Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
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o |
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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) |
(201) 405-2400
(Registrants Telephone Number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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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 |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares outstanding of each of the registrants classes of common stock, as of May 4,
2011 was as follows:
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CLASS |
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SHARES OUTSTANDING |
Common Stock, $0.10 stated value
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21,650,245 |
PART 1 FINANCIAL INFORMATION
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ITEM 1. |
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FINANCIAL STATEMENTS |
KID BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
(UNAUDITED)
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March 31, 2011 |
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December 31, 2010 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
1,549 |
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$ |
1,075 |
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Accounts receivable- trade, less allowances of $7,267 in 2011 and $6,934 in 2010 |
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50,063 |
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55,270 |
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Inventories, net |
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52,046 |
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48,564 |
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Prepaid expenses and other current assets |
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3,254 |
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3,843 |
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Income tax receivable |
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205 |
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307 |
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Deferred income taxes, net |
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6,433 |
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6,372 |
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Total current assets |
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113,550 |
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115,431 |
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Property, plant and equipment, net |
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5,091 |
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5,030 |
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Intangible assets |
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76,465 |
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77,154 |
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Note receivable, net allowance of $16,814 in 2011 and $16,648 in 2010 |
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Deferred income taxes, net |
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41,793 |
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41,626 |
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Other assets |
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2,685 |
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3,255 |
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Total assets |
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$ |
239,584 |
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$ |
242,496 |
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Liabilities and Shareholders Equity |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
13,533 |
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$ |
13,526 |
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Short-term debt |
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22,660 |
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18,595 |
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Accounts payable |
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17,189 |
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22,940 |
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Accrued expenses |
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18,307 |
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16,954 |
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Income taxes payable |
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341 |
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207 |
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Total current liabilities |
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72,030 |
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72,222 |
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Income taxes payable non-current |
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37 |
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37 |
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Deferred income taxes |
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337 |
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332 |
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Long-term debt |
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37,750 |
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41,000 |
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Other long-term liabilities |
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997 |
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923 |
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Total liabilities |
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111,151 |
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114,514 |
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Commitments and contingencies |
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Shareholders equity: |
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Common stock: $0.10 stated value; authorized 50,000,000 shares; issued
26,727,780 shares at March 31, 2011 and December 31, 2010 |
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2,674 |
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2,674 |
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Additional paid-in capital |
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89,673 |
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90,645 |
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Retained earnings |
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134,836 |
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135,049 |
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Accumulated other comprehensive income |
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482 |
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503 |
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Treasury stock, at cost 5,077,535 and 5,162,354 shares at March 31, 2011 and
December 31, 2010, respectively |
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(99,232 |
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(100,889 |
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Total shareholders equity |
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128,433 |
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127,982 |
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Total liabilities and shareholders equity |
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$ |
239,584 |
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$ |
242,496 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
KID BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share and Per Share Data)
(UNAUDITED)
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Three Months Ended March 31, |
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2011 |
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2010 |
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Net sales |
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$ |
59,836 |
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$ |
61,474 |
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Cost of sales |
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43,570 |
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42,806 |
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Gross profit |
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16,266 |
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18,668 |
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Selling, general and administrative expenses |
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15,370 |
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12,013 |
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Income from operations |
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896 |
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6,655 |
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Other (expense) income: |
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Interest expense, including amortization
and write-off of deferred financing costs |
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(1,102 |
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(1,181 |
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Interest and investment income |
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3 |
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Other, net |
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42 |
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228 |
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(1,057 |
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(953 |
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(Loss) income before income tax provision |
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(161 |
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5,702 |
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Income tax provision |
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52 |
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2,234 |
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Net (loss) income |
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$ |
(213 |
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$ |
3,468 |
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Net (loss) income per share: |
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Basic |
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$ |
(0.01 |
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$ |
0.16 |
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Diluted |
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$ |
(0.01 |
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$ |
0.16 |
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Weighted average shares: |
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Basic |
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21,633,000 |
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21,578,000 |
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Diluted |
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21,633,000 |
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21,811,000 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
KID BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(UNAUDITED)
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Three Months Ended March 31, |
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2011 |
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2010 |
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Cash flows from operating activities: |
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Net (loss) income |
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$ |
(213 |
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$ |
3,468 |
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Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
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Depreciation and amortization |
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992 |
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898 |
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Amortization of deferred financing costs |
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229 |
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231 |
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Provision for customer allowances |
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8,150 |
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8,915 |
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Provision for inventory reserve |
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485 |
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Share-based compensation expense |
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466 |
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389 |
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Deferred income taxes |
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(223 |
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1,628 |
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Change in assets and liabilities: |
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Accounts receivable |
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(2,904 |
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(10,350 |
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Income tax receivable |
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102 |
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160 |
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Inventories |
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(3,929 |
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6,336 |
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Prepaid expenses and other current assets |
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595 |
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1,086 |
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Other assets |
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456 |
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15 |
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Accounts payable |
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(5,748 |
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(5,405 |
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Accrued expenses |
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1,274 |
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989 |
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Income taxes payable |
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134 |
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500 |
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Net cash (used in) provided by operating activities |
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(134 |
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8,860 |
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Cash flows from investing activities: |
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Capital expenditures |
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(364 |
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(91 |
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Net cash used in investing activities |
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(364 |
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(91 |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock |
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243 |
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229 |
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Excess tax benefit from stock-based compensation |
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(24 |
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Repayment of long-term debt |
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(3,243 |
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(3,236 |
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Net borrowing (payment) on revolving credit facility |
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4,065 |
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(4,600 |
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Net cash provided by (used in) financing activities |
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1,041 |
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(7,607 |
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Effect of exchange rate changes on cash and cash equivalents |
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(69 |
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(22 |
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Net increase in cash and cash equivalents |
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474 |
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1,140 |
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Cash and cash equivalents at beginning of period |
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1,075 |
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1,593 |
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Cash and cash equivalents at end of period |
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$ |
1,549 |
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$ |
2,733 |
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Cash paid during the period for: |
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Interest |
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$ |
877 |
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$ |
1,451 |
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Income taxes |
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$ |
35 |
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$ |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
KID BRANDS, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Kid Brands, Inc. (KID), together with its subsidiaries (collectively with KID, the
Company), is a leading designer, importer, marketer and distributor of infant and juvenile
consumer products. The Company operates in one segment: the infant and juvenile business.
The Companys operations, which currently consist of Kids Line, LLC (Kids Line), Sassy, Inc.
(Sassy), LaJobi, Inc. (LaJobi) and CoCaLo, Inc. (CoCaLo), each direct or indirect
wholly-owned subsidiaries of KID, design, manufacture through third parties and market products in
a number of categories including, among others; infant bedding and related nursery accessories and
décor, 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).
The accompanying unaudited interim consolidated financial statements have been prepared by the
Company in accordance with accounting principles generally accepted in the United States of America
for interim financial reporting and the instructions to the Quarterly Report on Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared under generally accepted accounting principles have been
condensed or omitted pursuant to such principles and regulations. The information furnished
reflects all adjustments, which are, in the opinion of management, of a normal recurring nature and
necessary for a fair presentation of the Companys consolidated financial position, results of
operations and cash flows for the interim periods presented. Results for interim periods are not
necessarily an indication of results to be expected for the year. This Quarterly Report on Form
10-Q should be read in conjunction with the Companys Annual Report on Form 10-K for the year ended
December 31, 2010, as amended (the 2010 10-K).
The Company evaluates all subsequent events prior to filing.
NOTE 2 SHAREHOLDERS EQUITY
Share-Based Compensation
As of March 31, 2011, 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 March 31, 2011, 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 10 years from the date of grant. Shares in respect of equity awards are issued
from authorized shares reserved for such issuance or treasury shares.
The EI Plan, which became effective July 10, 2008 (at which time no further awards could be
made under the 2004 Option Plan), provides for awards in any one or a combination of: (a) Stock
Options, (b) Stock Appreciation Rights, (c) Restricted Stock, (d) Stock Units, (e) Non-Restricted
Stock, and/or (f) Dividend Equivalent Rights. Any award under the EI Plan may, as determined by the
committee administering the EI Plan (the Plan Committee) in its sole discretion, constitute a
Performance-Based Award (an award that qualifies for the performance-based compensation exemption
of Section 162(m) of the Internal Revenue Code of 1986, as amended). All awards granted under the
EI Plan 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 March 31, 2011, 1,084,699
shares were available for issuance under the EI Plan.
