis import, business and staffing practices in Asia (including misconduct by
various LaJobi employees resulting in the underpayment of specified import duties), initiated as a
result of the discovery of certain potential issues in our preparation for the Focused Assessment
of LaJobis import practices, the approximately $6,860,000 charge we recorded for anticipated import
duties and interest related thereto, and additional amounts and penalties that may be required by
U.S. Customs (the foregoing collectively, the LaJobi Events), we determined that various events
of default, and potential events of default under the Credit Agreement (and related loan documents)
occurred as a result of breaches and potential breaches of various representations, warranties and
covenants in the Credit Agreement, including, but not limited to, an unmatured event of default
with respect to a breach of the Fixed Charge Coverage Ratio covenant for the quarter ended December
31, 2010 (as well as
projected breaches of the Fixed Charge Coverage Ratio and Total Debt to Covenant EBITDA Ratio
for certain future periods). In connection therewith, the Credit Agreement was amended on March
30, 2011 (the Amendment), to waive, among other things, specified existing events of default
resulting from such LaJobi Events and related breaches and potential breaches (and future events of
default as a result of the accrual or payment of specified Duty Amounts (as defined below)), and
to amend the definition of Covenant EBITDA for all purposes under the Credit Agreement and
related loan documents (including for the determination of the applicable interest rate margins and
compliance with financial covenants) for the December 31, 2010 reporting period and all periods
thereafter. The Borrowers paid a fee of approximately $100,000 during the first quarter of 2011,
in connection with the execution of the Amendment. As a result of the Amendment, the Company must
be in compliance with the Financial Covenants described above at the time of any accrual in excess
of $1.0 million or proposed payment of any Duty Amounts.
Covenant EBITDA, as currently defined, is a non-GAAP financial measure used to determine
relevant interest rate margins and the Companys compliance with the financial covenants set forth
above, as well as the determination of whether certain dividends and repurchases can be made if
other specified prerequisites are met. Covenant EBITDA 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 and non-cash transaction losses (gains) due
solely to fluctuations in currency values. As a result of the Amendment, Covenant EBITDA is
further adjusted (up to an aggregate maximum of $14.855 million for all periods, less LaJobi
Earnout Consideration paid, if any, other than in accordance with the Credit Agreement and/or to
the extent not deducted in determining consolidated net income) for: (i) all customs duties,
interest, penalties and other related amounts owed by LaJobi to U.S. Customs as a result of the
LaJobi Events (Duty Amounts); (ii) fees and expenses incurred in connection with the internal
investigation into LaJobis import, business and staffing practices and the Focused Assessment of
U.S. Customs; and (iii) LaJobi Earnout Consideration, if any, paid in accordance with the terms of
the Credit Agreement. 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 Fixed Charge Coverage Ratio is the ratio of Covenant
EBITDA for such purpose (as described above) to an amount generally equal to, with respect to the
Company, the sum for the applicable testing period of all scheduled interest and principal payments
of debt, including the principal component of any capital lease, paid or payable in cash. Total
Debt, as used in the Credit Agreement for purposes of the determination of the Total Debt to
Covenant EBITDA Ratio, generally means, with respect to the Company, the outstanding principal
amount of all debt (including debt of capital leases plus the undrawn face amount of all letters of
credit).
The Credit Agreement also contains customary affirmative and negative covenants. Among other
restrictions, the Company is restricted in its ability to purchase or redeem stock, incur
additional debt, make acquisitions above certain amounts and pay any Earnout Consideration or any
amounts due with respect to a promissory note to CoCaLo as part of such acquisition (the CoCaLo
Note), unless in each case certain conditions are satisfied. With respect to the payment of any
LaJobi Earnout Consideration, as a result of the Amendment, such conditions now include that excess
revolving loan availability equal or exceed the greater of (A) $18,000,000 less the amount of any
Duty Amounts previously paid by LaJobi to U.S. Customs and (B) $9,000,000, until such time that the
Focused Assessment has been deemed concluded and all Duty Amounts required thereby have been
remitted by LaJobi (the Conclusion Date), such that after the Conclusion Date, this condition
shall require only that excess revolving loan availability equal or exceed $9,000,000 (previously,
such condition with respect to the payment of any Earnout Consideration was limited to excess
revolving loan availability being equal to or exceeding $9,000,000, and such requirement with
respect to the payment of any CoCaLo Earnout Consideration remains unchanged). The Company
currently anticipates that payment of Earnout Consideration, if any, and the final payment of the
CoCaLo Note will be permitted under the terms of the Credit Agreement and related documentation,
although there can be no assurance that this will be the case. See Item 7 Managements Discussion
and Analysis of Financial Condition and Results of Operations under the section captioned
Earnouts with respect to Acquisitions for a discussion of the LaJobi Earnout Consideration (and
finders fee) in light of the LaJobi Events. The Credit Agreement also contains specified events of
default related to the CoCaLo Earnout Consideration and LaJobi Earnout Consideration. In addition,
KID may not pay a dividend to its shareholders unless the Earnout Consideration, if any, has been
paid no default exists or would result therefrom (including compliance with the financial
covenants), Excess Revolving Loan Availability is at least $4.0 million, and the Total Debt to
Covenant EBITDA Ratio for the two most recently completed fiscal quarters is less than 2.00:1.00.
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. As a result of the Amendment, specified existing
events of default related to the LaJobi Events (and specified future events of default relating to
the payment of any Duty Amounts) were waived, and the Borrowers are now deemed to be in compliance
with all applicable financial covenants in the Credit Agreement as of December 31, 2010 (see
discussion above).
36
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 which
expired on April 30, 2010. Changes in the cost of the swap agreement and its fair value as of
April 30, 2010 resulted in income of approximately $0.7 million and $1.4 million for the year ended
December 31, 2010 and 2009, respectively and expense of approximately $2.1 million for the year
ended December 31, 2008. Such amounts are included in interest expense in the consolidated
statements of operations.
The Borrowers entered into a new interest rate swap agreement with a notional amount of $31.9
million on April 30, 2010, which expired December 21, 2010, and was replaced by a new interest rate
swap agreement on such date with a notional amount of $28.6 million. An unrealized net loss of
$87,000 for this interest rate swap at December 31, 2010 was recorded as a component of
comprehensive income, and is expected to be reclassified into earnings within the next twelve
months (see Note 6 of Notes to Consolidated Financial Statements below).
The Credit Agreement is secured by substantially all of the Companys domestic assets,
including a pledge of the capital stock of each Borrower and Licensor, and a portion of KIDs
equity interests in its active foreign subsidiaries, and is also guaranteed by KID.
Financing costs associated with the Revolving Loan and Term Loan are deferred and are
amortized over their contractual term.
Other Events and Circumstances Pertaining to Liquidity
See Item 1A
Risk Factors, Any failure to fully comply with the laws of various Asian jurisdictions
could cause potential liability and have other adverse effects, and We are
currently party to
litigation that could be costly to defend and distracting to management, Item 3,
Legal Proceedings, the sections entitled Recent Developments and Debt Financings above,
and Notes 12 and 18 of Notes to Consolidated Financial Statements for a discussion of a U.S.
Customs Focused Assessment of the import practices and procedures of our LaJobi subsidiary, and
an internal investigation into such import practices and certain of LaJobis business and
staffing practices in Asia, as well as other actions taken by us in connection therewith, and a
description of a litigation that has been instituted against us.
In connection with the sale of the Gift Business, KID and Russ Berrie U.S. Gift, Inc. (U.S.
Gift), our subsidiary at the time, sent a notice of termination, which notice was effective
December 23, 2010, with respect to the lease (the Lease) originally entered into by KID (and
subsequently assigned to U.S. Gift) of a facility in South Brunswick, New Jersey. Although this
Lease became 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 became effective. It is our understanding that TRC and the landlord have agreed to allow
U.S. Gift to occupy the premises under certain conditions but that U.S. Gift has failed to pay
certain amounts due and outstanding on the termination date, for which we may remain contingently
liable. 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 fails to make payments of amounts outstanding on the termination
date 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 KID
indemnification, reimbursement and similar obligations. In addition, KID may remain obligated with
respect to certain contracts or other obligations that were not novated in connection with their
transfer. No payments have been made by KID in connection with any of these obligations as of
March 31, 2011, but there can be no assurance that payments will not be required of KID in the
future.
In addition, 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.
37
We commenced the implementation in 2010 of a new consolidated information technology system
for our operations, which we believe will provide greater efficiencies, and greater reporting
capabilities than those provided by the current systems in place across our individual infant and
juvenile companies. In connection with such implementation, we anticipate incurring aggregate
costs of approximately $3.3 million, of which $1.3 million has been incurred as of December 31,
2010, and anticipate the balance of the costs to be incurred in 2011 and the first half of 2012,
which has been and is intended to continue to be financed with borrowings under our Revolving Loan.
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.
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 pre-payments 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 12 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, 2010, and the future periods in which such obligations are expected to be settled in cash (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
Operating Lease Obligations |
|
$ |
15,757 |
|
|
$ |
2,744 |
|
|
$ |
2,947 |
|
|
$ |
3,048 |
|
|
$ |
1,796 |
|
|
$ |
1,858 |
|
|
$ |
3,364 |
|
Capitalized Leases |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note Payable (1) |
|
|
533 |
|
|
|
533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Obligations (2) |
|
|
47,497 |
|
|
|
47,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Repayment Obligations (3) |
|
|
54,000 |
|
|
|
13,000 |
|
|
|
13,000 |
|
|
|
28,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on Debt Repayment Obligations (4) |
|
|
2,715 |
|
|
|
1,449 |
|
|
|
1,052 |
|
|
|
214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty Obligations |
|
|
12,364 |
|
|
|
4,166 |
|
|
|
5,106 |
|
|
|
2,016 |
|
|
|
1,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations* |
|
$ |
132,867 |
|
|
$ |
69,390 |
|
|
$ |
22,105 |
|
|
$ |
33,278 |
|
|
$ |
2,872 |
|
|
$ |
1,858 |
|
|
$ |
3,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects the final installment due (April 2, 2011) of a note payable with respect to the
CoCaLo acquisition (the CoCaLo Note). The present value of the CoCaLo Note is $526,000 and
the aggregate remaining imputed interest at 5.5% is $7,000. Upon the occurrence of an event
of default under the CoCaLo 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 Credit Agreement. See Note 8 of Notes to
Consolidated Financial Statements for a description of the Credit Agreement, including amounts
and dates of repayment obligations and provisions that create, increase and/or accelerate
obligations thereunder. Excludes, as of December 31, 2010, approximately $18.6 million
borrowed under the Revolving Loan. The 2011 interest payment for this Revolving Loan using an
assumed 3.01% interest rate was $0.6 million. Such amounts are estimates only and actual
interest payments could differ materially. The Revolving Loan 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, 2010, calculated using an assumed interest rate of 3.01% 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 the TRC Lease (or contingent obligations under other
off-balance sheet arrangements described below), as the amount, if any, and/or timing of their
potential settlement is not reasonably estimable. See Off-Balance Sheet Arrangements below. In
connection with the acquisitions of LaJobi and CoCaLo, the Company agreed to make certain potential
Earnout Consideration payments (together with a finders fee for the LaJobi acquisition) based on
the performance of the acquired businesses. The Company has concluded that no CoCaLo Earnout
Consideration and no LaJobi Earnout Consideration (or related finders fee) was earned or will
become payable, therefore no amount with respect thereto are included in the table above. (See
Recent Developments and Earnouts with respect to Acquisitions above). Of the total income tax
payable for uncertain tax positions of $542,000, we have classified $506,000 as current as of
December 31,
2010, 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. |
38
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, which notice was effective December 23, 2010, with respect
to the lease (the Lease) originally entered into by KID (and subsequently assigned to U.S. Gift)
of a facility in South Brunswick, New Jersey. Although this Lease became 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 became effective. It is
our understanding that TRC and the landlord have agreed to allow U.S. Gift to occupy the premises
under certain conditions but that U.S. Gift has failed to pay certain amounts due and outstanding
on the termination date, for which we may remain contingently liable. 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
fails to make payment of amounts outstanding on the termination date 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 March 31, 2011, but there
can be no assurance that payments will not be required of KID in the future.
In connection with Kids Lines execution of a sublease in October 2010 with respect to
specified office space in Los Angeles, California, KID executed a guarantee for the benefit of the
sublessor, guaranteeing payment of the aggregate rental payments under the sublease if Kids Line
defaults on its obligations. In addition, under specified circumstances (generally if the
underlying lease is terminated because the sublessor is in default thereof but Kids Line is not in
default under its sublease of the premises), the landlord under the underlying lease has agreed to
enter into a direct lease with Kids Line on the terms of the sublease, provided that Kids Line
shall be obligated to pay the original (higher) rent applicable to the underlying lease between
such landlord and the sublessor (representing an aggregate differential of $4.1 million as of the
effective date of the sublease). In connection therewith, the sublessor has issued an irrevocable
standby letter of credit for the benefit of Kids Line, in the aggregate amount of $4.1 million (to
be reduced annually to correspond to the remaining differential in rental amounts payable over
time). This letter of credit expires on May 31, 2011, but will automatically be extended to May 31
in each succeeding year (subject to a final expiration on February 28, 2018, the stated date of
expiration of the sublease) unless the issuing bank (Bank of America, N.A.) provides written notice
otherwise to Kids Line at least 60 days prior to the then current expiration date. Upon receipt of
any such expiration notice, Kids Line shall have the right to draw under the letter of credit in an
amount equal to its then current full amount. See Item 9B Other Information under the caption
entitled Sublease for more information on the Kids Line sublease, and related letter of credit.
The Company has 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,
2010, 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
2010. 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.
39
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 2010 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
each of December 31, 2010 and 2009. The trade names tested were Kids Line®,
Sassy®, LaJobi® and CoCaLo®. As with
respect to the testing for 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 2010, it used a five-year projection period, which has been its prior
practice, and projected for each business unit the long-term growth rate of each business, as well
as the assumed royalty rate that could be obtained by each such business by licensing out each
intangible. For 2010, the Company increased its long-term growth rate for all of its business
units, while the assumed royalty rates remained constant with 2009.
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 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. 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 $5.0 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.
40
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. No impairments to intangible assets with definite lives were recorded in 2010. As discussed
in Note 5 to Notes to Consolidated Financial Statements, in connection with the annual impairment
testing of intangible assets during the fourth quarter of 2008, we determined that, based upon
then-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 year ended December 31, 2008, and $1.6 million for each of
the years ended December 31, 2010 and 2009. In addition, as discussed above, an impairment charge
to our Applause® trade name was recorded in 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 consider 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, 2010, (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 prior year losses and the continued 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 estimates
and assumptions considering the continuing 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
(excluding impairment charges) since each of their respective dates of purchase and are expected to
continue to be profitable over the next five 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 operations generated
profit before taxes of approximately $18.5 million for 2010. We have prepared forecasts for five
years. We have determined that, for the years 2011-2015, we would need to generate an aggregate of
approximately $89.0 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.
41
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 $4.0 million for our deferred tax assets, of which $3.1
million consists of valuation allowances against foreign tax credit carry forwards, approximately
$0.5 million against foreign NOL carry forwards and approximately $0.4 million against 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. We assume that full inventory
reserve, bad debt reserve, inventory capitalization and other current
assets will reverse in 2011, which are in the 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, 2011 through 2015 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, we
considered and concluded 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 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. |
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risk
Market risk is the potential loss arising from changes in market rates and market prices. Our
market risk exposure results primarily from fluctuations in foreign currency exchange rates and
interest rates. Our views on market risk are not necessarily indicative of actual results that may
occur and do not represent the maximum possible gains and losses that may occur, since actual gains
and losses will differ from those estimated, based upon actual fluctuations in foreign currency
exchange rates and interest rates and the timing of transactions.