6
KID BRANDS, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 March 31, 2011, 60,947 shares were
available for issuance under the 2009 ESPP.
Impact on Net Income
The components of share-based compensation expense follows (in thousands):
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Three Months Ended March 31, |
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2011 |
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2010 |
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Stock option expense |
|
$ |
116 |
|
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$ |
159 |
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Restricted stock expense |
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79 |
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|
100 |
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Restricted stock unit expense |
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59 |
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20 |
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SAR expense |
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178 |
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77 |
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2009 ESPP expense |
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34 |
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33 |
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Total share-based payment expense |
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$ |
466 |
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$ |
389 |
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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 three
months ended March 31, 2011 and 2010. The relevant Financial Accounting Standards Board (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.
The fair value of stock options and stock appreciation rights (SARs) granted under the Plans
or otherwise is estimated on the date of grant using a Black-Scholes-Merton options pricing model
using assumptions with respect to dividend yield, risk-free interest rate, volatility and expected
term, which are included below for SARs only, as there were no stock options issued during the
three months ended March 31, 2011 or 2010. Expected volatilities are calculated based on the
historical volatility of the Companys stock. The expected term of options or SARs granted is
derived from the vesting period of the award, as well as historical exercise behavior, and
represents the period of time that the award is expected to be outstanding. Management monitors
exercises and employee termination patterns to estimate forfeiture 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 award.
Stock Options
Stock options are rights to purchase the Companys Common Stock in the future at a
predetermined per share exercise price (generally the closing price for such stock on the New York
Stock Exchange on the date of grant). Stock options may be either: Incentive Stock Options
(stock options which comply with Section 422 of the Code), or Nonqualified Stock Options (stock
options which are not Incentive Stock Options). There were no stock options issued during the
three months ended March 31, 2011 and 2010.
As of March 31, 2011, the total remaining unrecognized compensation cost related to unvested
stock options, net of forfeitures, was approximately $1.2 million, and is expected to be recognized
over a weighted-average period of 2.1 years.
Activity regarding outstanding stock options for the three months ended March 31, 2011 is as
follows:
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All Stock Options Outstanding |
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Weighted Average |
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Shares |
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Exercise Price |
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Options Outstanding as of December 31, 2010 |
|
|
704,175 |
|
|
$ |
13.53 |
|
Options Granted |
|
|
|
|
|
|
|
|
Options Forfeited/Cancelled* |
|
|
(37,200 |
) |
|
$ |
13.65 |
|
|
|
|
|
|
|
|
Options Outstanding as of March 31, 2011 |
|
|
666,975 |
|
|
$ |
13.52 |
|
|
|
|
|
|
|
|
|
Option price range at March 31, 2011 |
|
$ |
6.63-$34.05 |
|
|
|
|
|
|
|
|
* |
|
See disclosure below regarding forfeitures. |
7
KID BRANDS, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The aggregate intrinsic value of the unvested and vested outstanding stock options was $59,250
and $239,250 at March 31, 2011 and December 31, 2010, respectively. The aggregate intrinsic value
is the total pretax value of in-the-money stock options,
which is the difference between the fair value at the measurement date and the exercise price
of each stock option. No stock options were exercised during the three months ended March 31, 2011
or 2010, respectively. There were no stock options vested for the three months ended March 31,
2011.
A summary of the Companys unvested stock options at March 31, 2011 and changes during the
three months ended March 31, 2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Grant |
|
Unvested stock options |
|
Options |
|
|
Date Fair Value |
|
Unvested at December 31, 2010 |
|
|
278,200 |
|
|
$ |
5.22 |
|
Granted |
|
|
|
|
|
$ |
|
|
Vested |
|
|
|
|
|
$ |
|
|
Forfeited/cancelled* |
|
|
(16,800 |
) |
|
$ |
5.21 |
|
|
|
|
|
|
|
|
Unvested stock options at March 31, 2011 |
|
|
261,400 |
|
|
$ |
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 three months ended March 31, 2011 and 2010, respectively, there were no shares of
restricted stock issued under the EI Plan or otherwise. At March 31, 2011 and December 31, 2010,
there were 26,690 and 29,270 shares of unvested restricted stock outstanding, respectively. 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.
A summary of the Companys unvested restricted stock at March 31, 2011 and changes during the
three months ended March 31, 2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Grant |
|
Unvested Restricted Stock |
|
Restricted Stock |
|
|
Date Fair Value |
|
Unvested at December 31, 2010 |
|
|
29,270 |
|
|
$ |
15.91 |
|
Granted |
|
|
|
|
|
$ |
|
|
Vested |
|
|
|
|
|
$ |
|
|
Forfeited/cancelled* |
|
|
(2,580 |
) |
|
$ |
13.65 |
|
|
|
|
|
|
|
|
Unvested restricted stock at March, 31, 2011 |
|
|
26,690 |
|
|
$ |
16.13 |
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
See disclosure below regarding forfeitures. |
As of March 31, 2011, the total remaining unrecognized compensation cost related to issuances
of restricted stock was approximately $0.3 million, and is expected to be recognized over a
weighted-average period of 0.9 years.
Restricted Stock Units
A Restricted Stock Unit (RSU) is a notional account representing a participants conditional
right to receive at a future date one (1) share of Common Stock or its equivalent in value. Shares
of Common Stock issued in settlement of an RSU may be issued with or without other consideration as
determined by the Plan Committee in its sole discretion. RSUs may be settled in the sole discretion
of the Plan Committee: (i) by the distribution of shares of Common Stock equal to the grantees
RSUs, (ii) by a lump sum payment of an amount in cash equal to the fair value of the shares of
Common Stock which would otherwise be distributed to the grantee, or (iii) by a combination of cash
and Common Stock. The RSUs issued under the EI Plan vest (and will be settled) ratably over a
5-year period commencing from the date of grant and are equity classified in the consolidated
balance sheets. There were
10,000 and 147,250 RSUs issued to employees of the Company during the three months ended
March 31, 2011 and 2010, respectively.
8
KID BRANDS, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value of each RSU grant is estimated on the grant date. The fair value is set using
the closing price of the Companys Common Stock on the New York Stock Exchange on the date of
grant. Compensation expense for RSUs is recognized ratably over the vesting period, based upon the
market price of the shares underlying the awards on the date of grant.
A summary of the Companys unvested RSUs at March 31, 2011 and changes during the three months
ended March 31, 2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Restricted |
|
|
Average |
|
|
|
Stock |
|
|
Grant-Date |
|
|
|
Units |
|
|
Fair Value |
|
Unvested at December 31, 2010 |
|
|
174,730 |
|
|
$ |
5.22 |
|
Granted |
|
|
10,000 |
|
|
$ |
8.50 |
|
Vested |
|
|
(26,250 |
) |
|
$ |
5.01 |
|
Forfeited/cancelled* |
|
|
(13,400 |
) |
|
$ |
5.03 |
|
|
|
|
|
|
|
|
Unvested at March 31, 2011 |
|
|
145,080 |
|
|
$ |
5.50 |
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
See disclosure below regarding forfeitures. |
As of March 31, 2011, 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
3.7 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 and unless terminated earlier, expire on
the tenth anniversary of the date of grant. SARs are typically granted 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. There were 50,000 and 423,250 SARs granted during the three months ended March 31, 2011, and
2010, respectively. SARs are accounted for at fair value at the date of grant in the consolidated
statement of operations, are generally amortized on a straight line basis over the vesting term,
and are equity-classified in the consolidated balance sheets.