Interest Rate Changes
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, 2010, 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 $0.7 million
annually. See Note 8 of Notes to Consolidated Financial Statements for a discussion of the
applicable interest rates under our Credit Agreement.
42
The Borrowers under the Credit Agreement 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 which expired on April 30, 2010. Changes in the cost of the swap agreement and its
fair value as of April 30, 2010 resulted in income of approximately $0.7 million and $1.4 million
for the years ended December 31, 2010 and 2009, respectively. The Borrowers entered into a new
interest rate swap agreement with a notional amount of $31.9 million on April 30, 2010 which
expired December 21, 2010 and was replaced by a new interest rate swap agreement on such date with
a notional amount of $28.6 million. An unrealized net loss of $87,000 for this interest rate swap
for the year ended
December 31, 2010 was recorded as a component of comprehensive income, and is expected to be
reclassified into earnings within the next twelve months (see Notes 6 and 8 of Notes to
Consolidated Financial Statements for information with respect to these interest rate swap
agreements).
Foreign Currency Exchange Rate
At December 31, 2010 and 2009, 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 $99,000 and $113,000 for each such year, respectively.
We are exposed to market risk associated with foreign currency fluctuations. In 2008, we
entered into foreign currency forward exchange contracts as part of our overall financial risk
management policy, but did not use such instruments for speculative or trading purposes. Such
forward exchange contracts did not qualify as hedges under generally accepted accounting
principles. We do not currently utilize any derivative financial instruments to hedge foreign
currency risks. The volatility of applicable currencies is monitored frequently. If appropriate, we
may enter into hedging transactions in order to mitigate our risk from foreign currency
fluctuations. Due to the substantial volatility of currency exchange rates, among other factors, we
cannot predict the effect of exchange rate fluctuations upon future operating results. There can be
no assurances that we will not experience currency losses in the future. 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 Factors Currency exchange rate
fluctuations could increase our expenses.
Our financial position is also impacted by currency exchange rate fluctuations on translation
of our net investment in subsidiaries with non-US dollar functional currencies. Assets and
liabilities of subsidiaries with non-US dollar functional currencies are translated into US dollars
at fiscal year-end exchange rates. Income, expense, and cash flow items are translated at weighted
average exchange rates prevailing during the fiscal year. The resulting currency translation
adjustments are recorded as a component of accumulated other comprehensive loss within
stockholders equity. Our primary currency translation exposures during 2010 were related to our
net investment in entities having functional currencies denominated in the Australian dollar and
British pound.
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.
43
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ITEM 8. |
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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
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Page No. |
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1. Financial Statements |
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45 |
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46 |
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47 |
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48 |
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49 |
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50 |
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2. Financial Statement Schedule: |
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93 |
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44
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. and
subsidiaries as of December 31, 2010 and 2009, 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, 2010. In connection with our audit of the
consolidated financial statements, we also have audited the consolidated financial statement
schedule Schedule II Valuation and Qualifying Accounts. We also have audited Kid Brands,
Inc.s, internal control over financial reporting as of December 31, 2010, based on criteria
established in Internal Control Integrated 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,
2010, and 2009, and the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2010, 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, 2010, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ KPMG LLP
Short Hills, New Jersey
March 31, 2011
45
KID BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
(Dollars in Thousands, Except Share and Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,075 |
|
|
$ |
1,593 |
|
Accounts receivabletrade, less allowances of $6,934 in 2010 and $7,101 in 2009 |
|
|
55,270 |
|
|
|
42,940 |
|
Inventories, net |
|
|
48,564 |
|
|
|
37,018 |
|
Prepaid expenses and other current assets |
|
|
3,843 |
|
|
|
2,950 |
|
Income tax receivable |
|
|
307 |
|
|
|
241 |
|
Deferred income taxes |
|
|
6,372 |
|
|
|
2,607 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
115,431 |
|
|
|
87,349 |
|
Property, plant and equipment, net |
|
|
5,030 |
|
|
|
4,251 |
|
Intangible assets |
|
|
77,154 |
|
|
|
80,352 |
|
Note receivable, net allowance of $16,648 in 2010 and $15,981 in 2009 |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
41,626 |
|
|
|
30,993 |
|
Other assets |
|
|
3,255 |
|
|
|
3,933 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
242,496 |
|
|
$ |
206,878 |
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
13,526 |
|
|
$ |
13,533 |
|
Short-term debt |
|
|
18,595 |
|
|
|
15,100 |
|
Accounts payable |
|
|
22,940 |
|
|
|
17,420 |
|
Accrued expenses |
|
|
16,954 |
|
|
|
8,684 |
|
Income taxes payable |
|
|
207 |
|
|
|
3,630 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
72,222 |
|
|
|
58,367 |
|
Income taxes payable non-current |
|
|
37 |
|
|
|
1,065 |
|
Deferred income taxes |
|
|
332 |
|
|
|
|
|
Long-term debt, excluding current portion |
|
|
41,000 |
|
|
|
54,492 |
|
Other long-term liabilities |
|
|
923 |
|
|
|
1,860 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
114,514 |
|
|
|
115,784 |
|
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, 2010 and 2009, respectively |
|
|
2,674 |
|
|
|
2,674 |
|
Additional paid-in capital |
|
|
90,645 |
|
|
|
89,756 |
|
Retained earnings |
|
|
135,049 |
|
|
|
100,377 |
|
Accumulated other comprehensive income |
|
|
503 |
|
|
|
458 |
|
Treasury stock, at cost, 5,162,354 and 5,227,985 shares at December 31, 2010 and 2009, respectively |
|
|
(100,889 |
) |
|
|
(102,171 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
127,982 |
|
|
|
91,094 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
242,496 |
|
|
$ |
206,878 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
46
KID BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
(Dollars in Thousands, Except Share and Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Net sales |
|
$ |
275,777 |
|
|
$ |
243,936 |
|
|
$ |
229,194 |
|
Cost of sales |
|
|
199,483 |
|
|
|
168,741 |
|
|
|
160,470 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
76,294 |
|
|
|
75,195 |
|
|
|
68,724 |
|
Selling, general and administrative expenses |
|
|
53,939 |
|
|
|
48,583 |
|
|
|
50,779 |
|
Impairment of investment and valuation reserve |
|
|
|
|
|
|
15,620 |
|
|
|
|
|
Impairment of goodwill and intangibles |
|
|
|
|
|
|
|
|
|
|
136,931 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
53,939 |
|
|
|
64,203 |
|
|
|
187,710 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
22,355 |
|
|
|
10,992 |
|
|
|
(118,986 |
) |
|
|
|
|
|
|
|
|
|
|
Other (expense) income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, including amortization and write-off of deferred financing costs |
|
|
(4,210 |
) |
|
|
(6,620 |
) |
|
|
(9,655 |
) |
Interest and investment income |
|
|
11 |
|
|
|
10 |
|
|
|
78 |
|
Other, net |
|
|
308 |
|
|
|
161 |
|
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,891 |
) |
|
|
(6,449 |
) |
|
|
(9,385 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income tax (benefit) |
|
|
18,464 |
|
|
|
4,543 |
|
|
|
(128,371 |
) |
Income tax (benefit) |
|
|
(16,208 |
) |
|
|
(7,162 |
) |
|
|
(29,031 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
34,672 |
|
|
|
11,705 |
|
|
|
(99,340 |
) |
|
|
|
|
|
|
|
|
|
|
Discontinued Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
(17,268 |
) |
Gain on disposition |
|
|
|
|
|
|
|
|
|
|
905 |
|
Income tax (benefit) from discontinued operations |
|
|
|
|
|
|
|
|
|
|
(4,147 |
) |
|
|
|
|
|
|
|
|
|
|
(Loss) from discontinued operations net of tax benefit |
|
|
|
|
|
|
|
|
|
|
(12,216 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
34,672 |
|
|
$ |
11,705 |
|
|
$ |
(111,556 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
1.61 |
|
|
$ |
0.55 |
|
|
$ |
(4.66 |
) |
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
(0.57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.61 |
|
|
$ |
0.55 |
|
|
$ |
(5.23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
1.59 |
|
|
$ |
0.54 |
|
|
$ |
(4.66 |
) |
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
(0.57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.59 |
|
|
$ |
0.54 |
|
|
$ |
(5.23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
21,547,000 |
|
|
|
21,371,000 |
|
|
|
21,302,000 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
21,838,000 |
|
|
|
21,532,000 |
|
|
|
21,302,000 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
47
KID BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
Common |
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Stock |
|
|
Paid In |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury |
|
|
|
Total |
|
|
Issued |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Income/(Loss) |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tax shortfall on share-based compensation |
|
|
(497 |
) |
|
|
|
|
|
|
|
|
|
|
(497 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Share transactions under stock plans(31,317 shares) |
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
(525 |
) |
|
|
|
|
|
|
|
|
|
|
606 |
|
Share-based compensation |
|
|
1,605 |
|
|
|
|
|
|
|
|
|
|
|
1,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
91,094 |
|
|
|
26,728 |
|
|
|
2,674 |
|
|
|
89,756 |
|
|
|
100,377 |
|
|
|
458 |
|
|
|
(102,171 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
34,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,672 |
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss on derivatives |
|
|
(87 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87 |
) |
|
|
|
|
Foreign currency translation adjustment |
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
34,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tax shortfall on share-based compensation |
|
|
(81 |
) |
|
|
|
|
|
|
|
|
|
|
(81 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Share transactions under stock plans(65,631 shares), net of cash settlement of SAR exercise |
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
(1,162 |
) |
|
|
|
|
|
|
|
|
|
|
1,282 |
|
Share-based compensation |
|
|
2,132 |
|
|
|
|
|
|
|
|
|
|
|
2,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
$ |
127,982 |
|
|
|
26,728 |
|
|
$ |
2,674 |
|
|
$ |
90,645 |
|
|
$ |
135,049 |
|
|
$ |
503 |
|
|
$ |
(100,889 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
48
KID BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
34,672 |
|
|
$ |
11,705 |
|
|
$ |
(111,556 |
) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,747 |
|
|
|
3,838 |
|
|
|
5,959 |
|
Impairment of goodwill and other intangibles |
|
|
|
|
|
|
|
|
|
|
140,631 |
|
Amortization and write-off of deferred financing costs |
|
|
922 |
|
|
|
1,527 |
|
|
|
886 |
|
Provision for customer allowances |
|
|
35,921 |
|
|
|
31,121 |
|
|
|
17,189 |
|
Provision for impairment and valuation reserve |
|
|
|
|
|
|
15,620 |
|
|
|
|
|
Provision for inventory reserve |
|
|
504 |
|
|
|
1,209 |
|
|
|
6,828 |
|
Deferred income taxes |
|
|
(14,066 |
) |
|
|
(3,700 |
) |
|
|
(32,742 |
) |
Impairment on long term asset |
|
|
|
|
|
|
|
|
|
|
7,041 |
|
Share-based compensation expense |
|
|
2,132 |
|
|
|
1,605 |
|
|
|
1,635 |
|
Other |
|
|
|
|
|
|
|
|
|
|
(462 |
) |
Change in assets and liabilities, excluding the effects of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Accounts receivable |
|
|
(48,126 |
) |
|
|
(34,322 |
) |
|
|
(6,368 |
) |
Income tax receivable |
|
|
(70 |
) |
|
|
(225 |
) |
|
|
209 |
|
Inventories |
|
|
(11,826 |
) |
|
|
9,340 |
|
|
|
(13,029 |
) |
Prepaid expenses and other current assets |
|
|
(893 |
) |
|
|
307 |
|
|
|
(1,238 |
) |
Other assets |
|
|
(215 |
) |
|
|
(73 |
) |
|
|
(1,197 |
) |
Accounts payable |
|
|
5,492 |
|
|
|
(5,995 |
) |
|
|
17,115 |
|
Accrued expenses |
|
|
7,631 |
|
|
|
(6,060 |
) |
|
|
(3,535 |
) |
Income taxes payable |
|
|
(4,445 |
) |
|
|
(5,278 |
) |
|
|
(1,865 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
11,380 |
|
|
|
20,619 |
|
|
|
25,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(1,765 |
) |
|
|
(771 |
) |
|
|
(2,253 |
) |
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 |
) |
Other |
|
|
|
|
|
|
(4 |
) |
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,765 |
) |
|
|
(775 |
) |
|
|
(79,696 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
228 |
|
|
|
81 |
|
|
|
|
|
Settlement of SAR exercise |
|
|
(108 |
) |
|
|
|
|
|
|
|
|
Excess tax benefit from stock-based compensation |
|
|
(81 |
) |
|
|
(497 |
) |
|
|
|
|
Issuance of long-term debt |
|
|
|
|
|
|
|
|
|
|
100,000 |
|
Payments of long-term debt |
|
|
(13,499 |
) |
|
|
(22,673 |
) |
|
|
(54,300 |
) |
Net borrowings on revolving credit facility |
|
|
3,495 |
|
|
|
2,986 |
|
|
|
(8,057 |
) |
Capital leases |
|
|
|
|
|
|
|
|
|
|
(308 |
) |
Payment of deferred financing costs |
|
|
|
|
|
|
(1,697 |
) |
|
|
(1,655 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(9,965 |
) |
|
|
(21,800 |
) |
|
|
35,680 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(168 |
) |
|
|
(179 |
) |
|
|
319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(518 |
) |
|
|
(2,135 |
) |
|
|
(18,197 |
) |
Cash and cash equivalents at beginning of year |
|
|
1,593 |
|
|
|
3,728 |
|
|
|
21,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
1,075 |
|
|
$ |
1,593 |
|
|
$ |
3,728 |
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
3,562 |
|
|
$ |
6,457 |
|
|
$ |
6,254 |
|
Income taxes |
|
$ |
3,000 |
|
|
$ |
2,711 |
|
|
$ |
828 |
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Note payable CoCaLo purchase |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,439 |
|
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.
49
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
Note 1 Description of Business
Kid Brands, Inc., (KID) and its subsidiaries (collectively with KID, the Company) is a
leading designer, importer, marketer and distributor of infant and juvenile consumer products. The
Company currently operates in one segment: the infant and juvenile business.
On December 23, 2008, KID sold all of the capital stock of all KIDs subsidiaries actively
engaged in the Gift Business (the Gift Business), and substantially all of KIDs subsidiaries
actively engaged in the Gift Business ( the Gift Sale) to The Russ Companies, Inc., a Delaware
corporation (TRC). As a result of the Gift Sale, the Consolidated Statement of Operations for the
year ended December 31, 2008 has been restated to show the Gift Business as discontinued
operations. The Consolidated Statement of Cash Flows for the year ended December 31, 2008 has 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.
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, kitchen and nursery appliances and food preparation products, diaper bags, and bath/spa
products (Kids Line® and CoCaLo®); nursery furniture and related products (LaJobi®); and
developmental toys and feeding, bath and baby care items with features that address the various
stages of an infants early years (Sassy®). In addition to branded products, the Company also
markets certain categories under various licenses, including Carters®, Disney®, Graco® and Serta®.
The Companys products are sold primarily to retailers in North America, the United Kingdom and
Australia, including large, national retail accounts and independent retailers (including toy,
specialty, food, drug, apparel and other retailers).
Note 2 Summary 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 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.