The assumptions used to estimate the weighted average fair value of the SARs granted during
the three months ended March 31, 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Risk-free interest rate |
|
|
1.03 |
% |
|
|
2.36 |
% |
Volatility |
|
|
1.04 |
% |
|
|
0.830 |
% |
Expected term (years) |
|
|
3.0 |
|
|
|
5.0 |
|
Weighted-average fair value of SARs granted |
|
$ |
5.42 |
|
|
$ |
3.34 |
|
9
KID BRANDS, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Activity regarding outstanding SARs for the three months ended March 31, 2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
All SARs Outstanding |
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Shares |
|
|
Exercise Price |
|
SARs Outstanding as of December 31, 2010 |
|
|
1,111,513 |
|
|
$ |
4.17 |
|
SARs Granted |
|
|
50,000 |
|
|
$ |
8.50 |
|
SARs Exercised |
|
|
(1,100 |
) |
|
$ |
5.54 |
|
SARs Forfeited/Cancelled* |
|
|
(133,600 |
) |
|
$ |
2.82 |
|
|
|
|
|
|
|
|
SARs Outstanding as of March 31, 2011 |
|
|
1,026,813 |
|
|
$ |
4.55 |
|
|
|
|
|
|
|
|
|
SAR price range at March 31, 2011 |
|
$ |
1.36-9.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
See disclosure below regarding forfeitures. |
The aggregate intrinsic value of the unvested and vested outstanding SARs at March 31, 2011
and December 31, 2010 was $3.0 million and $4.9 million, respectively. The aggregate intrinsic
value is the total pretax value of in-the-money SARs, which is the difference between the fair
value at the measurement date and the exercise price of each SAR. There were 1,100 (all of which
were settled in cash) and 0 SARs exercised for the three months ended March 31, 2011 and 2010,
respectively.
A summary of the Companys unvested SARs at March 31, 2011 and changes during the three months
ended March 31, 2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Grant |
|
|
|
Shares |
|
|
Date Value Per Share |
|
Unvested at December 31, 2010 |
|
|
888,830 |
|
|
$ |
2.90 |
|
Granted |
|
|
50,000 |
|
|
$ |
5.42 |
|
Vested |
|
|
(130,550 |
) |
|
$ |
2.31 |
|
Forfeited* |
|
|
(84,200 |
) |
|
$ |
2.04 |
|
|
|
|
|
|
|
|
Unvested at March 31, 2011 |
|
|
724,080 |
|
|
$ |
3.28 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
See disclosure below regarding forfeitures. |
As of March 31, 2011, there was approximately $2.2 million of unrecognized compensation cost
related to unvested SARs, which is expected to be recognized over a weighted-average period of 3.5
years.
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 unvested
and/or vested but unexercised options/SARs. Pursuant to the 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 charts set forth 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
outstanding 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.
10
KID BRANDS, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 or the right to purchase more than 25,000 shares 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 March 31, 2011, 60,947 shares
were available for issuance under the 2009 ESPP. At March 31, 2011, there were 126 enrolled
participants in the 2009 ESPP.
The fair value of each option granted under the 2009 ESPP is estimated on the date of grant
using the Black-Scholes-Merton option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Risk-free interest rate |
|
|
0.29 |
% |
|
|
0.45 |
% |
Volatility |
|
|
73.5 |
% |
|
|
89.2 |
% |
Expected term (years) |
|
|
1.0 |
|
|
|
1.0 |
|
Expected volatilities are calculated based on the historical volatility of the Companys
stock. The risk-free interest rate is based on the U.S. Treasury yield with a term that is
consistent with the expected life of the options. The expected life of options granted under the
2009 ESPP is one year, or the equivalent of the annual plan year.
NOTE 3 WEIGHTED AVERAGE COMMON SHARES
Earnings per share (EPS) under the two-class method, 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 outstanding, earnings are allocated to both
common shares and participating securities based on the respective number of weighted-average
shares outstanding for the period. Participating securities include unvested restricted stock
awards where, like the Companys restricted stock awards, such awards carry a right to receive
non-forfeitable dividends, if declared.
With respect to RSUs, as the right to receive dividends or dividend equivalents is contingent
upon vesting or exercise, in accordance with the applicable accounting standard, the Company does
not include unvested RSUs in the calculation of basic earnings per share. To the extent such RSUs
are settled in stock, upon settlement, such stock is included in the calculation of basic earnings
per share.
The weighted average common shares outstanding included in the computation of basic and
diluted net (loss)/income per share is set forth below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Weighted average common shares outstanding-Basic |
|
|
21,633 |
|
|
|
21,578 |
|
Dilutive effect of common shares issuable upon
exercise of stock options, RSUs and SARs |
|
|
|
|
|
|
233 |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding assuming
dilution |
|
|
21,633 |
|
|
|
21,811 |
|
|
|
|
|
|
|
|
The computation of diluted net (loss) per common share for the three months ended March 31,
2011 did not include stock options and stock appreciation rights to purchase an aggregate of
approximately 1.8 million shares of common stock, because their inclusion would have been
anti-dilutive due to the loss incurred during the period. The computation of diluted net income per
common share for the three months ended March 31, 2010 did not include stock options and stock
appreciation rights to purchase an aggregate of approximately 1.3 million shares of common stock
because their inclusion would have been anti-dilutive due to their exercise price exceeding the
average market price of the common stock during such period.
11
KID BRANDS, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 DEBT
Consolidated long-term debt at March 31, 2011 and December 31, 2010 consisted of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Term Loan (Credit Agreement) |
|
$ |
50,750 |
|
|
$ |
54,000 |
|
Note Payable (CoCaLo purchase) |
|
|
533 |
|
|
|
526 |
|
|
|
|
|
|
|
|
Total |
|
|
51,283 |
|
|
|
54,526 |
|
Less current portion |
|
|
13,533 |
|
|
|
13,526 |
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
37,750 |
|
|
$ |
41,000 |
|
|
|
|
|
|
|
|
At March 31, 2011 and December 31, 2010, there was approximately $22.7 million and $18.6
million, respectively, borrowed under the Revolving Loan (defined below), which is classified as
short-term debt. At March 31, 2011 and December 31, 2010, Revolving Loan Availability was $27.2
million and $28.3 million, respectively.
As of March 31, 2011 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
March 31, 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2011 |
|
|
|
LIBOR Loans |
|
|
Base Rate Loans |
|
Revolving Loan |
|
|
3.01 |
% |
|
|
5.00 |
% |
Term Loan |
|
|
3.06 |
% |
|
|
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
March 31, 2011, 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 quarterly minimum Fixed Charge Coverage Ratio of 1.35:1.00; (b) a
quarterly maximum Total Debt to Covenant EBITDA Ratio of 2.75:1.00; and (c) an annual capital
expenditure limitation.
Due to the facts and circumstances discovered in 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 in the fourth
quarter and full year ended December 31, 2010 for anticipated import duties and interest related
thereto, and additional amounts and penalties that may be required by U.S. Customs and Border
Protection (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 fees of $131,000
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.
12
KID BRANDS, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 any earnout
consideration paid in respect of KIDs 2008 purchase of LaJobi (LaJobi Earnout Consideration)
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 and Border Protection (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 LaJobi Earnout Consideration,
any earnout consideration in respect of KIDs 2008 acquisition of CoCaLo (CoCaLo 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 (LaJobi or CoCaLo) was limited to excess revolving loan availability being equal to
or exceeding $9,000,000, and such requirement with respect to the payment of any CoCaLo Earnout
Consideration remains unchanged). See Note 10 for a discussion of the LaJobi Earnout Consideration
(and related 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 earned Earnout
Consideration (LaJobi or CoCaLo), 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 were deemed to be in
compliance with all applicable financial covenants in the Credit Agreement as of December 31, 2010
(see discussion above). The Borrowers were in compliance with all applicable financial covenants as
of March 31, 2011.
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 resulted in income of approximately $0.5 million for the three months
ended March 31, 2010, which was included in interest expense for such period in the consolidated
statement of operations.
13
KID BRANDS, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
$71,000 for the existing interest rate agreement for the three months ended March 31, 2011 was
recorded as a component of comprehensive (loss)/ income, and is expected to be reclassified into
earnings within the next twelve months (see Note 7).
The Credit Agreement is secured by substantially all of the Companys domestic assets,
including a pledge of the capital stock of each Borrower and RB Trademark HoldCo, LLC (Licensor),
a wholly-owned subsidiary of KID that owns the Russ® and Applause® trademarks
and trade names, and licenses such intellectual property to The Russ Companies, Inc. (TRC), the
purchaser of KIDs former gift business, 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. The fees for the Amendment ($131,000), were recorded as
expense in the consolidated statements of operations for the three months ended March 31,
2011.
NOTE 5 INTANGIBLE ASSETS
As of March 31, 2011 and December 31, 2010, the components of intangible assets consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
March 31, |
|
|
December 31, |
|
|
|
Amortization Period |
|
2011 |
|
|
2010 |
|
Sassy trade name |
|
Indefinite life |
|
$ |
5,400 |
|
|
$ |
5,400 |
|
Kids Line customer relationships |
|
20 years |
|
|
27,213 |
|
|
|
27,601 |
|
Kids Line trade name |
|
Indefinite life |
|
|
5,300 |
|
|
|
5,300 |
|
LaJobi trade name |
|
Indefinite life |
|
|
18,600 |
|
|
|
18,600 |
|
LaJobi customer relationships |
|
20 years |
|
|
10,795 |
|
|
|
10,954 |
|
LaJobi royalty agreements |
|
5 years |
|
|
1,166 |
|
|
|
1,278 |
|
CoCaLo trade name |
|
Indefinite life |
|
|
5,800 |
|
|
|
5,800 |
|
CoCaLo customer relationships |
|
20 years |
|
|
2,160 |
|
|
|
2,190 |
|
CoCaLo foreign trade name |
|
Indefinite life |
|
|
31 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
$ |
76,465 |
|
|
$ |
77,154 |
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense was approximately $689,000 and $690,000 for the three months
ended March 31, 2011 and 2010, respectively.
Indefinite-lived intangible assets are reviewed for impairment at least annually, and more
frequently if a triggering event occurs indicating that an impairment may exist. The Companys
annual impairment testing is performed in the fourth quarter of each year (unless specified
triggering events warrant more frequent testing). All intangible assets, both definite-lived and
indefinite-lived, were tested for impairment in the fourth quarter of 2010. There were no impairments of intangible assets in 2010.
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 the Company record additional impairment charges to the Companys assets. The Company will
continue to monitor circumstances and events in future periods to determine whether additional
asset impairment testing or recordation is warranted.
14
KID BRANDS, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 GEOGRAPHIC INFORMATION AND CONCENTRATION OF RISK
The following tables present net sales and total assets of the Company by geographic area (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months ended March 31, |
|
Net sales |
|
2011 |
|
|
2010 |
|
Net domestic sales |
|
$ |
56,988 |
|
|
$ |
58,854 |
|
Net foreign sales
(Australia and United
Kingdom)* |
|
|
2,848 |
|
|
|
2,620 |
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
59,836 |
|
|
$ |
61,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
Assets |
|
2011 |
|
|
2010 |
|
Domestic assets |
|
$ |
233,973 |
|
|
$ |
237,982 |
|
Foreign assets (Australia and United Kingdom) |
|
|
5,611 |
|
|
|
4,514 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
239,584 |
|
|
$ |
242,496 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Excludes export sales from the United States. |
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 Companys consolidated net sales by product category, as a percentage of total
consolidated net sales, for the three months ended March 31, 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
Soft Good Basics |
|
|
36.7 |
% |
|
|
41.7 |
% |
Hard Good Basics |
|
|
35.5 |
% |
|
|
38.2 |
% |
Accessories and Décor |
|
|
10.7 |
% |
|
|
9.8 |
% |
Toys and Entertainment |
|
|
15.6 |
% |
|
|
9.6 |
% |
Other |
|
|
1.5 |
% |
|
|
0.7 |
% |
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
Customers who account for a significant percentage of the Companys net sales are shown in the
table below:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
Toys R Us, Inc. and Babies R Us, Inc. |
|
|
38.5 |
% |
|
|
45.4 |
% |
Walmart |
|
|
13.9 |
% |
|
|
6.8 |
% |
Target |
|
|
9.6 |
% |
|
|
10.9 |
% |
The loss of these customers or any other significant customers, or a significant reduction in
the volume of business conducted with such customers, could have a material adverse impact on the
Company. The Company does not normally require collateral or other security to support credit
sales.
As part of its ongoing risk assessment procedures, the Company monitors concentrations of
credit risk associated with financial institutions with which it conducts business. The Company
seeks to avoid 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.
15
KID BRANDS, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the three months ended March 31, 2011, approximately 78% of the Companys dollar volume
of purchases was attributable to manufacturing in the Peoples Republic of China (PRC), compared
to 70% for the three months ended March 31, 2010. The PRC currently enjoys permanent normal trade
relations (PNTR) status under U.S. tariff laws, which provides a favorable category of U.S.
import duties. The loss of such PNTR status would result in a substantial increase in the import
duty for
products manufactured for the Company in the PRC and imported into the United States and would
result in increased costs for the Company. In 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 each of the first quarter of 2011, and the fourth
quarter and year ended December 31, 2010, for anticipated anti-dumping duties(and related interest)
and other actions taken by the Company in connection with a Focused Assessment of LaJobis import
practices, see Note 10. The Company has discontinued the practices that resulted in the charge for
anticipated anti-dumping duties.
The supplier accounting for the greatest dollar volume of the Companys purchases accounted
for approximately 18% of such purchases for the three months ended March 31, 2011 and approximately
20% for the three months ended March 31, 2010. The five largest suppliers accounted for
approximately 45% of the Companys purchases in the aggregate for the three months ended March 31,
2011 and 49% for the three months ended March 31, 2010.
NOTE 7 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
agreements 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.
In accordance with the fair value hierarchy described above, the following table shows the
fair value of the Companys current interest rate swap agreement as of March 31, 2011 and December
31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of March 31, 2011 |
|
|
|
March 31, 2011 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Interest Rate Swap Agreement |
|
$ |
(71 |
) |
|
$ |
|
|
|
$ |
(71 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2010 |
|
|
|
December 31, 2010 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Interest Rate Swap Agreement |
|
$ |
(87 |
) |
|
$ |
|
|
|
$ |
(87 |
) |
|
$ |
|
|
The fair values of the current interest rate swap agreement of $71,000 and $87,000 at March
31, 2011 and December 31, 2010, respectively are included in the Companys accrued expenses on the
balance sheet for the relevant period. Changes between the cost of the existing interest rate swap
agreement and its fair value resulted in unrealized net loss of $71,000 for the three months ended
March 31, 2011, which was recorded as a component of comprehensive (loss)/income, and is expected
to be reclassified into earnings within the next twelve months.
16
KID BRANDS, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash and cash equivalents, trade accounts receivable, inventory, income tax receivable, trade
accounts payable, accrued expenses and short-term debt are reflected in the consolidated balance
sheets at carrying value, which approximates fair value due to the short-term nature of these
instruments.
The carrying value of the Companys term loan borrowings approximates fair value because
interest rates under the term loan borrowings are variable, based on prevailing market rates.
There were no material changes to the Companys valuation techniques during the three months
ended March 31, 2011 compared to those used in prior periods.
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. 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 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 less than twelve months.
The interest rate swap 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 three months ended March 31, 2011. 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).
During the three months ended March 31, 2011, the Company did not discontinue any cash flow
hedges.
An unrealized net loss of $71,000 for the Companys current interest rate swap agreement,
recorded as a component of comprehensive income, for the three months ended March 31, 2011, 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.
17
KID BRANDS, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Changes between cost and fair value of this previous interest rate swap resulted in income of
$508,000 for the three months ended March 31, 2010, and such amount is included in interest expense in the
unaudited consolidated statements of operations for such period.
NOTE 8 COMPREHENSIVE INCOME
Comprehensive income, representing all changes in Shareholders Equity during the period other
than changes resulting from the issuance or repurchase of the Companys common stock and payment of
dividends, is reconciled to net income for the three months ended March 31, 2011 and 2010 as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
Net (loss) income |
|
$ |
(213 |
) |
|
$ |
3,468 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
Unrealized gain on derivative |
|
|
16 |
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(37 |
) |
|
|
97 |
|
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
$ |
(234 |
) |
|
$ |
3,565 |
|
|
|
|
|
|
|
|
NOTE 9 INCOME TAXES
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.