50
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
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
classifies them under selling, general and administrative expenses. For the years ended December
31, 2010, 2009, and 2008, the costs of warehousing, outbound handling costs and outbound shipping
costs were $7.2 million, $7.0 million, and $8.8 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 are incurred. Advertising costs for continuing operations for the years ended
December 31, 2010, 2009, and 2008, amounted to $0.8 million, $0.9 million, and $1.3 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 assess 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 mark down 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 periods.
At December 31, 2010 and 2009, the balance of the inventory reserve was approximately $1,589,000
and $1,923,000, respectively.
51
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
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 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, 2010 or 2009.
52
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
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, 2010 and 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 2010, it used a
five-year projection period, which has been its prior practice, and projected for each business
unit the long-term growth rate of each business, as well as the assumed royalty rate that could be
obtained by each such business by licensing out each trade name. For 2010, the Company increased
its long-term growth rate for all of its business units, while the assumed royalty rates remained
constant with 2009. The results of the 2010 testing indicated that non-amortizing intangible trade
names were not impaired at December 31, 2010. The results of the 2009 testing indicated that
non-amortizing intangible trade names were not impaired at December 31, 2009. 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.
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.
Derivative Instruments
The Company uses derivative financial instruments, primarily swaps, to hedge interest rate
exposures. The Company accounts for its derivative instruments as either assets or liabilities and
measures them at fair value. Derivatives that are not designated as hedges are adjusted to
fair value through earnings. See Note 6 for a full description of the Companys derivative
financial instrument activities.
Accounting for Income Taxes
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 10 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.
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 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.
53
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
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, stock appreciation rights
(SARS), all of which may be settled in stock, and RSUs) using the treasury stock method, except
when the effect would be anti-dilutive. (See Note 11)
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 duty and litigation. Actual results could differ from these estimates.
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, 2010, the Company had share-based
employee compensation plans which are described more fully in Note 15.
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. There was a tax deficiency of $0.1 million
and $0.5 million recognized from share-based compensation costs for the years ended December 31,
2010 and 2009, respectively. For the year ended December 31, 2008, there was no excess tax benefit
recognized from share-based compensation costs because the Company was not in a taxpaying position
in the United States in 2008.
Accumulated Other Comprehensive Income/(Loss)
Comprehensive income consists of net income (loss) and other gains and losses that are not
included in net income (loss), but are recorded directly in the consolidated statements of
shareholders equity, such as the unrealized gains and losses on the translation of the assets and
liabilities of the Companys foreign operations and gains or losses on derivatives.
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 2010 consolidated financial statements.
54
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
Recently Issued Accounting Standards
In January 2010, the Financial Accounting Standards Board (FASB) issued an amendment to the
standard pertaining to fair value measurements and disclosures. This amendment requires the
Company 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. The amendments prescribed by the standard were effective for the
Companys fiscal quarter ending March 31, 2010, except for the requirements described in item (3)
above, which are effective for the Companys fiscal year beginning January 1, 2011. The adoption of
this standard did not have a material impact on the Companys consolidated financial statements.
The Company adopted a new FASB standard concerning the determination of the useful life of
intangible assets beginning on January 1, 2010. The adoption of this standard did not have an
impact on the Companys consolidated financial statements at the time of adoption or during the
year ended December 31, 2010, but could have an impact in the future. 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.
In December 2010, the FASB issued updated accounting guidance related to the calculation of
the carrying amount of a reporting unit when performing the first step of a goodwill impairment
test. More specifically, this update will require an entity to use an equity premise when
performing the first step of a goodwill impairment test and if a reporting unit has a zero or
negative carrying amount, the entity must assess and consider qualitative factors and whether it is
more likely than not that a goodwill impairment exists. The new accounting guidance is effective
for public entities, for impairment tests performed during entities fiscal years (and interim
periods within those years) that begin after December 15, 2010. Early application is not permitted.
The Company will adopt the new disclosures in the first quarter of fiscal 2011, however as the
Company does not currently have any reporting units with a zero or negative carrying amount, the
Company does not expect the adoption of this guidance to have an impact on the Companys
consolidated financial statements.
In December 2010, the FASB issued updated accounting guidance to clarify that pro forma
disclosures should be presented as if a business combination occurred at the beginning of the prior
annual period for purposes of preparing both the current reporting period and the prior reporting
period pro forma financial information. These disclosures should be accompanied by a narrative
description about the nature and amount of material, nonrecurring pro forma adjustments. The new
accounting guidance is effective for business combinations consummated in periods beginning after
December 15, 2010, and should be applied prospectively as of the date of adoption. Early adoption
is permitted. The Company will adopt the new disclosures in the first quarter of fiscal 2011. The
Company does not believe that the adoption of this guidance will have a material impact to the
Companys consolidated financial statements.
Note 3 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), had grown at a compound annual growth rate (CAGR) of not less than 4%
during the three years ended December 31, 2010 (the Measurement Date), determined in accordance
with the Asset Agreement, LaJobi was to 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 could have
ranged between $0 and a maximum of $15.0 million.
55
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
As a result of the accrual recorded in the fourth quarter and year ended December 31, 2010 for
anticipated customs duty (and interest thereon) owed by LaJobi to U.S. Customs (see Note 18 below),
and the facts and circumstances discovered in our preparation for the Focused Assessment and in our
related investigation into LaJobis import practices described in Note 18 (including misconduct on
the part of certain employees at LaJobi), we have concluded that no LaJobi Earnout Consideration
(and therefore no finders fee) is payable. Accordingly, we have not recorded any amounts related
thereto in our financial statements for the fourth quarter and year ended December 31, 2010. The
Company previously disclosed a potential earnout payment of approximately $12 to $15 million in the
aggregate relating to its acquisitions of LaJobi and CoCaLo, substantially all of which was
estimated to relate to LaJobi. There can be no assurance, however, that the LaJobi
seller will not take a position different from ours and assert a claim for the payment of some
LaJobi Earnout Consideration. There can be no assurance that we will prevail in any such dispute.
See Note 8 for a discussion of a waiver and amendment executed to address various defaults
resulting from the charge recorded in the fourth quarter and year ended December 31, 2010 and other
circumstances discovered as a result of the internal investigation of Lajobis import practices.
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 two
payments of $533,000 were made during April 2009 and April 2010, respectively, and the final
payment is expected to be made in April 2011.
With respect to CoCaLo, the Company was obligated to pay to the relevant sellers the following
earnout consideration amounts (the CoCaLo Earnout Consideration) with respect to CoCaLos
performance for the aggregate three year period ending December 31, 2010: (i) $666,667 would have
been paid in the event of 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
would have been paid, on a sliding scale basis, in the event of the achievement of 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. CoCaLos performance did not satisfy any of the foregoing targets, and as a result, no
CoCaLo Earnout Consideration was earned or will be paid.
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.
56
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
The following unaudited pro forma consolidated results of operations of the Company for the
year ended December 31, 2008, assumes the acquisitions of CoCaLo and LaJobi occurred as of January
1, 2008 (in thousands).
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
Year Ended |
|
|
|
December 31, 2008 |
|
Net sales |
|
$ |
251,696 |
|
Net loss |
|
$ |
(110,906 |
) |
|
|
|
|
|
Basic loss per share: |
|
|
|
|
Continuing operations |
|
$ |
(4.63 |
) |
Discontinued operations |
|
|
(0.58 |
) |
|
|
|
|
|
|
$ |
(5.21 |
) |
|
|
|
|
|
|
|
|
|
Diluted loss per share: |
|
|
|
|
Continuing operations |
|
$ |
(4.63 |
) |
Discontinued operations |
|
|
(0.58 |
) |
|
|
|
|
|
|
$ |
(5.21 |
) |
|
|
|
|
The above amounts are based upon certain assumptions and estimates, and do not reflect
any benefits from combined operations. The pro forma results have not been audited and do not
necessarily represent results which would have occurred if the acquisitions had taken place on the
basis assumed above, and may not be indicative of the results of future combined operations.
Note 4 Sale of Gift Business and Discontinued Operations
On December 23, 2008, KID completed the sale of the Gift Business to TRC. 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 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 to 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. The Company received $287,500 in
respect of the Royalty payment due March 23, 2010, which was recorded as other income in the first
quarter of 2010, but has not received the initial lump sum Royalty payment or any payment to date
in respect of the Royalty payments that were due on June 23, 2010, September 23, 2010 or December
23, 2010, and therefore recorded no income during any such periods related to such Royalties.
57
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
KID and TRC continue to discuss a potential restructuring of: (i) the consideration received
by KID for its former Gift Business; (ii) payments due to Licensor under the License Agreement; and
(iii) ongoing arrangements between the parties and their respective affiliates. Such discussions
currently contemplate, among other things, the payment by TRC of certain amounts in exchange for
the cancellation of all or substantially all of the Gift Business consideration and the acquisition
by TRC of the Retained IP. The amounts potentially to be paid by TRC are anticipated to be
substantially less than the face value of the Gift Business consideration. As the Company has
written off or fully reserved against all such consideration, any payments received in exchange
therefor would be recorded as income, if and when received. There can be no assurance, however,
that any defaulted payments under the License Agreement referred to above will be made, that any
future payments due under the License Agreement will be made in a timely manner, or at all, that
any ongoing discussions will result in any definitive agreement, or that the terms of any
definitive agreement will be consistent with those described above. In October 2010, Bruce Crain
(CEO) and Mario Ciampi, each a member of KIDs Board of Directors, resigned from the board of
directors of TRC.
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
was 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.
Condensed Financial Information of Discontinued Operations
Condensed results of discontinued operations are as follows (in thousands):
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, 2008 |
|
Sales |
|
$ |
124,035 |
|
Loss before income taxes |
|
$ |
(17,268 |
) |
Gain on sale |
|
$ |
905 |
|
Benefit for income taxes |
|
$ |
(4,147 |
) |
Loss from discontinued operations |
|
$ |
(12,216 |
) |
Note 5 Intangible Assets and Goodwill
Intangible Assets
As of December 31, 2010, and 2009, the components of intangible assets other than goodwill
consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
December 31, |
|
|
December 31, |
|
|
|
Amortization Period |
|
2010 |
|
|
2009 |
|
Sassy trade name |
|
Indefinite life |
|
$ |
5,400 |
|
|
$ |
5,400 |
|
Kids Line customer relationships |
|
20 years |
|
|
27,601 |
|
|
|
29,156 |
|
Kids Line trade name |
|
Indefinite life |
|
|
5,300 |
|
|
|
5,300 |
|
LaJobi trade name |
|
Indefinite life |
|
|
18,600 |
|
|
|
18,600 |
|
LaJobi customer relationships |
|
20 years |
|
|
10,954 |
|
|
|
11,589 |
|
LaJobi royalty agreements |
|
5 years |
|
|
1,278 |
|
|
|
1,712 |
|
CoCaLo trade name |
|
Indefinite life |
|
|
5,800 |
|
|
|
6,100 |
|
CoCaLo customer relationships |
|
20 years |
|
|
2,190 |
|
|
|
2,464 |
|
CoCaLo foreign trade name |
|
Indefinite life |
|
|
31 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
$ |
77,154 |
|
|
$ |
80,352 |
|
|
|
|
|
|
|
|
|
|
58
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
Aggregate amortization expense, was $2.8 million, $2.8 million, and $2.3 million for 2010,
2009 and 2008, respectively.
Estimated annual amortization expense for each of the fiscal years ending December 31, is as
follows (in thousands):
|
|
|
|
|
2011 |
|
$ |
2,755 |
|
2012 |
|
|
2,755 |
|
2013 |
|
|
2,720 |
|
2014 |
|
|
2,319 |
|
2015 |
|
|
2,319 |
|
During the fourth quarter of 2010, the Company completed its calculation of the potential
payout of the CoCaLo Earnout Consideration, and determined no payout was earned or required. As a
result, the Company, reversed a long-term liability of $437,000 established at the date of the
CoCaLo acquisition, and in accordance with applicable accounting standards recorded a reduction in
the value of the CoCaLo trade name of $300,000 and the CoCaLo customer relationships of $137,000
for the quarter and year ended December 31, 2010.
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 2010 and 2009. As discussed below, except for an
impairment of $819,000 for the Applause® trade name that was recorded in the quarter
ended June 30, 2009 in connection with the impairment of the Gift Sale Consideration (discussed in
Note 4 above), there were no impairments recorded to either indefinite-lived or definite-lived
intangible assets in either 2009 or 2010.
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, 2010 and 2009, respectively, 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 2010, it used a five-year projection period, which has been its prior
practice, and projected for each business unit the long-term growth rate of each business, as well
as the assumed royalty rate that could be obtained by each such business by licensing out each
intangible. For 2010, the Company increased its long-term growth rate for all of its business
units, while the assumed royalty rates remained constant with 2009.
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 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. 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 $5.0 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 and 2010. Based upon then 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 each of the years ended December 31, 2010 and 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 for 2009 and 2010.
59
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
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 determined to have no implied value). As a result of the foregoing, no goodwill
assessment testing was required as of December 31, 2009. Because no amounts have been accrued in
respect of earnout obligations arising out of our 2008 purchases of each of LaJobi and CoCaLo for
the quarter and year ended December 31, 2010 no goodwill has been recorded on our consolidated
balance sheet, and therefore no goodwill impairment testing was required for the year ended
December 31, 2010.
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 the 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.
Note 6 Financial Instruments
Fair value of assets and liabilities is determined by reference to the estimated 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 relevant FASB standard
outlines a valuation framework and creates a fair value hierarchy in order to increase the
consistency and comparability of fair value measurements and related disclosures.
Financial assets and liabilities are measured using inputs from the three levels of the fair
value hierarchy. The three levels are as follows:
Level 1Inputs are unadjusted quoted prices in active markets for identical assets or
liabilities. The Company currently has no Level 1 assets or liabilities that are measured at a
fair value on a recurring basis.
Level 2Inputs include quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are not active, inputs
other than quoted prices that are observable for the asset or liability (i.e., interest rates,
yield curves, etc.), and inputs that are derived principally from or corroborated by observable
market data by correlation or other means (market corroborated inputs). Most of the Companys
assets and liabilities fall within Level 2 and include foreign exchange contracts (when applicable)
and an interest rate swap agreement. 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 standard, the Company is not permitted to adjust quoted market prices in an
active market.
60
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
In accordance with the fair value hierarchy described above, the following table shows the
fair value of the Companys interest rate swap agreement (also see Note 8) as of December 31, 2010
and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December |
|
|
Fair Value Measurements as of December 31, 2010 |
|
|
|
31, 2010 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
$ |
(87 |
) |
|
$ |
|
|
|
$ |
(87 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 rate swap agreement of $87,000 and $678,000 is included in the
Companys accrued expenses on the balance sheet at December 31, 2010, and 2009, respectively.
Cash and cash equivalents, trade accounts receivable, inventory, income tax receivable, trade
accounts payable, accrued expenses and short-term debt are reflected in the consolidated balance
sheets at carrying value, which approximates fair value due to the short-term nature of these
instruments.
The carrying value of the Companys term loan borrowings approximates fair value because
interest rates under the term loan borrowings are variable, based on prevailing market rates.
There have been no material changes to the Companys valuation techniques during the year
ended December 31, 2010, as compared to prior years.
Derivative Instruments
The Company is required by its lenders to maintain in effect interest rate swap agreements
that protect against potential fluctuations in interest rates with respect to a minimum of 50% of
the outstanding amount of the $80.0 million term loan facility. The Company is primarily exposed to
interest rate risk through its variable rate Term Loan. The Companys objective is to offset the
variability of cash flows in the interest payments on a portion of the total outstanding variable
rate debt. The Company applies hedge accounting based upon the criteria established by accounting
guidance for derivative instruments and hedging activities, including designation of its
derivatives as fair value hedges or cash flow hedges and assessment of hedge effectiveness. The
Company records its derivatives in its consolidated balance sheets at fair value. The Company does
not use derivative instruments for trading purposes.