The Company operates in multiple tax jurisdictions, both within the United States and outside
of the United States, and faces audits from various tax authorities regarding the inclusion of
certain items in taxable income, the deductibility of certain expenses, transfer pricing, the
utilization and carryforward of various tax credits, and the utilization of various carryforward
items such as charitable contributions and net operating loss carryforwards (NOLs). At March 31,
2011, the amount of liability for unrecognized tax benefits related to federal, state, and foreign
taxes was approximately $718,000 including approximately $164,000 of accrued interest.
Activity regarding the liability for unrecognized tax benefits for the three months ended
March 31, 2011 is as follows:
|
|
|
|
|
|
|
(in thousands) |
|
Balance at December 31, 2010 |
|
$ |
542 |
|
Increase related to prior year tax provisions |
|
|
176 |
|
|
|
|
|
Balance at March 31, 2011 |
|
$ |
718 |
|
|
|
|
|
The Company is currently under examination in several tax jurisdictions and remains subject to
examination until the statute of limitations expires for the respective tax jurisdiction. In
addition, the Company has been informed by the Internal Revenue Service that its consolidated
federal income tax return for 2009 will be audited. Based upon the expiration of statutes of
limitations and/or the conclusion of tax examinations in several jurisdictions, the Company
believes it is reasonably possible that the total amount of previously unrecognized tax benefits
discussed above may decrease by up to $681,000 within twelve months of March 31, 2011 and such
amount is reflected on the Companys consolidated balance sheet as current taxes payable.
The Companys policy is to classify interest and penalties related to unrecognized tax
benefits as income tax expense.
The provision for income tax for the three months ended March 31, 2011 was $52,000 on a loss
before tax of $161,000. The difference between the effective tax rate for the three months ended
March 31, 2011 and the U.S. federal tax rate primarily relates to an increase for unrecognized tax
benefits; offset by a benefit for state taxes. The provision for income tax for the three months
ended March 31, 2010 was $2.2 million on profit before tax of $5.7 million. The difference between
the effective tax rate of 39% for the three months ended March 31, 2010 and the U.S. federal tax
rate primarily relates to the provision for state taxes, net of federal tax benefit.
18
KID BRANDS, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 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.
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, the Company has recorded charges: (i) of approximately $382,000
(which includes approximately $55,000 of interest) for the quarter ended March 31, 2011; and (ii)
of approximately $6,860,000 (which includes approximately $340,000 of interest) for the fourth
quarter and year ended December 31, 2010, in each case for import duties the Company anticipates
will be owed to U.S. Customs by LaJobi in respect of the matters discussed above. These charges
were recorded in cost of sales (other than the interest portions, which were recorded in interest
expense), and adversely affected gross margins and net (loss)/ income for the affected periods. 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 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 its 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; however, to date, the Company is unaware of any such adverse actions.
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 concluded that no LaJobi Earnout Consideration (and
therefore no finders fee) was payable. Accordingly, the Company did not record any amounts related
thereto in the Companys financial statements for the fourth quarter and year ended December 31,
2010. The Company previously disclosed a potential earnout payment of approximately $12 to $15
million in the aggregate relating to its acquisitions of LaJobi and CoCaLo, substantially all of
which was estimated to relate to LaJobi. 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, although the Company believes that, in any event, it would have additional claims
that it could assert against the LaJobi seller for misconduct. 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 4 for a discussion of a waiver and amendment to the Credit Agreement 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 business and staffing practices.
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, the Company utilized the full time services of approximately 28 employees of L&J
Industries for such services. The Company ceased making direct payments to L&J Industries in June
2010, when it became aware that L&J Industries had ceased operations. However, the Company
continued to pay for the services of all or substantially all 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.
19
KID BRANDS, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LaJobi has since discontinued the above-described manner of paying individuals providing such
services in the PRC, Hong Kong, Vietnam and Thailand, 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
and 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 $44.1 million in outstanding purchase commitments at March 31,
2011, consisting primarily of purchase orders for inventory.
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 $19.7 million, of which
approximately $12.4 million remained unpaid at March 31, 2011. Royalty expense for the three
months ended March 31, 2011, and 2010 was $1.8 million, and $1.9 million, respectively.
In connection with the sale of the Companys former gift business (the Gift Sale) to TRC,
KID and Russ Berrie U.S. Gift, Inc. (U.S. Gift), the Companys subsidiary at the time (and
currently a subsidiary of TRC), 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 potentially obligated for
rental and other specified payments due thereunder (to the extent they are owed but have not been
paid by U.S. Gift) until the termination of such Lease became effective (December 23, 2010). It is
the Companys understanding that U.S. Gift may have failed to pay certain amounts due and
outstanding on the termination date, for which the Company may remain contingently liable. See
Note 13, Subsequent Events below, for a discussion of the voluntary petition for bankruptcy filed
by TRC in April of 2011, a demand for payment received by KID from the landlord under the Lease,
and other developments related to and/or resulting from such bankruptcy filing.
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 contracts described in the preceding sentence as of March 31, 2011, nor is KID aware of any
remaining potential obligations (other than the Lease described above), but there can be no assurance that payments will not be required
of KID in the future with respect thereto.
20
KID BRANDS, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of March 31, 2011, 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 11 RECENTLY ISSUED ACCOUNTING STANDARDS
The Company has implemented all new accounting pronouncements that are in effect and that may
materially impact its financial statements, and does not believe that there are any other new
accounting pronouncements or changes in accounting pronouncements issued during the three months
ended March 31, 2011, that might have a material impact on the Companys financial position,
results of operations or cash flows.
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 all or substantially all of such individuals, and is
in the process of establishing subsidiaries in the PRC and Thailand, through which the Company
intends to directly employ these quality control individuals in the future. For the three months
ended March 31, 2010, the Company incurred costs, recorded in cost of goods sold, aggregating
approximately $311,000 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. During 2010, this company is
owned by unrelated parties but the spouse of Renee Pepys Lowe is still a manager of the business.
For the three months ended March 31, 2010, CoCaLo paid approximately $0.6 million, to such company
for these services.
TRC and KID entered into a transition services agreement in connection with the Gift Sale,
pursuant to which TRC and KID provided certain specified services to each other, including, among
other things, the sublease of certain office and warehouse space (and related services) by KID from
TRC and its subsidiaries. As of March 31, 2011, KID has terminated all subleases of space from TRC,
and is no longer utilizing TRC services for operational support. KID has accrued $1.7 million and
$1.5 million at March 31, and December 31, 2010, respectively on its financial statements in
connection therewith. See Note 13, Subsequent Events.
NOTE 13 SUBSEQUENT EVENTS
On April 2, 2011, the final installment of the CoCaLo Note was paid in full.
On
April 21, 2011, TRC, the acquirer of the Companys former gift business, and TRCs domestic
subsidiaries, filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code (the
Code) in the United States Bankruptcy Court for the District of New Jersey (the Bankruptcy
Filing).
21
KID BRANDS, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As has been previously disclosed, KID and U.S. Gift sent a notice of termination on December
22, 2008 to the landlord with respect to the Lease. Although the Lease became the obligation of TRC
(through its ownership of U.S. Gift), KID remains potentially obligated for rental and other
specified payments due thereunder (to the extent they are owed but have not been paid by U.S. Gift)
until the termination of such Lease became effective (December 23, 2010). On April 27, 2011, KID
received a letter on behalf of the landlord under the Lease (the Demand Letter), demanding
payment by KID of specified amounts claimed to be owed to such landlord by U.S. Gift. The Demand
Letter alleges, among other things, that TRC has failed to pay specified rent and other additional
charges in an aggregate amount of approximately $5.9 million (including, among other things,
approximately $3.8 million in rent and other charges for periods subsequent to the effective date
of the termination of the Lease, for which KID does not believe it is responsible, and
approximately $1.0 million in specified repairs (Repair Charges)), and demands payment from KID
for all such amounts.
To the extent that: (i) the rental and related amounts described in the Demand Letter as due
and owing by U.S Gift under the Lease for periods on or prior to the termination date thereof
(Pre-Termination Amounts) are in fact due and owing, and no further amounts in respect of the
Lease are paid by TRC or U.S. Gift; (ii) no accommodation with respect to Pre-Termination Amounts
is secured from the landlord; (iii) KIDs potential defenses to payment of Pre-Termination Amounts
are not accorded any weight, (iv) KID is not required to pay any rental or related amounts
specified in the Demand Letter other than Pre-Termination Amounts, and (v) no amounts paid in
respect thereof by KID are reimbursed by TRCs bankrupt estate, we currently estimate that KIDs
maximum potential liability for rental and related amounts under the Lease is approximately $1.0
million. With respect to the alleged Repair Charges, KID is currently unable to assess its
potential liability therefor, if any, under the Lease. As a result, the specific amount of any
payments that might potentially be required to be made by KID with respect to the Lease 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 TRCs estate under the purchase
agreement governing the Gift Sale as an unsecured creditor. As a result, KID may not recover any
such amounts in a timely manner, or at all.
22
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ITEM 2. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The financial and business analysis below provides information which we believe is relevant to
an assessment and understanding of our consolidated financial condition, changes in financial
condition and results of operations. This financial and business analysis should be read in
conjunction with our Unaudited Consolidated Financial Statements and accompanying Notes to
Unaudited Consolidated Financial Statements set forth in Part I, Financial Information, Item 1,
Financial Statements of this Quarterly Report on Form 10-Q, and our Annual Report on Form 10-K for
the year ended December 31, 2010, as amended (the 2010 10-K), including the consolidated
financial statements and notes thereto.
OVERVIEW
We are a leading designer, importer, marketer and distributor of branded infant and juvenile
consumer products. Through our four wholly-owned operating subsidiaries Kids Line, LLC (Kids
Line); LaJobi, Inc. (LaJobi); Sassy, Inc. (Sassy); and CoCaLo, Inc. (CoCaLo) we design
and market branded infant and juvenile products in a number of complementary categories including,
among others: infant bedding and related nursery accessories and décor, 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®. Our products are sold primarily to
retailers in North America, the United Kingdom (U.K.) and Australia, including large, national
retail accounts and independent retailers (including toy, specialty, food, drug, apparel and other
retailers). We maintain a direct sales force and distribution network to serve our customers in the
United States, the 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.
We generated net sales of approximately $59.8 million in the three months ended March 31,
2011. International sales, defined as sales outside of the United States, including export sales,
constituted 9.8% and 8.5% of our net sales for the three months ended March 31, 2011 and 2010,
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.
We operate in one segment: the infant and juvenile business. Consistent with our strategy of
building a confederation of complementary businesses, each subsidiary in our infant and juvenile
business is operated substantially independently by a separate group of managers. Our senior
corporate management, together with senior management of our subsidiaries, coordinates the
operations of all of our businesses and seeks to identify cross-marketing, procurement and other
complementary business opportunities.
Aside from funds provided by our senior credit facility, revenues from the sale of products
have historically been the major source of cash for the Company, and cost of goods sold and payroll
expenses have been the largest uses of cash. As a result, operating cash flows primarily depend on
the amount of revenue generated and the timing of collections, as well as the quality of customer
accounts receivable. The timing and level of the payments to suppliers and other vendors also
significantly affect operating cash flows. Management views operating cash flows as a good
indicator of financial strength. Strong operating cash flows provide opportunities for growth both
internally and through acquisitions, and also enable us to pay down debt.
We do not ordinarily sell our products on consignment (although we may do so in limited
circumstances), and we ordinarily accept returns only for defective merchandise. In the normal
course of business, we grant certain accommodations and allowances to certain customers in order to
assist these customers with inventory clearance or promotions. Such amounts, together with
discounts, are deducted from gross sales in determining net sales.
Our products are manufactured by third parties, principally located in the PRC and other
Eastern Asian countries. Our purchases of finished products from these manufacturers are primarily
denominated in U.S. dollars. Expenses for these manufacturers are primarily denominated in Chinese
Yuan. As a result, any material increase in the value of the Yuan relative to the U.S. dollar, as
occurred in past periods, or higher rates of inflation in the country of origin, would increase our
expenses, and therefore, adversely affects our profitability. Conversely, a small portion of our
revenues are generated by our subsidiaries in Australia and the U.K. and are denominated primarily
in their local currencies. Any material increase in the value of the U.S. dollar relative to the
value of the Australian dollar or British pound would result in a decrease in the amount of these
revenues upon their translation into U.S. dollars for reporting purposes. See Item 1A, Risk Factors
Currency exchange rate fluctuations could increase
our expenses, of the 2010 10-K.
23
Our gross profit may not be comparable to those of other entities, since some entities include
the costs of warehousing, outbound handling costs and outbound shipping costs in their costs of
sales. We account for the above expenses as operating expenses and classify them under selling,
general and administrative expenses. The costs of warehousing, outbound handling costs and
outbound shipping costs were $2.1 million and $1.7 million, for the three months ended March 31,
2011 and 2010, respectively. In addition, the majority of outbound shipping costs are paid by our
customers, as many of our customers pick up their goods at our distribution centers.
If our suppliers experience increased raw materials, labor or other costs, and pass along such
cost increases to us through higher prices for finished goods, our cost of sales would increase.
Many of our suppliers are currently experiencing significant cost pressures related to labor rates,
raw material costs and currency inflation, which has and, we believe, will continue to put pressure
on our gross margins, at least for the foreseeable future. To the extent we are unable to
pass such price increases along to our customers or otherwise reduce our cost of goods, our gross
profit margins would decrease. Our gross profit margins have also been impacted in recent periods
by: (i) a shift in product mix toward lower margin products, including increased sales of licensed
products, which typically generate lower margins as a result of required royalty payments (which
are recorded in cost of goods sold); (ii) our LaJobi subsidiary, which has experienced significant
sales growth but which also typically generates lower gross margins, on average, than our other
business units, due to the nature of the furniture category; (iii) increased pressure from major
retailers, largely as a result of prevailing economic conditions, to offer additional mark downs
and other pricing accommodations to clear existing inventory and secure new product placements; and
(iv) increased freight cost and other costs of goods. We believe that our future gross margins
will continue to be under pressure as a result of the items listed above, and such pressures may be
more acute over the next several quarters as a result of anticipated product cost increases. See
Note 10 of the Notes to Unaudited Consolidated Financial Statements for a description of accruals
for anticipated customs duty and interest payment requirements related to certain wooden furniture
imported by our LaJobi subsidiary from the PRC (until January of 2011), which accruals have further
adversely impacted our gross margins and net (loss)/ income for the three months ended March 31,
2011, and the fourth quarter and year ended December 31, 2010.
We continue to seek to mitigate margin pressure through the development of new products that
can command higher pricing, the identification of alternative, lower-cost sources of supply,
re-engineering of certain existing products to reduce manufacturing costs and, where possible,
price increases. Particularly in the mass market, our ability to increase prices or resist
requests for mark-downs and/or other allowances is limited by market and competitive factors, and,
while we have implemented selective price increases and will likely continue to seek to do so, we
have generally focused on maintaining (or increasing) shelf space at retailers and, as a result,
our market share.
Inventory and Intangible Assets
Inventory, which consists of finished goods, is carried on our balance sheet at the lower of
cost or market. Cost is determined using the weighted average cost method and includes all costs
necessary to bring inventory to its existing condition and location. Market represents the lower
of replacement cost or estimated net realizable value of such inventory. Inventory reserves are
recorded for damaged, obsolete, excess and slow-moving inventory if management determines that the
ultimate expected proceeds from the disposal of such inventory will be less than its carrying cost
as described above. Management uses estimates to determine the necessity of recording these
reserves based on periodic reviews of each product category based primarily on the following
factors: length of time on hand, historical sales, sales projections (including expected sales
prices), order bookings, anticipated demand, market trends, product obsolescence, the effect new
products may have on the sale of existing products and other factors. Risks and exposures in
making these estimates include changes in public and consumer preferences and demand for products,
changes in customer buying patterns, competitor activities, our effectiveness in inventory
management, as well as discontinuance of products or product lines. In addition, estimating sales
prices, establishing markdown percentages and evaluating the condition of our inventories all
require judgments and estimates, which may also impact the inventory valuation. However, we believe
that, based on our prior experience of managing and evaluating the recoverability of our slow
moving, excess, damaged and obsolete inventory in response to market conditions, including
decreased sales in specific product lines, our established reserves are materially adequate. If
actual market conditions and product sales were less favorable than we have projected, however,
additional inventory reserves may be necessary in future periods.