Cash Flow Hedges
To comply with a requirement in the Companys Credit Agreement to offset variability in cash
flows related to the interest rate payments on the Term Loan, the Company uses an interest rate
swap designated as a cash flow hedge. The interest rate swap agreement converts the variable rate
on a portion of the Term Loan to a specified fixed interest rate by requiring payment of a fixed
rate of interest in exchange for the receipt of a variable rate of interest at the LIBOR U.S.
dollar three month index rate. The duration of the contract is twelve months.
The interest rate swap agreement is recorded at fair value on the Companys consolidated
balance sheets. Accumulated other comprehensive income reflects the difference between the overall
change in fair value of the interest rate swap since inception of the hedge and the amount of
ineffectiveness reclassified into earnings.
The Company assesses hedge effectiveness both at inception of the hedge and at regular
intervals at least quarterly throughout the life of the derivative. These assessments determine
whether derivatives designated as qualifying hedges continue to be highly effective in offsetting
changes in the cash flows of hedged transactions. The Company measures hedge ineffectiveness by
comparing the cumulative change in cash flows of the hedge contract with the cumulative change in
cash flows of the hedged transaction. The Company recognizes any ineffective portion of the hedge
in its Consolidated Statement of Operations as a component of Other, net. The impact of hedge
ineffectiveness on earnings was not significant during the year ended December 31, 2010. Each
period, the hedging relationship will be evaluated to determine whether it is expected that the
hedging relationship will continue to be highly effective based on the updated analysis. In
addition, the Company will consider the likelihood of the counterpartys compliance with the
contractual terms of the hedging derivative that could require the counterparty to make payments
(counterparty default risk).
61
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
During the year ended December 31, 2010, the Company did not discontinue any cash flow hedges.
An unrealized net loss of $87,000 for this interest rate swap agreement, recorded as a
component of comprehensive income, for the year ended December 31, 2010, is expected to be
reclassified into earnings within the next twelve months.
Non-Qualifying Derivative Instruments
A previous interest rate swap contract, utilized to offset exposure of the Companys
Term Loan to interest rate risk, (as required by the Credit Agreement), terminated on April 30,
2010. This contract converted the variable rate on a portion of the Term Loan to a specified fixed
interest rate by requiring payment of a fixed rate of interest in exchange for the receipt of a
variable rate of interest at the LIBOR USD three month index rate. This contract was not
designated as a hedge and was adjusted to fair value at regular intervals, with any resulting gains
or losses recorded immediately in earnings.
Changes between cost and fair value of this interest rate swap agreement resulted in income of
$0.7 million and $1.4 million for the years ended December 31, 2010 and 2009, respectively 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.
Foreign Currency Forward Exchange Contracts
Certain of the Companys subsidiaries periodically enter 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, 2010, and 2009, the Company had
no forward contracts.
Concentrations of Credit Risk
Customers who account for a significant percentage of the Companys net sales are shown in the
table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Toys R Us, Inc. and Babies R Us, Inc. |
|
|
48.6 |
% |
|
|
46.9 |
% |
|
|
43.8 |
% |
Target |
|
|
9.9 |
% |
|
|
12.3 |
% |
|
|
11.6 |
% |
Walmart |
|
|
9.4 |
% |
|
|
4.8 |
% |
|
|
5.6 |
% |
The loss of any of these customers or any other significant customers, or a significant
reduction in the volume of business conducted with such customers, could have a material adverse
impact on the Company. The Company does not normally require collateral or other security to
support credit sales.
As part of its ongoing risk assessment procedures, the Company monitors concentrations of
credit risk associated with financial institutions with which it conducts business. The Company
avoids concentration with any single financial institution. The Company also monitors the
creditworthiness of its customers to which it grants credit terms in the normal course of business.
62
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
Note 7 Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Land |
|
$ |
690 |
|
|
$ |
690 |
|
Buildings |
|
|
2,155 |
|
|
|
2,155 |
|
Machinery and equipment |
|
|
5,526 |
|
|
|
5,693 |
|
Furniture and fixtures |
|
|
1,396 |
|
|
|
984 |
|
Leasehold improvements |
|
|
1,023 |
|
|
|
872 |
|
|
|
|
|
|
|
|
|
|
|
10,790 |
|
|
|
10,394 |
|
Less: Accumulated depreciation and amortization |
|
|
(5,760 |
) |
|
|
(6,143 |
) |
|
|
|
|
|
|
|
|
|
$ |
5,030 |
|
|
$ |
4,251 |
|
|
|
|
|
|
|
|
Depreciation expense was approximately $1.0 million, $1.0 million, and $0.8 million
for the years ended December 31, 2010, 2009, and 2008, respectively.
Note 8 Debt
Consolidated long-term debt at December 31, 2010, and December 31, 2009, consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Term Loan (Credit Agreement) |
|
$ |
54,000 |
|
|
$ |
67,000 |
|
Note Payable (CoCaLo purchase) |
|
|
526 |
|
|
|
1,025 |
|
|
|
|
|
|
|
|
Total |
|
|
54,526 |
|
|
|
68,025 |
|
Less current portion |
|
|
13,526 |
|
|
|
13,533 |
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
41,000 |
|
|
$ |
54,492 |
|
|
|
|
|
|
|
|
The aggregate maturities of long-term debt at December 31, 2010, are as follows (in
thousands):
|
|
|
|
|
2011 |
|
$ |
13,526 |
|
2012 |
|
|
13,000 |
|
2013 |
|
|
28,000 |
|
2014 |
|
|
|
|
2015 |
|
|
|
|
|
|
|
|
Total |
|
$ |
54,526 |
|
|
|
|
|
At December 31, 2010, and December 31, 2009, there was approximately $18.6 million and $15.1
million, respectively, borrowed under the Revolving Loan (defined below), which is classified as
short-term debt. At December 31, 2010 and 2009, Revolving Loan Availability was $28.3 million and
$31.4 million, respectively.
As of December 31, 2010, the applicable interest rate margins were 2.75% for LIBOR Loans and
1.75% for Base Rate Loans. The weighted average interest rates for the outstanding loans as of
December 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010 |
|
|
|
LIBOR Loans |
|
|
Base Rate Loans |
|
Revolving Loan |
|
|
3.01 |
% |
|
|
5.00 |
% |
Term Loan |
|
|
3.05 |
% |
|
|
5.00 |
% |
63
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
Credit Agreement Summary
KID, its operating subsidiaries, and I&J Holdco, Inc. (such subsidiaries and I&J Holdco, Inc.,
the Borrowers) maintain a credit facility (the Credit Agreement) with certain financial
institutions (the Lenders), including Bank of America, N.A. (as successor by merger to 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. The
credit facility provides for: (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). The total borrowing capacity is based on a borrowing
base, which is defined as 85% of eligible receivables plus the lesser of (x) $25.0 million and (y)
55% of eligible inventory. The scheduled maturity date of the facility is April 1, 2013 (subject
to customary early termination provisions).
The Loans under the Credit Agreement bear interest, at the Companys option, at a base rate or
at LIBOR, plus applicable margins based on the most recent quarter-end Total Debt to Covenant
EBITDA Ratio. Applicable margins vary between 2.0% and 4.25% on LIBOR borrowings and 1.0% and
3.25% on base rate borrowings (base rate borrowings include a floor of 30 day LIBOR plus 1%). At
December 31, 2010, the applicable margins were 2.75% for LIBOR borrowings and 1.75% for base rate
borrowings. The principal of the Term Loan is required to be repaid in quarterly installments of
$3.25 million through December 31, 2012, and a final payment of $28.0 million due on April 1, 2013.
The Term Loan is also required to be prepaid upon the occurrence, and with the proceeds, of
certain transactions, including most asset sales or debt or equity issuances, and extraordinary
receipts. The Company is also required to pay an agency fee of $35,000 per annum, an annual
non-use fee of 0.55% to 0.80% of the unused amounts under the Revolving Loan, as well as other
customary fees as are set forth in the Credit Agreement.
Under the terms of the Credit Agreement, the Company is required to comply with the following
financial covenants: (a) a minimum Fixed Charge Coverage Ratio of 1.35:1.00 for the fourth quarter
of 2010 and each fiscal quarter thereafter; (b) a maximum Total Debt to Covenant EBITDA Ratio of
2.75:1.00 for the fourth quarter of 2010 and each fiscal quarter thereafter; and (c) an annual
capital expenditure limitation.
Due to the facts and circumstances discovered in the Companys ongoing internal investigation
of LaJobis import, business and staffing practices in Asia (including misconduct by various LaJobi
employees resulting in the underpayment of specified import duties), initiated as a result of the
discovery of certain potential issues in the Companys preparation for the Focused Assessment of
LaJobis import practices, the approximately $6,860,000 charge the Company recorded for anticipated
import duties and interest related thereto, and additional amounts and penalties that may be
required by U.S. Customs (the foregoing collectively, the LaJobi Events), the Company determined
that various events of default and potential events of default under the Credit Agreement (and
related loan documents) occurred as a result of breaches and potential breaches of various
representations, warranties and covenants in the Credit Agreement, including, but not limited to,
an unmatured event of default with respect to a breach of the Fixed Charge Coverage Ratio covenant
for the quarter ending December 31, 2010 (as well as projected breaches of the Fixed Charge
Coverage Ratio and Total Debt to Covenant EBITDA Ratio for certain future periods). In connection
therewith, the Credit Agreement was amended on March 30, 2011 (the Amendment), to waive, among
other things, specified existing events of default resulting from such LaJobi Events and related
breaches and potential breaches (and future events of default as a result of the accrual or payment
of specified Duty Amounts (as defined below)), and to amend the definition of Covenant EBITDA
for all purposes under the Credit Agreement and related loan documents (including for the
determination of the applicable interest rate margins and compliance with financial covenants) for
the December 31, 2010 reporting period and all periods thereafter. The Borrowers paid a fee of
approximately $100,000 during the first quarter of 2011 in connection with the execution of the
Amendment. As a result of the Amendment, the Company must be in compliance with the Financial
Covenants described above at the time of any accrual in excess of $1.0 million, or proposed
payment, of any Duty Amounts.
Covenant EBITDA, as currently defined, is a non-GAAP financial measure used to determine
relevant interest rate margins and the Companys compliance with the financial covenants set forth
above, as well as the determination of whether certain dividends and repurchases can be made if
other specified prerequisites are met. Covenant EBITDA 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,
64
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
specified acquisitions,
and specified requirements under the Credit Agreement and non-cash transaction losses (gains) due solely to fluctuations in currency values. As a result of the
Amendment, Covenant EBITDA is further adjusted (up to an aggregate maximum of $14.855 million for
all periods, less any LaJobi Earnout Consideration paid other than in accordance with the Credit
Agreement and/or to the extent not deducted in determining consolidated net income) for: (i) all
customs duties, interest, penalties and other related amounts owed by LaJobi to U.S. Customs as a
result of the LaJobi Events (Duty Amounts); (ii) fees and expenses incurred in connection with
the internal investigation into LaJobis import, business and staffing practices and the Focused
Assessment of U.S. Customs; and (iii) LaJobi Earnout Consideration, if any, paid. 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 Fixed Charge Coverage Ratio is the ratio of Covenant EBITDA for such purpose (as
described above) to an amount generally equal to, with respect to the Company, the sum for the
applicable testing period of all scheduled interest and principal payments of debt, including the
principal component of any capital lease, paid or payable in cash. Total Debt, as used in the
Credit Agreement for purposes of the determination of the Total Debt to Covenant EBITDA Ratio,
generally means, with respect to the Company, the outstanding principal amount of all debt
(including debt of capital leases plus the undrawn face amount of all letters of credit).
The Credit Agreement also contains customary affirmative and negative covenants. Among other
restrictions, the Company is restricted in its ability to purchase or redeem stock, incur
additional debt, make acquisitions above certain amounts and pay any Earnout Consideration or any
amounts due with respect to a promissory note to CoCaLo as part of such acquisition (the CoCaLo
Note), unless in each case certain conditions are satisfied. With respect to the payment of
LaJobi Earnout Consideration, if any, as a result of the Amendment, such conditions now include
that excess revolving loan availability equal or exceed the greater of (A) $18,000,000 less the
amount of any Duty Amounts previously paid by LaJobi to U.S. Customs and (B) $9,000,000, until such
time that the Focused Assessment has been deemed concluded and all Duty Amounts required thereby
have been remitted by LaJobi (the Conclusion Date), such that after the Conclusion Date, this
condition shall require only that excess revolving loan availability equal or exceed $9,000,000
(previously, such condition with respect to the payment of any Earnout Consideration was limited to
excess revolving loan availability being equal to or exceeding $9,000,000, and such requirement
with respect to the payment of any CoCaLo Earnout Consideration remains unchanged). See Note 3 for
a discussion of the LaJobi Earnout Consideration (and related finders fee) in light of the LaJobi
Events, and the CoCaLo Earnout Consideration. The Credit Agreement also contains specified events
of default related to the CoCaLo Earnout Consideration and LaJobi Earnout Consideration. In
addition, KID may not pay a dividend to its shareholders unless any earned Earnout Consideration,
if any; has been paid; no default exists or would result therefrom (including compliance with the
financial covenants), Excess Revolving Loan Availability is at least $4.0 million, and the Total
Debt to Covenant EBITDA Ratio for the two most recently completed fiscal quarters is less than
2.00:1.00.
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. As a result of the Amendment, among other things, specified
existing events of default related to the LaJobi Events (and specified future events of default
relating to the payment of any Duty Amounts) were waived, and the Borrowers are now deemed to be in
compliance with all applicable financial covenants in the Credit Agreement as of December 31, 2010
(see discussion above).
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 which
expired on April 30, 2010. Changes in the cost of the swap agreement and its fair value as of
April 30, 2010 resulted in income of approximately $0.7 million and $1.4 million for the years
ended December 31, 2010 and 2009, respectively and expense of approximately $2.1 million for the
year ended December 31, 2008. Such amounts are included in interest expense in the consolidated
statements of operations.
The Borrowers entered into a new interest rate swap agreement with a notional amount of $31.9
million on April 30, 2010 which expired December 21, 2010 and was replaced by a new interest rate
swap agreement on such date with a notional amount of $28.6 million. An unrealized net loss of
$87,000 for this interest rate swap for the year ended December 31, 2010 was recorded as a
component of comprehensive income, and is expected to be reclassified into earnings within the next
twelve months (see Note 6).
The Credit Agreement is secured by substantially all of the Companys domestic assets,
including a pledge of the capital stock of each Borrower and Licensor, and a portion of KIDs
equity interests in its active foreign subsidiaries, and is also guaranteed by KID.