Indefinite-lived intangible assets are reviewed for impairment at least annually, and more
frequently if a triggering event occurs indicating that an impairment may exist. The Companys
annual impairment testing is performed in the fourth quarter of each year (unless specified
triggering events warrant more frequent testing). All intangible assets, both definite-lived and
indefinite-lived, were tested for impairment in the fourth quarter of
2010. There were no impairments of intangible assets during 2010. We will
continue to evaluate the carrying amounts of our intangible assets.
24
Recent Developments
TRC Matters
On April 21, 2011, The Russ Companies, Inc. (TRC), the acquirer of the Companys former gift
business, and TRCs domestic subsidiaries, filed a voluntary petition under Chapter 7 of the United
States Bankruptcy Code (the Code) in the United States Bankruptcy Court for the District of New
Jersey (the Bankruptcy Filing).
On December 23, 2008, KID completed the Gift Sale to TRC. The aggregate purchase price payable
by TRC for such gift business was: (i) 199 shares of the Common Stock of TRC, representing a 19.9%
interest in TRC after consummation of the transaction; and (ii) a subordinated, secured promissory
note issued by TRC to KID in the original principal amount of $19.0 million (the Seller Note). As
has been previously disclosed, in the second quarter of 2009, KID fully impaired or reserved
against all such consideration.
In connection with the Seller Note: (i) TRC and specified subsidiaries granted a subordinated
(to TRCs senior lender) lien to KID on substantially all of their respective assets, and such
subsidiaries guaranteed the payment (subject to intercreditor arrangements described below) of all
obligations to KID under the Seller Note; and (ii) KID entered into an Intercreditor Agreement with
TRCs senior lender, pursuant to which payment of the Seller Note is fully subordinated to payment
of TRCs obligations under its credit facility with such senior lender.
In addition, in connection with the Gift Sale, a limited liability company wholly-owned by KID
(the Licensor) executed a license agreement (the License Agreement) with TRC permitting TRC to
use specified intellectual property, consisting generally of the Russ and Applause trademarks
and tradenames (the Retained IP). Pursuant to the License Agreement, TRC is required to pay the
Licensor a fixed, annual royalty (the Royalty) equal to $1,150,000. The initial annual royalty
payment was due and payable in one lump sum on December 31, 2009. Thereafter, the Royalty is
required to be paid quarterly at the close of each three-month period during the term. TRC has not
paid the initial lump sum Royalty payment. KID received $287,500 in respect of the Royalty payment
due March 23, 2010, which was recorded as other income in the first quarter of 2010, but has not
received any payment to date in respect of the Royalty payments that were due thereafter, and
therefore recorded no further income related to such Royalties.
The termination of the License Agreement (which would otherwise be required by its terms), and
actions entitled to be taken by KID pursuant to the terms of the Seller Note upon an event of
default thereunder (triggered by, among other things, the Bankruptcy Filing), have each been stayed
in accordance with the provisions of the Code. The enforcement of certain of KIDs remedies under
the Seller Note are further restricted by the Intercreditor Agreement.
As a subordinated lien holder with respect to the Seller Note, KID may be able to recover a
portion of amounts owed thereunder from TRCs estate to the extent assets remain available for such
payment under the Code after payment in full of TRCs senior lender. In addition, Licensor may be
able to recover a portion of Royalties owed to it under the License Agreement from TRCs estate to
the extent assets remain available under the Code for payment to TRCs general unsecured creditors.
Any such recoveries may benefit from all or a portion of any amounts that KID might be required to
pay to TRC as described below. However, KID and/or Licensor may experience significant delays in
obtaining any recovery of amounts owed to them by TRC, may obtain only limited recovery, or may
obtain no recovery at all.
As has been previously disclosed, KID and U.S. Gift sent a notice of termination on December
22, 2008 to the landlord with respect to the Lease. Although the Lease became the obligation of TRC
(through its ownership of U.S. Gift), KID remains potentially obligated for rental and other
specified payments due thereunder (to the extent they are owed but have not been paid by U.S. Gift)
until the termination of such Lease became effective (December 23, 2010). On April 27, 2011, KID
received a letter on behalf of the landlord under the Lease (the Demand Letter), demanding
payment by KID of specified amounts claimed to be owed to such landlord by U.S. Gift. The Demand
Letter alleges, among other things, that TRC has failed to pay specified rent and other additional
charges in an aggregate amount of approximately $5.9 million (including, among other things,
approximately $3.8 million in rent and other charges for periods subsequent to the effective date
of the termination of the Lease, for which KID does not believe it is responsible, and
approximately $1.0 million in specified repairs (Repair Charges)), and demands payment from KID
for all such amounts.
To the extent that: (i) the rental and related amounts described in the Demand Letter as due
and owing by U.S Gift under the Lease for periods on or prior to the termination date thereof
(Pre-Termination Amounts) are in fact due and owing, and no further amounts in respect of the
Lease are paid by TRC or U.S. Gift; (ii) no accommodation with respect to Pre-Termination Amounts
is secured from the landlord; (iii) KIDs potential defenses to payment of Pre-Termination Amounts
are not accorded any weight, (iv) KID is not required to pay any rental or related amounts
specified in the Demand Letter other than Pre-Termination Amounts, and (v) no amounts paid in
respect thereof by KID are reimbursed by TRCs bankrupt estate, we currently estimate that KIDs
maximum
potential liability for rental and related amounts under the Lease is approximately $1.0
million. With respect to the alleged Repair Charges, KID is currently unable to assess its
potential liability therefor, if any, under the Lease. As a result, the specific amount of any
payments that might potentially be required to be made by KID with respect to the Lease 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 TRCs estate under the purchase
agreement governing the Gift Sale as an unsecured creditor. As a result, KID may not recover any
such amounts in a timely manner, or at all.
25
TRC and KID also entered into a transition services agreement in connection with the Gift
Sale, pursuant to which TRC and KID provided certain specified services to each other, including,
among other things, the sublease of certain office and warehouse space (and related services) by
KID from TRC and its subsidiaries. KID has terminated all subleases of space from TRC, and is no
longer utilizing TRC services for operational support. However, as previously disclosed, KID and
TRC had engaged in a series of discussions regarding a potential restructuring of payments and
arrangements among the parties as a result of the Gift Sale. Such discussions included, among other
things, a potential offset of amounts owed by KID to TRC and certain of its subsidiaries for the
sublease of office and warehouse space (and related services) under the transition services
agreement described above (Sublease Amounts) against Royalties owed by TRC to Licensor under the
License Agreement. In connection with such discussions, the parties had an arrangement whereby KID
ceased cash payments of Sublease Amounts, with the expectation that such amounts would be offset by
Royalties owed to Licensor. KID has accrued all Sublease Amounts on its financial statements as and
when they became due (totaling an aggregate amount of approximately $1.7 million). As a result, to
the extent KID becomes obligated to pay any Sublease Amounts, such payment would reduce cash, but
would not impact our statement of operations. Any Sublease Amounts required to be paid are expected
to be financed through our revolving credit facility.
KIDs Sassy subsidiary currently owes TRCs Canadian subsidiary approximately $274,000
pursuant to a distribution agreement executed in connection with the Gift Sale, which amount is
subject to offset in the approximate amount of $110,000 pursuant to the terms of such agreement.
As has been previously disclosed, under current provisions of state bankruptcy, fraudulent
transfer and/or fraudulent conveyance laws, the Gift Sale (or the transfer of the Retained IP from
U.S. Gift to Licensor, or other component transactions of or related to the Gift Sale) may be
voided or cancelled, and damages imposed on KID, if, among other things, TRC, at the time the
relevant transaction was consummated, received less than reasonably equivalent value for the
consideration paid, and either was insolvent or rendered insolvent by reason of such transaction.