65
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
Financing costs associated with the Revolving Loan and Term Loan are deferred and are
amortized over their contractual term. As a result of an amendment to the Credit Agreement in
March 2009, 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 9 Accrued Expenses
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Payroll and incentive compensation |
|
$ |
3,586 |
|
|
$ |
3,952 |
|
Customs duty |
|
|
6,519 |
|
|
|
|
|
Other (a) |
|
|
6,849 |
|
|
|
4,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,954 |
|
|
$ |
8,684 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
No individual item exceeds five percent of current liabilities |
Note 10 Income 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, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
United States |
|
$ |
17,474 |
|
|
$ |
3,414 |
|
|
$ |
(129,500 |
) |
Foreign |
|
|
990 |
|
|
|
1,129 |
|
|
|
1,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,464 |
|
|
$ |
4,543 |
|
|
$ |
(128,371 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit) from continuing operations consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(2,704 |
) |
|
$ |
(3,522 |
) |
|
$ |
(1,844 |
) |
Foreign |
|
|
77 |
|
|
|
447 |
|
|
|
555 |
|
State |
|
|
561 |
|
|
|
322 |
|
|
|
612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(2,066 |
) |
|
$ |
(2,753 |
) |
|
$ |
(677 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(12,528 |
) |
|
|
(2,996 |
) |
|
|
(23,845 |
) |
Foreign |
|
|
260 |
|
|
|
|
|
|
|
|
|
State |
|
|
(1,874 |
) |
|
|
(1,413 |
) |
|
|
(4,509 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,142 |
) |
|
|
(4,409 |
) |
|
|
(28,354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(16,208 |
) |
|
$ |
(7,162 |
) |
|
$ |
(29,031 |
) |
|
|
|
|
|
|
|
|
|
|
The tax benefit is primarily related to a decrease in valuation allowances recorded on
intangible assets, a reduction in the valuation allowance on its foreign tax credit carry forwards,
and a reduction in the reserve for tax contingencies due to the statute of limitations lapsing.
The Company has determined it is more likely than not that the full value of the deferred tax
assets related to intangible amortization will be realized.
66
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (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, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Income tax provision (benefit) at U.S. Federal statutory rate |
|
$ |
6,462 |
|
|
$ |
1,545 |
|
|
$ |
(44,930 |
) |
State income tax, net of Federal tax benefit |
|
|
(854 |
) |
|
|
(720 |
) |
|
|
(2,533 |
) |
Foreign rate differences |
|
|
132 |
|
|
|
63 |
|
|
|
160 |
|
Change in valuation allowance affecting income tax expense |
|
|
(17,688 |
) |
|
|
(3,886 |
) |
|
|
19,275 |
|
Change in unrecognized tax benefits |
|
|
(3,927 |
) |
|
|
(5,112 |
) |
|
|
(3,812 |
) |
Changes in federal rate used |
|
|
(1,150 |
) |
|
|
1,099 |
|
|
|
|
|
Other, net |
|
|
817 |
|
|
|
(151 |
) |
|
|
2,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(16,208 |
) |
|
$ |
(7,162 |
) |
|
$ |
(29,031 |
) |
|
|
|
|
|
|
|
|
|
|
The components of the deferred tax asset and the valuation allowance, resulting from
temporary differences between accounting for financial and tax reporting purposes, are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Assets (Liabilities) |
|
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Inventories |
|
$ |
1,591 |
|
|
$ |
1,449 |
|
Accruals / reserves |
|
|
4,074 |
|
|
|
1,314 |
|
Investment impairments and unrealized losses |
|
|
5,764 |
|
|
|
6,130 |
|
Foreign tax credit carry forward |
|
|
9,222 |
|
|
|
11,859 |
|
Charitable contributions carry forwards |
|
|
|
|
|
|
285 |
|
State net operating loss carry forwards |
|
|
1,026 |
|
|
|
1,024 |
|
Foreign net operating loss carry forwards |
|
|
512 |
|
|
|
361 |
|
Intangible assets |
|
|
29,870 |
|
|
|
35,436 |
|
Depreciation |
|
|
|
|
|
|
12 |
|
Other |
|
|
1,551 |
|
|
|
1,161 |
|
|
|
|
|
|
|
|
Gross deferred tax asset |
|
|
53,610 |
|
|
|
59,031 |
|
Less: valuation allowance |
|
|
(3,997 |
) |
|
|
(24,334 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
|
49,613 |
|
|
|
34,697 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Unrepatriated earnings of foreign subsidiaries |
|
|
(722 |
) |
|
|
(354 |
) |
Other |
|
|
(1,225 |
) |
|
|
(743 |
) |
|
|
|
|
|
|
|
Gross deferred tax liability |
|
|
(1,947 |
) |
|
|
(1,097 |
) |
|
|
|
|
|
|
|
|
Total net deferred tax asset (liability) |
|
$ |
47,666 |
|
|
$ |
33,600 |
|
|
|
|
|
|
|
|
At December 31, 2010, and 2009, the Company has provided total valuation allowances of $4.0
million and $24.3 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 approximately $20.3 million in 2010 primarily related to the
reduction in valuation allowance on the deferred tax asset for intangible amortization
(approximately $19.7 million), a decrease in valuation allowance related to foreign tax credit
carry forwards (approximately $0.8 million), and an increase in foreign net operating loss carry
forwards (approximately $0.2 million). The valuation allowance decreased by $3.9 million in 2009
primarily related to the reduction in the deferred tax asset for intangible assets. The change in
valuation allowance in the rate reconciliation and the net change in the 2010 and 2009 balances of
valuation allowance differ as a result of the portion of the valuation allowance pertaining to
state tax-effected deferred tax assets of $2.6 million, which is included in State income tax, net
of Federal tax benefit.
67
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
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, 2010 and 2009, the Company has recorded a deferred tax
liability of $0.7 million and $0.4 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 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 $1.8 million which are indefinite in
nature. The Company has foreign tax credits carry forwards of $9.2 million which expire in
2015-2018.
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.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Balance at January 1 |
|
$ |
4,470 |
|
|
$ |
9,582 |
|
Increases related to prior year tax positions |
|
|
50 |
|
|
|
174 |
|
Decreases related to prior year tax positions |
|
|
(144 |
) |
|
|
(661 |
) |
Reductions due to lapsed statute of limitations |
|
|
(3,834 |
) |
|
|
(4,625 |
) |
|
|
|
|
|
|
|
Balance at December 31 |
|
$ |
542 |
|
|
$ |
4,470 |
|
|
|
|
|
|
|
|
The above table includes interest and penalties of $130,000 as of December 31, 2010, and
interest and penalties of $138,000 as of December 31, 2009. The Company has elected to record
interest and penalties as an income tax expense, in accordance with applicable accounting
standards. Included in the liability for unrecorded tax benefits as of December 31, 2010 is
$542,000 of unrecognized tax benefits that, if recognized, would impact the effective tax rate.
The Company anticipates that the unrecorded tax benefits at December 31, 2010 could decrease by
approximately $506,000 within the next 12 months as a result of the expiration of the statue 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, 2010, a summary of the
tax years that remain subject to examination in the Companys major jurisdictions are:
|
|
|
United States federal |
|
2007 and forward |
United States states |
|
2006 and forward |
Foreign |
|
2006 and forward |
Note 11 Weighted 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 vested 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, even when unvested. 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 adoption of this standard and the
effects of such restatement were immaterial.
68
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
EPS for the quarter and year ended December 31, 2008 were also restated, as the Company had
incorrectly included unvested restricted stock in its basic earnings per common share calculations
for such period, which was not the appropriate treatment for such periods. The effect of the
restatement was 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.
The weighted average common shares outstanding included in the computation of basic and
diluted net earnings (loss) per share are set forth below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Weighted average common shares outstanding |
|
|
21,547 |
|
|
|
21,371 |
|
|
|
21,302 |
|
Dilutive effect of common shares issuable upon exercise of
stock options, RSUs and SARs (all of which may be settled
in stock) |
|
|
291 |
|
|
|
161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding assuming dilution |
|
|
21,838 |
|
|
|
21,532 |
|
|
|
21,302 |
|
|
|
|
|
|
|
|
|
|
|
The computation of net income per diluted common share for the years ended December 31, 2010,
2009, and 2008, excluded 744,403, 880,615 and 1,941,379 stock options outstanding, respectively, in
that they would be anti-dilutive due to their exercise price exceeding the average market price in
2010 and 2009, or due to the loss the Company incurred from continuing operations in 2008.
The computation of net income per diluted common share for the years ended December 31, 2010,
2009, and 2008, excluded 341,058, 278,000 and 118,000 stock appreciation rights (SARs) from the
computation of diluted EPS because they would be anti-dilutive due to their exercise price
exceeding the average market price in 2010 and 2009 or due to the loss the Company incurred from
continuing operations in 2008. EPS for the year ended December 31, 2008 has been revised in
accordance with the accounting guidance for earnings per share. The Company had incorrectly
included non-vested restricted stock in its basic earnings per common share calculation for the
period. The revision was immaterial.
Note 12 Related Party Transactions
Lawrence Bivona, the President of LaJobi until March 14, 2011, along with various family
members, established L&J Industries in Asia to provide quality control, compliance and other
services to LaJobi for goods being shipped by LaJobi from Asian ports. Pursuant to the terms of a
transition services agreement entered into in connection with the acquisition of LaJobi, commencing
in April 2008, the Company had used the full-time services of approximately 28 employees of L&J
Industries for such quality control and other services. To the Companys knowledge, L&J Industries
ceased operations in June 2010, thereby terminating the affiliated relationship. However, the
Company continues to utilize the services of approximately 26 of such individuals, and is in the process of establishing subsidiaries in Thailand and
China, through which the Company intends to directly employ these quality control individuals in
the future. For the years ended December 31, 2010, 2009, and 2008, the Company incurred costs,
recorded in cost of goods sold, aggregating approximately $1.0 million, $1.0 million and $0.7
million, respectively, related to the services provided, based on the actual, direct costs
incurred (by L&J Industries or otherwise) for the services of 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 employee of the Company until December 31, 2010. 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, 2010, 2009, and 2008, CoCaLo paid approximately $2.2 million, $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.
69
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
In connection with the sale of the Gift Business, KID and TRC 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 provided certain specified transitional services to each other
and pursuant to which TRC continues to provide certain service to the Company. For the years ended
December 31, 2010 and 2009, the Company recorded $0 and $75,000, respectively in selling, general
and administrative expense pursuant to the TSA, not including amounts payable 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 its affiliates), or amounts payable by Sassy to a subsidiary of TRC
for the use of certain employees in the PRC, each of which is governed by underlying operating
lease agreements. At December 31, 2010, the aggregate amount accrued for sublease and PRC employee
amounts payable to TRC (or its affiliates) by the Company was approximately $1.7 million.
Note 13 Leases
At December 31, 2010, the Company and its subsidiaries were obligated under operating lease
agreements (principally for buildings and other leased facilities) for remaining lease terms
ranging from 1 year to 7.2 years, although the sublease with TRC may be terminated on six month
notice by TRC.
Rent expense for continuing operations for the years ended December 31, 2010, 2009, and 2008
amounted to approximately $3.2 million, $2.9 million and $2.4 million, respectively.
The approximate aggregate minimum future rental payments as of December 31, 2010, under
operating leases are as follows (in thousands):
|
|
|
|
|
2011 |
|
$ |
2,744 |
|
2012 |
|
|
2,947 |
|
2013 |
|
|
3,048 |
|
2014 |
|
|
1,796 |
|
2015 |
|
|
1,858 |
|
Thereafter |
|
|
3,364 |
|
|
|
|
|
Total |
|
$ |
15,757 |
|
|
|
|
|
Note 14 Stock 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, 2010, a total of 5,643,284 shares had been
repurchased pursuant to this program. During the twelve-month periods ended December 31, 2010,
2009, and 2008, the Company did not repurchase any shares pursuant to this program or otherwise.
During the years ended December 31, 2010, 2009, and 2008, the Company issued from treasury stock
65,631, 30,977 and 169,175 shares, respectively, that were purchased under the stock repurchase
program in prior years.
Note 15 Shareholders Equity
Share-Based Compensation
Equity Plans
As of December 31, 2010, 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 Amended and Restated
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. As of December 31, 2010, 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 KIDs 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 ten years from the date of grant. Shares in respect of equity awards are
issued from authorized shares reserved for such issuance or treasury shares.
70
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
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 are evidenced by a written agreement between the Company and each participant (which need
not be identical with respect to each grant or participant) that provides 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,
2010, 956,389 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, 2010, 60,947 shares were
available for issuance under the 2009 ESPP, after giving effect to the 61,149 shares issued
thereunder with respect to the 2010 plan year.
Impact on Net Income
The components of share-based compensation expense for each of 2010, 2009, and 2008 follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Stock option expense |
|
$ |
907,000 |
|
|
$ |
690,000 |
|
|
$ |
810,000 |
|
Restricted stock expense |
|
|
433,000 |
|
|
|
525,000 |
|
|
|
686,000 |
|
Restricted stock unit expense |
|
|
154,000 |
|
|
|
20,000 |
|
|
|
4,000 |
|
SAR expense |
|
|
511,000 |
|
|
|
219,000 |
|
|
|
|
|
ESPP expense |
|
|
127,000 |
|
|
|
151,000 |
|
|
|
135,000 |
|
|
|
|
|
|
|
|
|
|
|
Total share-based payment expense |
|
$ |
2,132,000 |
|
|
$ |
1,605,000 |
|
|
$ |
1,635,000 |
|
|
|
|
|
|
|
|
|
|
|
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, 2010, 2009, and 2008.
Stock Options
Stock options are rights to purchase the Companys Common Stock in the future at a
pre-determined 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 Non-Qualified Stock Options (stock options
which are not Incentive Stock Options).
As of December 31, 2010, the total remaining unrecognized compensation cost related to
non-vested stock options, net of forfeitures, was approximately $1.4 million, and is expected to be
recognized over a weighted-average period of 2.3 years.
71
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
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. There were no stock options
granted during the year ended December 31, 2010. The assumptions used to estimate the fair value of
the stock options granted during the years ended December 31, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Risk-free interest rate |
|
|
2.45 |
% |
|
|
3.06 |
% |
Volatility |
|
|
80.0 |
% |
|
|
40.5 |
% |
Expected term (years) |
|
|
5.0 |
|
|
|
5.0 |
|
Weighted-average fair value of options granted |
|
$ |
4.32 |
|
|
$ |
4.53 |
|
Activity regarding outstanding options for 2010, 2009, and 2008 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 |
|
Options Granted |
|
|
|
|
|
|
|
|
Options Forfeited/Cancelled* |
|
|
(176,440 |
) |
|
|
11.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding as of December 31, 2010 |
|
|
704,175 |
|
|
$ |
13.53 |
|
|
|
|
|
|
|
|
Option price range at December 31, 2010 |
|
$ |
6.63-$34.05 |
|
|
|
|
|
|
|
|
* |
|
See disclosure below regarding forfeitures. |
The intrinsic value of the unvested and vested outstanding stock options was $239,250 at
December 31, 2010. 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 pre-tax 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. There was no intrinsic value of stock options exercised for the
years ended December 31, 2010, 2009, and 2008. The weighted average fair value of stock options
vested for the years ended December 31, 2010, 2009, and 2008, was $806,518, $805,215, and $819,358,
respectively.
72
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
The following table summarizes information about fixed-price stock options outstanding at December
31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
|
|
Options Exercisable |
|
|
|
|
|
Number |
|
|
Weighted Average |
|
Weighted |
|
|
Number |
|
|
Weighted |
|
|
|
|
|
Outstanding |
|
|
Remaining |
|
Average |
|
|
Exercisable |
|
|
Average |
|
Exercise Prices |
|
|
at 12/31/10 |
|
|
Contractual Life |
|
Exercise Price |
|
|
at 12/31/10 |
|
|
Exercise Price |
|
$ |
34.05 |
|
|
|
975 |
|
|
3 Years |
|
$ |
34.05 |
|
|
|
975 |
|
|
$ |
34.05 |
|
|
13.05 |
|
|
|
40,000 |
|
|
4 Years |
|
|
13.05 |
|
|
|
40,000 |
|
|
|
13.05 |
|
|
13.06 |
|
|
|
15,000 |
|
|
4 Years |
|
|
13.06 |
|
|
|
15,000 |
|
|
|
13.06 |
|
|
11.52 |
|
|
|
20,000 |
|
|
4 Years |
|
|
11.52 |
|
|
|
20,000 |
|
|
|
11.52 |
|
|
15.05 |
|
|
|
60,000 |
|
|
5 Years |
|
|
15.05 |
|
|
|
48,000 |
|
|
|
15.05 |
|
|
14.90 |
|
|
|
10,000 |
|
|
6 Years |
|
|
14.90 |
|
|
|
6,000 |
|
|
|
14.90 |
|
|
16.77 |
|
|
|
151,000 |
|
|
6 Years |
|
|
16.77 |
|
|
|
90,600 |
|
|
|
16.77 |
|
|
16.05 |
|
|
|
120,000 |
|
|
6 Years |
|
|
16.05 |
|
|
|
80,000 |
|
|
|
16.05 |
|
|
14.83 |
|
|
|
100,000 |
|
|
7 Years |
|
|
14.83 |
|
|
|
60,000 |
|
|
|
14.83 |
|
|
13.65 |
|
|
|
37,200 |
|
|
7.25 Years |
|
|
13.65 |
|
|
|
20,400 |
|
|
|
13.65 |
|
|
7.28 |
|
|
|
75,000 |
|
|
8.5 Years |
|
|
7.28 |
|
|
|
30,000 |
|
|
|
7.28 |
|
|
6.63 |
|
|
|
75,000 |
|
|
8.75 Years |
|
|
6.63 |
|
|
|
15,000 |
|
|
|
6.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
704,175 |
|
|
|
|
$ |
13.53 |
|
|
|
425,975 |
|
|
$ |
14.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining life of the outstanding options as of December 31, 2010, 2009,
and 2008, is 6.8 years, 7.3 years, and 5.9 years, respectively.
A summary of the Companys unvested stock options at December 31, 2010, and changes during
2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Grant |
|
Unvested stock options |
|
Options |
|
|
Date Fair Value |
|
Unvested at December 31, 2009 |
|
|
499,400 |
|
|
$ |
5.17 |
|
Granted |
|
|
|
|
|
$ |
|
|
Vested |
|
|
(147,400 |
) |
|
$ |
5.47 |
|
Forfeited/cancelled* |
|
|
(73,800 |
) |
|
$ |
4.40 |
|
|
|
|
|
|
|
|
Unvested options at December 31, 2010 |
|
|
278,200 |
|
|
$ |
5.22 |
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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. The fair value of each
restricted stock grant is estimated on the date of grant using the closing price of the Companys
Common Stock on the New York Stock Exchange on the date of grant.
During the years ended December 31, 2010, and 2009, there were no shares of restricted stock
issued under the EI Plan or otherwise. At December 31, 2010, there were 29,270 shares of
restricted stock outstanding. These restricted stock grants have vesting periods ranging from four
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.
73
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
A summary of the Companys unvested restricted stock for the years 2010, 2009 and 2008 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Grant |
|
Unvested Restricted Stock |
|
Restricted Stock |
|
|
Date Fair Value |
|
Unvested restricted stock at December 31, 2007 |
|
|
170,675 |
|
|
$ |
16.31 |
|
Granted |
|
|
7,900 |
|
|
$ |
13.65 |
|
Vested |
|
|
(37,645 |
) |
|
$ |
16.32 |
|
Forfeited/cancelled* |
|
|
(9,400 |
) |
|
$ |
16.47 |
|
|
|
|
|
|
|
|
Unvested restricted stock at December 31, 2008 |
|
|
131,530 |
|
|
$ |
16.14 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(38,070 |
) |
|
$ |
16.21 |
|
Forfeited/cancelled* |
|
|
(36,480 |
) |
|
$ |
16.53 |
|
|
|
|
|
|
|
|
Unvested restricted stock at December 31, 2009 |
|
|
56,980 |
|
|
$ |
15.84 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(25,550 |
) |
|
$ |
15.94 |
|
Forfeited/cancelled* |
|
|
(2,160 |
) |
|
$ |
13.65 |
|
|
|
|
|
|
|
|
Unvested restricted stock at December 31, 2010 |
|
|
29,270 |
|
|
$ |
15.91 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
See disclosure below regarding forfeitures. |
As of December 31, 2010, the total remaining unrecognized compensation cost related to
issuances of restricted stock was approximately $0.4 million, and is expected to be recognized over
a weighted-average period of 1.2 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 a RSU may be issued with or without other consideration as
determined by the Plan Committee in its sole discretion. RSUs may be settled in the sole
discretion of the Plan Committee (i) by the distribution of shares of Common Stock equal to the
grantees RSUs, (ii) by a lump sum payment of an amount in cash equal to the fair value of the
shares of Common Stock which would otherwise be distributed to the grantee, or (iii) by a
combination of cash and Common Stock. RSUs issued under the EI Plan vest (and will be settled)
ratably over a five-year period commencing from the date of grant and are classified as equity in
the consolidated balance sheets.
The fair value of each RSU grant is estimated on the grant date. The fair value of RSUs 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. There were
157,750, 30,000 and 13,900 RSUs granted during the years ended December 31, 2010, 2009 and 2008,
respectively.
74
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
The following table summarizes information about RSU activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Restricted |
|
|
Average |
|
|
|
Stock |
|
|
Grant-Date |
|
Unvested RSUs |
|
Units |
|
|
Fair Value |
|
Unvested at December 31, 2007 |
|
|
|
|
|
|
|
|
Granted |
|
|
13,900 |
|
|
$ |
6.43 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited/cancelled* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2008 |
|
|
13,900 |
|
|
$ |
6.43 |
|
Granted |
|
|
30,000 |
|
|
$ |
4.79 |
|
Vested |
|
|
(2,780 |
) |
|
$ |
6.43 |
|
Forfeited/cancelled* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2009 |
|
|
41,120 |
|
|
$ |
5.23 |
|
Granted |
|
|
157,750 |
|
|
$ |
5.20 |
|
Vested |
|
|
(8,740 |
) |
|
$ |
5.30 |
|
Forfeited/cancelled* |
|
|
(15,400 |
) |
|
$ |
5.07 |
|
|
|
|
|
|
|
|
Unvested at December 31, 2010 |
|
|
174,730 |
|
|
$ |
5.22 |
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
See disclosure below regarding forfeitures. |
As of December 31, 2010, there was approximately $0.8 million of unrecognized compensation
cost related to unvested RSUs. That cost is expected to be recognized over a weighted-average
period of 4.1 years.
Stock Appreciation Rights
A Stock Appreciation Right (a SAR) is a right to receive a payment in cash, Common Stock, or
a combination thereof as determined by the Plan Committee in an amount or value equal to the excess
of (i) the fair value, or other specified valuation (which may not exceed fair value), of a
specified number of shares of Common Stock on the date the right is exercised, over (ii) the fair
value or other specified amount (which may not be less than fair value) of such shares of Common
Stock on the date the right is granted; provided, however, that if a SAR is granted in tandem with
or in substitution for a stock option, the designated fair value for purposes of the foregoing
clause (ii) will be the fair value on the date such stock option was granted. No SARs will be
exercisable later than ten (10) years after the date of grant. The SARs issued under the EI Plan
vest ratably over a period ranging from zero to five years, at an exercise price equal to the
closing price of the Companys Common Stock on the New York Stock Exchange on the date of grant,
and unless terminated earlier, expire on the tenth anniversary of the date of grant. There were
536,250, 724,943 and 118,000 SARs granted during the years ended December 31, 2010, 2009, and 2008,
respectively. The 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. There were 55,180 SARs exercised in 2010, of
which 24,089 were settled in cash.
75
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
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, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
Dividend yield |
|
|
|
% |
|
|
|
% |
Risk-free interest rate |
|
|
2.24 |
% |
|
|
1.57 |
% |
Volatility |
|
|
83.2 |
% |
|
|
86.6 |
% |
Expected term (years) |
|
|
5.0 |
|
|
|
3.95 |
|
Weighted-average fair value of SARs granted |
|
$ |
3.78 |
|
|
$ |
1.31 |
|
Activity regarding outstanding SARs for 2010, 2009, and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
All Stock Appreciation Rights Outstanding |
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Shares |
|
|
Exercise Price |
|
SARs Outstanding as of December 31, 2007 |
|
|
|
|
|
|
|
|
SARs Granted |
|
|
118,000 |
|
|
$ |
6.43 |
|
SARs exercised |
|
|
|
|
|
|
|
|
SARs Forfeited/Cancelled* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs Outstanding as of December 31, 2008 |
|
|
118,000 |
|
|
$ |
6.43 |
|
SARs Granted |
|
|
724,943 |
|
|
$ |
2.21 |
|
SARs exercised |
|
|
|
|
|
|
|
|
SARs Forfeited/Cancelled* |
|
|
(125,000 |
) |
|
$ |
1.53 |
|
|
|
|
|
|
|
|
SARs Outstanding as of December 31, 2009 |
|
|
717,943 |
|
|
$ |
3.02 |
|
SARs Granted |
|
|
536,250 |
|
|
$ |
5.67 |
|
SARs exercised |
|
|
(55,180 |
) |
|
$ |
4.84 |
|
SARs Forfeited/Cancelled* |
|
|
(87,500 |
) |
|
$ |
3.51 |
|
|
|
|
|
|
|
|
SARs Outstanding as of December 31, 2010 |
|
|
1,111,513 |
|
|
$ |
4.17 |
|
|
|
|
|
|
|
|
|
SARs price range at December 31, 2010 |
|
$ |
1.36-$9.86 |
|
|
|
|
|
|
|
|
* |
|
See disclosure below regarding forfeitures. |
The following table summarizes information about SARs outstanding at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs Outstanding |
|
|
|
|
|
SARs Exercisable |
|
|
|
|
|
Number |
|
|
Weighted Average |
|
Weighted |
|
|
Number |
|
|
Weighted |
|
|
|
|
|
Outstanding |
|
|
Remaining |
|
Average |
|
|
Exercisable |
|
|
Average |
|
Exercise Prices |
|
|
at 12/31/10 |
|
|
Contractual Life |
|
Exercise Price |
|
|
at 12/31/10 |
|
|
Exercise Price |
|
$ |
6.43 |
|
|
|
107,820 |
|
|
7.75 Years |
|
$ |
6.43 |
|
|
|
40,740 |
|
|
$ |
6.43 |
|
|
1.53 |
|
|
|
285,000 |
|
|
8.25 Years |
|
|
1.53 |
|
|
|
65,000 |
|
|
|
1.53 |
|
|
1.36 |
|
|
|
114,943 |
|
|
8.25 Years |
|
|
1.36 |
|
|
|
114,943 |
|
|
|
1.36 |
|
|
5.34 |
|
|
|
10,000 |
|
|
8.5 Years |
|
|
5.34 |
|
|
|
2,000 |
|
|
|
5.34 |
|
|
4.68 |
|
|
|
100,000 |
|
|
9.00 Years |
|
|
4.68 |
|
|
|
|
|
|
|
|
|
|
4.79 |
|
|
|
30,000 |
|
|
9.25 Years |
|
|
4.79 |
|
|
|
|
|
|
|
|
|
|
5.03 |
|
|
|
350,750 |
|
|
9.25 Years |
|
|
5.03 |
|
|
|
|
|
|
|
|
|
|
9.86 |
|
|
|
6,000 |
|
|
9.25 Years |
|
|
9.86 |
|
|
|
|
|
|
|
|
|
|
8.17 |
|
|
|
90,000 |
|
|
9.5 Years |
|
|
8.17 |
|
|
|
|
|
|
|
|
|
|
7.35 |
|
|
|
17,000 |
|
|
9.5 Years |
|
|
7.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,111,513 |
|
|
|
|
$ |
4.17 |
|
|
|
222,683 |
|
|
$ |
2.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining life of the outstanding SARs as of December 31, 2010, 2009 and
2008 is 8.6 years, 8.7 years and 9.4 years, respectively.
76
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
A summary of the Companys unvested SARs at December 31, 2010, and changes during 2010 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
Unvested, December 31, 2009 |
|
|
579,400 |
|
|
$ |
1.74 |
|
Granted |
|
|
536,250 |
|
|
$ |
3.78 |
|
Vested |
|
|
(139,960 |
) |
|
$ |
1.93 |
|
Forfeited* |
|
|
(86,860 |
) |
|
$ |
2.19 |
|
|
|
|
|
|
|
|
Unvested, December 31, 2010 |
|
|
888,830 |
|
|
$ |
2.90 |
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
See disclosure below regarding forfeitures. |
As of December 31, 2010, there was approximately $2.3 million of unrecognized compensation
cost related to non-vested SARs. That cost is expected to be recognized over a weighted average
period of 3.8 years.
The aggregate intrinsic value of the non-vested and vested outstanding SARs at December 31,
2010, 2009, and 2008, was $4,877,000, $1,273,000 and $0, respectively. The aggregate intrinsic
value is the total pre-tax 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 55,180 SARs exercised
during the year ended 2010. 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, 2010, 2009,
and 2008, was $270,000, $155,000 and $0, respectively.
Option/SAR Forfeitures
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.
Restricted Stock/RSU Forfeitures
All of the forfeited Restricted Stock and RSUs described in the chart above resulted from the
termination of the employment of the respective grantees and the resulting forfeiture of unvested
Restricted Stock and RSUs. Pursuant to the award agreements governing the Companys Restricted
Stock and RSUs, upon a grantees termination of employment, such grantees outstanding unvested
Restricted Stock and RSUs are forfeited, except in the event of disability or death, in which case
all restrictions lapse.
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, 2010 and 2009, the 2009
ESPP had 60,947 and 122,096 shares reserved for future issuance, respectively (in each case after
giving effect to the shares issued thereunder with respect to each such plan year). At December 31,
2010, there were 50 enrolled participants in the 2009 ESPP.
77
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
The following table summarizes the exercise prices of options exercised under the 2009 or 2004
ESPP, as applicable, and the aggregate number of shares purchased thereunder, for each of 2010,
2009 and 2008 plan years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Exercise Price |
|
$ |
3.98 |
|
|
$ |
2.95 |
|
|
$ |
2.52 |
|
Shares Purchased |
|
|
61,149 |
|
|
|
77,904 |
|
|
|
31,317 |
|
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, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Risk-free interest rate |
|
|
0.45 |
% |
|
|
.40 |
% |
|
|
3.17 |
% |
Volatility |
|
|
89.2 |
% |
|
|
129 |
% |
|
|
34.4 |
% |
Expected term (years) |
|
|
1.0 |
|
|
|
1.0 |
|
|
|
1.0 |
|
Expected volatilities are calculated based on the historical volatility of the Companys
stock. The risk-free interest rate is based on the U.S. Treasury yield with a term that is
consistent with the expected life of the options. The expected life of options under each of the
2009 ESPP and 2004 ESPP is one year, or the equivalent of the annual plan year.
Note 16 401(k) Plan
KID 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
(other than the case of CoCaLo, Inc.) is matched by the relevant employer. The provision for
contributions charged to continuing operations for the years ended December 31, 2010, 2009, and
2008, was approximately $0.4 million, $0.3 million and $0.3 million, respectively.
Note 17 Concentrations of Risk and Geographic Information
The following table represents net sales and assets of the Company by geographic area (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Net domestic sales |
|
$ |
266,347 |
|
|
$ |
235,390 |
|
|
$ |
220,685 |
|
Net foreign sales (Australia and United Kingdom)* |
|
|
9,430 |
|
|
|
8,546 |
|
|
|
8,509 |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
275,777 |
|
|
$ |
243,936 |
|
|
$ |
229,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic assets |
|
$ |
237,982 |
|
|
$ |
203,155 |
|
|
$ |
232,780 |
|
Foreign assets (Australia and United Kingdom) |
|
|
4,514 |
|
|
|
3,723 |
|
|
|
2,654 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
242,496 |
|
|
$ |
206,878 |
|
|
$ |
235,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Excludes export sales from the United States |
78
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
The Company currently categorizes its sales in five product categories: Soft Good Basics,
Hard Good Basics, Accessories and Décor, Toys and Entertainment and Other. Soft Good Basics
includes bedding, blankets, mattresses and sleep positioners. Hard Good Basics includes cribs and
other nursery furniture, feeding, food preparation and kitchen 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, 2010, 2009, and 2008
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Hard Good Basics |
|
|
38.9 |
% |
|
|
33.3 |
% |
|
|
32.0 |
% |
Soft Good Basics |
|
|
38.1 |
% |
|
|
44.6 |
% |
|
|
41.7 |
% |
Toys and Entertainment |
|
|
11.8 |
% |
|
|
10.0 |
% |
|
|
12.9 |
% |
Accessories and Décor |
|
|
10.3 |
% |
|
|
11.2 |
% |
|
|
12.5 |
% |
Other |
|
|
0.9 |
% |
|
|
0.9 |
% |
|
|
0.9 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
During 2010, 2009, and 2008, approximately 74%, 67%, and 59%, 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 generally 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 addition, certain categories of wooden bedroom furniture imported from the PRC by
the Companys LaJobi subsidiary are also subject to anti-dumping duties. For a discussion of a
charge taken in the fourth quarter and year ended December 31, 2010 for anticipated anti-dumping
duties and other actions taken by the Company in connection with a Focused Assessment of LaJobis
import practices, see Note 18 of Notes to Consolidated Financial Statements. The Company has
discontinued the practices that resulted in the charge for anticipated anti-dumping duties.
In 2010, 2009, and 2008, the suppliers accounting for the greatest dollar volume of the
Companys purchases accounted for approximately 18%, 20%, and 23%, respectively, of such purchases
and the five largest suppliers accounted for approximately 44%, 46%, and 49%, respectively, in the
aggregate.
See Note 6 above for information regarding dependence on certain large customers.
Note 18 Litigation, Commitments and Contingencies
In late December 2010, the Companys LaJobi subsidiary was selected by U.S. Customs for a
Focused Assessment of its import practices and procedures, which Focused Assessment commenced on
January 19, 2011. In preparing for the Focused Assessment, the Company found certain potential
issues with respect to LaJobis import practices. As a result, the Board of Directors initiated an
investigation, supervised by a Special Committee of three non-management members of the Board. The
Boards investigation found instances at LaJobi in which incorrect import duties were applied on
certain wooden furniture imported from vendors in the PRC, resulting in a violation of anti-dumping
regulations. On the basis of the investigation, the
Board concluded that there was misconduct involved on the part of certain LaJobi employees in
connection with the incorrect payment of duties, including misidentifying the manufacturer and
shipper of products. As a result, effective March 14, 2011, LaJobis President, Lawrence Bivona,
and LaJobis Managing Director of operations were both terminated from employment. Promptly upon
becoming aware of such issues and related misconduct, the Company voluntarily disclosed its
findings to the SEC on an informal basis and is cooperating with the Staff of the SEC as it reviews
this matter.
Upon completion
of the investigation, the Company currently expects to complete a voluntary
prior disclosure to U.S. Customs identifying certain underpayments of import duty, and remit
payment of customs duty not paid, with interest thereon. Accordingly, for the fourth quarter and
year ended December 31, 2010, the Company recorded a charge in the amount of approximately
$6,860,000 (which includes approximately $340,000 of interest) for import duties the Company
anticipates will be owed to U.S. Customs by LaJobi in respect of the matters discussed above. This
charge was recorded in cost of sales (other than the interest portion, which was recorded in
interest expense), and adversely affected gross margins and net income for the affected periods. It
is possible that the actual amount of duty owed with respect to the Focused Assessment will be
higher upon completion thereof, and in any event, additional interest will continue to accrue on
the amounts the Company currently anticipates the Company will owe until payment is made. In
addition, the Company may be assessed by U.S. Customs a penalty of up to 100% of any customs duty
owed as well as possibly being subject to fines, penalties or other measures from U.S. Customs or other governmental authorities.
The Company has discontinued the practices that resulted in the charge for anticipated
anti-dumping duty, and the Company believes that the Companys ability to procure the affected
categories of wooden bedroom furniture will not be materially adversely affected in future periods.
The Company is committed to working closely with U.S. Customs to address issues relating to
incorrect import duties. The Company has also initiated certain enhancements to its processes and
procedures in areas where underpayments were found, and will be reviewing these and possibly other
remedial measures. In addition, there can be no assurance that the Companys licensors, vendors
and/or retail partners will not take adverse action under applicable agreements with the Company
(or otherwise) as a result of the matters described above.
79
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
As a result of the accrual recorded in the fourth quarter and year ended December 31, 2010 for
anticipated customs duty (and interest thereon) owed by LaJobi to U.S. Customs and the facts and
circumstances discovered in the Companys preparation for the Focused Assessment and in its related
investigation into LaJobis import practices described above (including misconduct on the part of
certain employees at LaJobi), the Company has concluded that no LaJobi Earnout Consideration (and
therefore no finders fee) is payable. Accordingly, the Company has not recorded any amounts
related thereto in the Companys financial statements for the fourth quarter and year ended
December 31, 2010. The Company previously disclosed a potential earnout payment of approximately
$12 to $15 million in the aggregate relating to its acquisitions of LaJobi and CoCaLo,
substantially all of which was estimated to relate to LaJobi. There can be no assurance, however,
that the LaJobi seller will not take a position different from the Company and assert a claim for
the payment of some LaJobi Earnout Consideration. There can be no assurance that the Company will
prevail in any such dispute. The Company anticipates that cash flow from operations and
anticipated availability under the Credit Agreement will be sufficient to fund any customs duty,
interest and potential penalties thereon, and any potential LaJobi Earnout Consideration and
related finders fee, and will be permitted under the terms of the Credit Agreement and related
documentation, but there can be no assurance that this will be the case. See Note 8 for a
discussion of a waiver and amendment executed to address among other things various defaults
resulting from the charge recorded in the fourth quarter and year ended December 31, 2010 and other
circumstances discovered as a result of the internal investigation of LaJobis import practices
described above and LaJobis business and staffing practices described in Note 12.
Lawrence Bivona,
the former President of LaJobi, Inc., along with various family members, established L&J
Industries in Asia to provide quality control, compliance and certain other services to LaJobi
for goods being shipped by LaJobi from Asian ports. Pursuant to the terms of a transition
services agreement entered into in connection with the acquisition of LaJobi, commencing in
April 2008, we utilized the full time services of approximately 28 employees of L&J Industries
for such services. We ceased making direct payments to L&J Industries in June 2010, when we
became aware that L&J Industries has ceased operations. However, we continued to pay for the
services of approximately 26 of the former employees of L&J Industries (based in Hong Kong,
China, Vietnam and Thailand), including through an individual based in Hong Kong. Companies
retaining the services of individuals in these jurisdictions are subject to a variety of foreign
laws. The Company believes that the payment and other practices with respect to quality control,
compliance and certain other services in Hong Kong, China, Vietnam and Thailand violated civil
laws and potentially violated criminal laws in these jurisdictions; however, the
Company currently does not believe that any such violations will have a material adverse effect
on the Company.
LaJobi has since
discontinued the above-described manner of paying individuals providing such services in the PRC
and Hong Kong, and has taken corrective action by establishing interim arrangements which it
believes are currently in compliance with applicable requirements in such jurisdictions, and is
in the process of establishing subsidiaries in the PRC through which the Company intends to
directly employ the quality control individuals in these jurisdictions in the future. With
respect to Thailand and Vietnam, we are investigating appropriate corrective interim arrangements,
and are in the process of establishing a subsidiary in Thailand through which the Company
intends to directly employ the quality control individuals in these jurisdictions in the future.
Although we believe that once these subsidiaries are fully established, the Company will be in
compliance with applicable laws of the relevant Asian countries, no assurance can be given that
applicable governmental authorities will concur with such a view and will not impose taxes or
penalties or other measures with respect to staffing practices prior thereto.
On March 22, 2011, a complaint was filed in the United States District Court, District of New
Jersey, encaptioned Shah Rahman v. Kid Brands, et al. (the Complaint). The Complaint is
brought by one plaintiff on behalf of a putative class of all those who purchased or otherwise
acquired the common stock of the Company between March 26, 2010 and March 15, 2011. In addition to
the Company, Bruce G. Crain, KIDs President, Chief Executive Officer and a member of KIDs board
of
directors, Guy A. Paglinco, KIDs Vice President and Chief Financial Officer, Raphael
Benaroya, Mario Ciampi, Frederick J. Horowitz, Salvatore Salibello and Michael Zimmerman, each
members of KIDs board of directors, as well as Lauren Krueger and John Schaefer, each former
member of KIDs board of directors, were named as defendants.
The Complaint alleges one claim for relief pursuant to Section 10(b) of the
Securities Exchange Act of 1934, as amended (the Exchange Act), and Rule 10b-5 promulgated
thereunder, and a second claim pursuant to Exchange Act, claiming generally that the Company and/or
the other defendants issued materially false and misleading statements during the relevant time
period regarding compliance with customs laws, the Companys financial reports and internal
controls. The complaint does not state the size of the class or quantify the amount of damages
sought.
The Company
intends to defend this action (and any similar actions that may be filed in the future) vigorously, and has notified its insurance
companies of the existence of the Complaint.
In addition to the proceedings described above, in the ordinary course of its business, the
Company is party to various copyright, patent and trademark infringement, unfair competition,
breach of contract, customs, employment and other legal actions incidental to the Companys
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 the Companys
consolidated results of operations, financial condition or cash flows.
The Company has approximately $47.5 million in outstanding purchase commitments at December
31, 2010, consisting primarily of purchase orders for inventory.
80
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (CONTINUED)
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 pre-payments 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 $19.5 million, of which
approximately $12.4 million remained unpaid at December 31, 2010. Royalty expense for the years
ended December 31, 2010, 2009, and 2008 was $7.7 million, $6.4 million, and $5.2 million,
respectively.
In connection with the sale of the Gift Business, KID and Russ Berrie U.S. Gift, Inc. (U.S.
Gift), the Companys subsidiary at the time, sent a notice of termination, which notice was
effective December 23, 2010, with respect to the lease (the Lease) originally entered into by KID
(and subsequently assigned to U.S. Gift) of a facility in South Brunswick, New Jersey. Although
this Lease became 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 became effective. It is the Companys understanding that TRC and the
landlord have agreed to allow U.S. Gift to occupy the premises under certain conditions but that
U.S. Gift has failed to pay certain amounts due and outstanding on the termination date, for which
the Company may remain contingently liable. 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 fails to make payments of amounts
outstanding on the termination date 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 the Companys former Gift
Business. However, the Company cannot assure that the Company 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, 2010, but there can be no assurance that payments will not be required of KID in the future.
As of December 31, 2010, the Company had obligations under certain letters of credit that
require the Company to make payments to parties aggregating $0.1 million upon the occurrence of
specified events.
Note 19 Quarterly Financial Information
(Unaudited)
The following quarterly financial data for the four quarters ended December 31, 2010, and
2009, were 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.
The quarter ended December 31, 2010, includes an approximate $6.9 million accrual for import
duty underpayments and related interest with respect to LaJobi import practices (See Note 18).
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Quarters Ended |
|
2010 |
|
March 31 |
|
|
June 30 |
|
|
September 30 |
|
|
December 31 |
|
|
|
(Dollars in Thousands, Except Per Share Data) |
|
Net sales |
|
$ |
61,474 |
|
|
$ |
67,921 |
|
|
$ |
71,128 |
|
|
$ |
75,254 |
|
Gross profit |
|
|
18,668 |
|
|
|
20,706 |
|
|
|
20,638 |
|
|
|
16,282 |
|
Income (loss) from operations |
|
|
6,655 |
|
|
|
7,896 |
|
|
|
6,928 |
|
|
|
876 |
|
Net income (loss) |
|
$ |
3,468 |
|
|
$ |
4,476 |
|
|
$ |
3,960 |
|
|
$ |
22,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) per Common Share |
|
$ |
0.16 |
|
|
$ |
0.21 |
|
|
$ |
0.18 |
|
|
$ |
1.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) per Common Share |
|
$ |
0.16 |
|
|
$ |
0.20 |
|
|
$ |
0.18 |
|
|
$ |
1.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008 (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 operations |
|
|
4,386 |
|
|
|
(8,055 |
) |
|
|
6,403 |
|
|
|
8,258 |
|
Net income (loss) |
|
$ |
1,336 |
|
|
$ |
(5,689 |
) |
|
$ |
2,868 |
|
|
$ |
13,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) per Common Share |
|
$ |
0.06 |
|
|
$ |
(0.26 |
) |
|
$ |
0.13 |
|
|
$ |
0.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) per Common Share |
|
$ |
0.06 |
|
|
$ |
(0.26 |
) |
|
$ |
0.13 |
|
|
$ |
0.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share are computed independently for each of the quarters presented and the
cumulative amount may not agree to annual earnings per share.
82
|
|
|
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 Exchange Act 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, 2010. 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, 2010.
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 of December 31, 2010, of the Companys internal control over financial reporting.
In making this evaluation, management used the framework set forth in Internal Control
Integrated 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, 2010.
KPMG LLP, the independent registered public accounting firm that audited our 2010 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, 2010.
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.
83
|
|
|
ITEM 9B. |
|
OTHER INFORMATION |
Amendment to Credit Agreement
As a result of the LaJobi Events, we determined that various events of default and potential
events of default under the Credit Agreement (and related loan documents) occurred as a result of
breaches and potential breaches of various representations, warranties and covenants in the Credit
Agreement, including, but not limited to, an unmatured event of default related to a breach of the
Fixed Charge Coverage Ratio covenant for the quarter ending December 31, 2010 (as well as projected
breaches of the Fixed Charge Coverage Ratio and Total Debt to Covenant EBITDA Ratio for certain
future periods). In connection therewith, on March 30, 2011, the Borrowers under the Credit
Agreement, KID, the Lenders party thereto and Bank of America, N.A., as successor by merger to
LaSalle Bank National Association, as administrative agent for the Lenders, executed a Third
Amendment and Waiver to Credit Agreement (the Amendment), to waive, among other things, specified
existing events of default resulting from such LaJobi Events and related breaches (and future
events of default as a result of the accrual or payment of specified Duty Amounts (as defined
below)), and potential breaches, and to amend the definition of Covenant EBITDA for all purposes
under the Credit Agreement and related loan documents (including for the determination of the
applicable interest rate margins and compliance with financial covenants) for the December 31, 2010
reporting period and all periods thereafter. The Borrowers paid a fee of approximately $100,000
during the first quarter of 2011, in connection with the execution of the Amendment. As a result
of the Amendment, the Company must be in compliance with the financial covenants specified in the
Credit Agreement at the time of any accrual in excess of $1.0 million, or proposed payment, of any
Duty Amounts.
In addition to the adjustments to consolidated net income to derive Covenant EBITDA applicable
prior to the execution of the Amendment, the Amendment specifies that Covenant EBITDA will be
further adjusted (up to an aggregate maximum of $14.855 million for all periods, less any LaJobi
Earnout Consideration paid other than in accordance with the Credit Agreement and/or to the extent
not deducted in determining consolidated net income) for: (i) all customs duties, interest,
penalties and other related amounts owed by LaJobi to U.S. Customs as a result of the LaJobi Events
(Duty Amounts); (ii) fees and expenses incurred in connection with the internal investigation
into LaJobis import, business and staffing practices and the Focused Assessment of U.S. Customs;
and (iii) LaJobi Earnout Consideration, if any, paid in accordance with the terms of the Credit
Agreement.
The Credit Agreement contains customary affirmative and negative covenants. Among other
restrictions, the Company is restricted in its ability to pay any Earnout Consideration unless
certain conditions are satisfied. With respect to the payment of LaJobi Earnout Consideration, if
any, as a result of the Amendment, such conditions now include that excess revolving loan
availability equal or exceed the greater of (A) $18,000,000 less the amount of any Duty Amounts
previously paid by LaJobi to U.S. Customs and (B) $9,000,000, until such time that the Focused
Assessment has been deemed concluded and all Duty Amounts required thereby have been remitted by
LaJobi (the Conclusion Date), such that after the Conclusion Date, this condition shall require
only that excess revolving loan availability equal or exceed $9,000,000 (previously, such condition
with respect to the payment of any Earnout Consideration was limited to excess revolving loan
availability being equal to or exceeding $9,000,000, and such requirement with respect to the
payment of any CoCaLo Earnout Consideration remains unchanged).
Sublease
In October 2010, effective as of September 30, 2010, our Kids Line subsidiary entered into a
sublease (the Sublease) with The Capital Group Companies, Inc., a Delaware corporation
(the Sublessor) with respect to 27,515 rentable square feet of office space located in
Los Angeles, California. Under the terms of the Sublease, Kids Line will make monthly base rental
payments of $52,737 to the Sublessor, which amount will increase by three percent (3%) annually
during the term of the Sublease, and shall also pay operating expenses in excess of those incurred
in the applicable base year. The stated term of the Sublease expires February 28, 2018. In
connection with the execution of the Sublease, on October 4, 2010, KID executed a guarantee for the
benefit of Sublessor, guaranteeing payment of the aggregate rental payments under the Sublease if
the Sublessee defaults on its obligations thereunder.
In addition, in the event that the underlying master lease (the Master Lease) between the
Sublessor and the landlord (the Landord) is terminated due to a default by the Sublessor, and
Kids Line is not in default under the Sublease; the Landlord has agreed to enter into a direct
lease with Kids Line on the terms of the Sublease; provided that Kids Line shall be obligated to
pay the original (higher) rent applicable to the Master Lease (representing an aggregate
differential of $4.1 million as of the effective date of the Sublease). In connection therewith,
the Sublessor has issued an irrevocable standby letter of credit (the Letter of Credit), with
Kids Line as the beneficiary, in the aggregate amount of $4.1 million, which amount will be reduced
annually to correspond with payments made by the Sublessor under the Master Lease. The Letter of
Credit expires on May 31, 2011, but will automatically be extended to May 31 in each succeeding
year (subject to a final expiration on February 28, 2018) unless the issuing bank (Bank of America,
N.A.) provides written notice to Kids Line at least 60 days prior
to the then current expiration date that it does not intend to extend the Letter of Credit.
Upon receipt of any such expiration notice, Kids Line shall have the right to draw under the Letter
of Credit in an amount equal to its then current full amount.
84
PART III
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ITEM 10. |
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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
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 2011
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 Exchange Act. The Audit Committee currently consists of
Salvatore Salibello (Chair), Frederick J. Horowitz, and Hugh Rovit.
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
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 One Meadowlands Plaza, New Jersey 07073, 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.
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ITEM 11. |
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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 2011 Proxy
Statement, which is incorporated herein by reference thereto.
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|
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ITEM 12. |
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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 2011 Proxy Statement, which are each incorporated herein by reference
thereto.
85
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information, as of December 31, 2010, regarding compensation
plans (including individual compensation arrangements) under which equity securities of the Company
are authorized for issuance:
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|
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Number of |
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|
|
|
|
|
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|
|
|
|
securities |
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|
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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) |
|
|
1,795,688 |
(2) |
|
$ |
7.71 |
|
|
|
956,389 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans not approved
by security holders |
|
|
20,000 |
(4) |
|
$ |
16.05 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,815,688 |
|
|
$ |
7.80 |
|
|
|
956,389 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
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(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 (SARs) issued under the EIP (such SARs 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, 2010. Excludes 50,000 SARs
issued and includes 123,600 SARs forfeited/cancelled after December 31, 2010. Includes
28,000 options that were forfeited/cancelled after December 31, 2010. Does not include a
total of 174,730 Restricted Stock Units (RSUs) granted under the EIP as of December 31,
2010 and 10,000 RSUs issued after December 31, 2010, and includes 13,400 RSUs
forfeited/cancelled after December 31, 2010 which 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 956,389
shares of Common Stock remained available as of December 31, 2010 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. 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, 2010, 60,947 shares were available for issuance under the 2009 ESPP, after
giving effect to the 61,149 shares issued thereunder with respect to the 2010 plan year. |
86
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(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 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. |
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ITEM 13. |
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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 GOVERNANCE
I. INDEPENDENCE DETERMINATIONS of the 2011 Proxy Statement, which is incorporated herein by
reference thereto.
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ITEM 14. |
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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 2011 Proxy Statement, which are each
incorporated herein by reference thereto.
PART IV
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ITEM 15. |
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EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
Documents filed as part of this Report.
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1. |
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Financial Statements: |
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Report of Independent Registered Public Accounting Firm |
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Consolidated Balance Sheets at December 31, 2010 and 2009 |
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Consolidated Statements of Operations for the years ended December 31, 2010, 2009, and 2008 |
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Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) for the
years ended December 31, 2010, 2009, and 2008 |
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Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009, and 2008 |
|
|
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|
Notes to Consolidated Financial Statements |
87
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2. |
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Financial Statement Schedule: |
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Schedule II Valuation and Qualifying Accounts Years Ended December 31, 2010, 2009, and
2008 |
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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. |
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Exhibits: |
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(Listed by numbers corresponding to Item 602 of Regulation S-K) |
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2.1 |
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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) |
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2.2 |
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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 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) |
|
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|
|
(b) Certificate of Amendment to Restated Certificate of Incorporation of the Company
filed April 30, 1987. (5) |
|
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|
|
(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 |
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|
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) |
|
4.8 |
|
|
Investor Rights Agreement, dated as of August 10, 2006, among the Company and
the investors listed on the signature pages thereto. (16) |
88
|
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4.9 |
|
|
Third Amendment and Waiver to Credit Agreement, dated as of March 30, 2011,
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. |
|
10.1 |
|
|
Lease Agreement, dated April 1, 1981, between Tri-State Realty and Investment
Company and Kid Brands, Inc. (12) |
|
10.2 |
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|
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 |
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|
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 |
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|
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 |
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|
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 |
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Form of Stock Option Agreement with respect to 2004 Stock Option Restricted
and Non-Restricted Stock Plan*(18) |
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10.11 |
|
|
Form of Stock Option Agreement for Non-Employee Directors with respect to 2004
Stock Option Restricted and Non-Restricted Stock Plan*(18) |
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10.12 |
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|
Form of Restricted Stock Agreement with respect to 2004 Stock Option
Restricted and Non-restricted Stock Plan*(18) |
|
10.13 |
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|
Incentive Compensation Program adopted on March 11, 2005*(19) |
|
10.14 |
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|
Employment Agreement dated July 27, 2005, effective August 1, 2005, between
Kid Brands, Inc., and Mr. Anthony Cappiello*(20) |
|
10.15 |
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|
Employment Agreement dated September 26, 2005, between Kid Brands, Inc., and
Marc S. Goldfarb*(21) |
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10.16 |
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|
Amended and Restated 2004 Employee Stock Purchase Plan effective January 3, 2006*(22) |
|
10.17 |
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Amended and Restated VP Severance Policy for Domestic Vice Presidents (and Above)*(23) |
|
10.18 |
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|
Employment Agreement dated as of December 4, 2007, between the Company and Bruce G. Crain*(24) |
|
10.19 |
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Bruce G. Crain Incentive Compensation Letter*(10) |
|
10.20 |
|
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Stockholders Agreement dated as of December 23, 2008, among Kid Brands, Inc.;
The Russ Companies, Inc.; and Encore Investors II, Inc.(4) |
|
10.21 |
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|
License Agreement dated as of December 23, 2008, among RB Trademark Holdco,
LLC and The Russ Companies, Inc. (4) |
|
10.22 |
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|
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 |
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|
Transition Services Agreement dated as of December 23, 2008, between Kid
Brands, Inc., and The Russ Companies, Inc. (4) |
|
10.24 |
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|
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 |
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|
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 |
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Inter-Creditor 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 |
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|
Amended and Restated Change in Control Severance Plan*(4) |
|
10.29 |
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Second Amended and Restated VP Severance Policy for Domestic Vice Presidents (and Above)*(8) |
|
10.30 |
|
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Equity Incentive Plan*(25) |
|
10.31 |
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2009 Employee Stock Purchase Plan*(25) |
|
10.32 |
|
|
Employment Agreement dated as of April 2, 2008, between LaJobi, Inc., and Lawrence Bivona*(8) |
|
10.33 |
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|
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*(26) |
|
10.36 |
|
|
Form of Equity Incentive Plan Stock Option Agreement*(6) |
89
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|
|
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* (15) |
|
10.41 |
|
|
Employment Agreement dated as of February 17, 2010, between Kid Brands, Inc.
(on behalf of Sassy, Inc.) and Richard F. Schaub, Jr.* (15) |
|
10.42 |
|
|
Sublease, effective as of September 30, 2010, between The Capital Group
Companies, Inc. and Kids Line, LLC |
|
10.43 |
|
|
Landlord Consent to Kids Line Sublease, effective as of September 30,
2010 |
|
10.44 |
|
|
Irrevocable Standby Letter of Credit from Bank of America, dated October
26, 2010 |
|
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 |
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(9) |
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Incorporated by reference to Current Report on Form 8-K filed on April 8, 2008 |
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(10) |
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Incorporated by reference to Quarterly Report on Form 10-Q for the quarter
ended June 30, 2008 |
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(11) |
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Incorporated by reference to Current Report on Form 8-K filed on March 23, 2009 |
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(12) |
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Incorporated by reference to Registration Statement No. 2-88797 on Form S-1
filed on February 2, 1984 |
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(13) |
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Incorporated by reference to the Companys definitive Proxy Statement filed on
April 4, 2003 |
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(14) |
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Incorporated by reference to Annual Report on Form 10-K for the year ended
December 31, 2003 |
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(15) |
|
Incorporated by reference to the Annual Report on Form 10-K for the year ended
December 31, 2009 |
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(16) |
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Incorporated by reference to Current Report on Form 8-K filed on August 14,
2006 |
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(17) |
|
Incorporated by reference to Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004 |
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(18) |
|
Incorporated by reference to Annual Report on Form 10-K for the year ended
December 31, 2004 |
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(19) |
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Incorporated by reference to Quarterly Report on Form 10-Q for the quarter
ended March 31, 2005 |
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(20) |
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Incorporated by reference to Current Report on Form 8-K filed on August 2, 2005 |
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(21) |
|
Incorporated by reference to Current Report on Form 8-K filed on September 29,
2005 |
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(22) |
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Incorporated by reference to Current Report on Form 8-K filed on December 30,
2005 |
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(23) |
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Incorporated by reference to Current Report on Form 8-K filed on July 17, 2007 |
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(24) |
|
Incorporated by reference to Current Report on Form 8-K filed on December
7, 2007 |
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(25) |
|
Incorporated by reference to the Companys definitive Proxy Statement filed on
June 13, 2008 |
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(26) |
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Incorporated by reference to the Annual Report on Form 10K/A for the year ended
December 31, 2008 |
90
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.
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KID BRANDS, INC. |
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(Registrant) |
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March 31, 2011 |
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By:
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/s/ GUY A. PAGLINCO
Guy A. Paglinco
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Vice President Chief Financial Officer |
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(Principal Financial Officer and |
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Principal Accounting Officer) |
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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.
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/s/ BRUCE G. CRAIN
Bruce G. Crain, Chief Executive Officer and Director
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March 31, 2011
Date
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(Principle Executive Officer) |
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/s/ RAPHAEL BENAROYA
Raphael Benaroya, Chairman and Director
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March 31, 2011
Date
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/s/ MARIO CIAMPI
Mario Ciampi, Director
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March 31, 2011
Date
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/s/ FREDERICK J. HOROWITZ
Frederick J. Horowitz, Director
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March 31, 2011
Date
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/s/ HUGH ROVIT
Hugh Rovit, Director
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March 31, 2011
Date
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/s/ SALVATORE SALIBELLO
Salvatore Salibello, Director
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March 31, 2011
Date
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/s/ MICHAEL ZIMMERMAN
Michael Zimmerman, Director
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March 31, 2011
Date
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91
Exhibit Index
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Exhibit |
Numbers |
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4.9 |
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Third Amendment and Waiver to Credit Agreement, dated as of March 30, 2011, 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. |
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10.42 |
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Sublease, effective as of September 30, 2010, between The Capital Group Companies, Inc.
and Kids Line, LLC. |
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10.43 |
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Landlord Consent to Kids Line Sublease, effective as of September 30, 2010 |
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10.44 |
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Irrevocable Standby Letter of Credit from Bank of America, dated October 26, 2010 |
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21.1 |
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List of Subsidiaries |
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23 |
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Consent of Independent Registered Public Accounting Firm |
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31.1 |
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Certification of CEO required by Section 302 of the Sarbanes Oxley Act of 2002 |
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31.2 |
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Certification of CFO required by Section 302 of the Sarbanes Oxley Act of 2002 |
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32.1 |
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Certification of CEO required by Section 906 of the Sarbanes Oxley Act of 2002 |
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32.2 |
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Certification of CFO required by Section 906 of the Sarbanes Oxley Act of 2002 |
92
KID BRANDS, INC. AND SUBSIDIARIES
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
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Column A |
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Column B |
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Column C |
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Column D |
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Column E |
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Column F |
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Balance at |
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Balance |
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Beginning |
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Charged to |
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Sale of Gift |
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at End |
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Description |
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of Period |
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Expenses |
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Deductions |
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Business (a) |
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of Period |
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Allowance for accounts
receivable: |
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Year ended December 31,
2008 |
|
$ |
4,730 |
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$ |
16,238 |
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$ |
14,639 |
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$ |
2,044 |
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$ |
4,285 |
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Year ended December 31,
2009 |
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4,285 |
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31,121 |
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28,305 |
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7,101 |
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Year ended December 31,
2010 |
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7,101 |
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35,921 |
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36,088 |
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6,934 |
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Allowance for inventory: |
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Year ended December 31,
2008 |
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$ |
6,310 |
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$ |
1,933 |
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$ |
20 |
|
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$ |
5,739 |
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$ |
2,484 |
|
Year ended December 31,
2009 |
|
|
2,484 |
|
|
|
1,209 |
|
|
|
1,770 |
|
|
|
|
|
|
|
1,923 |
|
Year ended December 31,
2010 |
|
|
1,923 |
|
|
|
504 |
|
|
|
838 |
|
|
|
|
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1,589 |
|
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a) |
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Reflects the sale of the Gift Business. |
93