The measures of insolvency for purposes of fraudulent transfer or conveyance laws vary depending
upon the particular law applied in any proceeding to determine whether a fraudulent transfer or
conveyance has occurred. With respect to the Gift Sale (including the transfer of the Retained IP
from U.S. Gift to Licensor, and other component transactions of or related to the Gift Sale), we
believe that, on the basis of historical financial information, operating history and other
factors, TRC did receive reasonably equivalent value for the consideration paid by TRC, and that
TRC was neither insolvent prior or subsequent to the consummation of the transactions. There can be
no assurance, 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 the Gift Sale confirming our position as to TRCs solvency,
there can be no assurance 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.
LaJobi Matters
See Note 10 of Notes to Unaudited Consolidated Financial Statements for a description of: (i)
the Focused Assessment of our LaJobi subsidiarys import practices and procedures by U.S.
Customs, charges recorded in the first quarter of 2011 and the fourth quarter and year ended
December 31, 2010 in connection therewith, and actions taken by the Company as a result thereof;
and (ii) a discussion of certain payment practices with respect to individuals providing quality
control, compliance and certain other services in the PRC, Hong Kong, Vietnam and Thailand, and
actions taken by the Company in connection therewith.
Company Outlook
The principal elements of our current global business strategy include:
|
|
|
focusing on design-led and branded product development at each of our
subsidiaries to enable us to continue to introduce compelling new products; |
|
|
|
pursuing organic growth opportunities to capture additional market share,
including: |
|
(i) |
|
expanding our product offerings into related categories; |
26
|
(ii) |
|
increasing our existing product penetration (selling more products
to existing customer locations); |
|
(iii) |
|
increasing our existing store or online penetration (selling to
more store locations within each large, national retail customer or their
associated websites); and |
|
(iv) |
|
expanding and diversifying of our distribution channels, with
particular emphasis on sales into international markets and non-traditional
infant and juvenile retailers; |
|
|
|
growing through licensing, distribution or other strategic alliances, including
pursuing acquisition opportunities in businesses complementary to ours; |
|
|
|
implementing strategies to further capture synergies within and between our
confederation of businesses, through cross-marketing opportunities, consolidation of
certain operational activities and other collaborative activities; and |
|
|
|
continuing efforts to manage costs within and across each of our businesses. |
General Economic Conditions as they Impact Our Business
Our business, financial condition and results of operations have and may continue to be
affected by various economic factors. Periods of economic uncertainty, such as the recession
experienced in 2008 and much of 2009, can lead to reduced consumer and business spending, including
by our customers, and the purchasers of their products, as well as reduced consumer confidence,
which we believe has resulted in lower birth rates, although recent third party forecasts have
suggested declining birth trends are likely to reverse with modest improvements in the economy.
Reduced access to credit has and may continue to adversely affect the ability of consumers to
purchase our products from retailers, as well as the ability of our customers to pay us. If such
conditions are experienced in future periods, our industry, business and results of operations may
be negatively impacted. Continuing adverse global economic conditions in our markets may result in,
among other things: (i) reduced demand for our products; (ii) increased price competition for our
products; and/or (iii) increased risk in the collectibility of cash from our customers. See Item
1A, Risk FactorsThe state of the economy may impact our business in the 2010 10-K.
In addition, if internal funds are not available from our operations, we may be required to
rely on the banking and credit markets to meet our financial commitments and short-term liquidity
needs. Continued disruptions in the capital and credit markets, could adversely affect our ability
to draw on our bank revolving credit facility. Our access to funds under our credit facility is
dependent on the ability of the banks that are parties to such facility to meet their funding
commitments. Those banks may not be able to meet their funding commitments to us if they experience
shortages of capital and liquidity or if they experience excessive volumes of borrowing requests
from us and other borrowers within a short period of time. Such disruptions could require us to
take measures to conserve cash until the markets stabilize or until alternative credit arrangements
or other funding for our business needs can be arranged. See Item 1A, Risk FactorsFurther
potential disruptions in the credit markets may adversely affect the availability and cost of
short-term funds for liquidity requirements and our ability to meet long-term commitments, which
could adversely affect our results of operations, cash flows, and financial condition in the 2010
10-K.
SEGMENTS
The Company operates in one segment: the infant and juvenile business.
RESULTS OF OPERATIONSTHREE MONTHS ENDED MARCH 31, 2011 AND 2010
Net sales for the three months ended March 31, 2011 decreased 2.7% to $59.8 million, compared
to $61.5 million for the three months ended March 31, 2010. This decrease was primarily the result
of lower sales volume at Kids Line and LaJobi, partially offset by strong growth at Sassy, which was
driven by Sassys licensed Garanimals® product line.
Gross profit was $16.3 million, or 27.2% of net sales, for the three months ended March 31,
2011, as compared to $18.7 million, or 30.4% of net sales, for the three months ended March 31,
2010. In absolute terms, gross profit decreased as a result of lower net sales and lower gross
margin percentages. Gross profit margins decreased on a relative basis primarily as a result of:
(i) increased ocean freight costs (approximately $0.9 million); (ii) additional inventory reserves
related to certain underperforming product lines (approximately $0.4 million); and (iii) a $0.3
million accrual for additional anticipated anti-dumping duties, including an accrual for a small
amount of product imported in January 2011 (prior to the discontinuance of the practices at LaJobi
that resulted in the underpayment of such duties), partially offset by a reduction in customer
allowances.
27
Selling, general and administrative expense was $15.4 million, or 25.7% of net sales, for the
three months ended March 31, 2011 compared to $12.0 million, or 19.5% of net sales, for the three
months ended March 31, 2010. Selling, general and administrative expense increased as a percentage
of sales primarily as a result of costs incurred in the aggregate amount of approximately $2.4
million in connection with the Companys internal investigation of LaJobis import, business and
staffing practices in Asia (the LaJobi Investigation), as well as a lower sales base. In absolute
terms, the increase in SG&A costs was primarily a function of: (i) costs related to the LaJobi
Investigation; (ii) additional investment costs in personnel; (iii) increased warehouse, outbound
handling and outbound shipping costs and (iv) increased marketing costs in connection with trade
shows.
Other expense was $1.1 million for the three months ended March 31, 2011 as compared to $1.0
million for the three months ended March 31, 2010. This increase of approximately $0.1 million was
primarily due to: (i) a favorable change of $0.5 million in the fair market value of an interest rate
swap agreement in the first quarter of 2010, which was not a factor in the first quarter of 2011;
(ii) fees for the Amendment ($0.1 million); and (iii) an additional $55,000 of interest recorded in the first
quarter of 2011 associated with anticipated anti-dumping duties, all of which was offset by a reduction in
interest expense due to lower borrowings and lower borrowing costs in such period compared to the
same period in 2010.
Loss before income tax provision was $161,000 for the three months ended March 31, 2011 as
compared to income of $5.7 million for the three months ended March 31, 2010, primarily as a result
of the items described above.
The provision for income tax for the three months ended March 31, 2011 was $52,000 on a loss
before tax of $161,000. The difference between the effective tax rate for the three months ended
March 31, 2011 and the U.S. federal tax rate primarily relates to an increase for unrecognized tax
benefits; offset by a benefit for state taxes. The provision for income tax for the three months
ended March 31, 2010 was $2.2 million on profit before tax of $5.7 million. The difference between
the effective tax rate of 39% for the three months ended March 31, 2010 and the U.S. federal tax
rate primarily relates to the provision for state taxes, net of federal tax benefit.
As a result of the foregoing, net loss for the three months ended March 31, 2011 was $213,000
or $(0.01) per diluted share, compared to net income of $3.5 million, or $0.16 per diluted share,
for the three months ended March 31, 2010.
Liquidity and Capital Resources
Our principal sources of liquidity are cash and cash equivalents, funds from operations, and
availability under our bank facility. Our operating activities generally provide sufficient cash to
fund our working capital requirements and, together with borrowings under our bank facility, are
expected to be sufficient to fund our operating needs and capital requirements for at least the
next 12 months. Any significant future business or product acquisitions, earnout payments (if any)
or other unanticipated expenses (including additional customs duty assessments and related interest
and/or penalties in excess of current accruals) may require additional debt or equity financing.
We anticipate that cash flow from operations and anticipated availability under the Revolving
Loan will be sufficient to fund 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 for a discussion of a waiver and
amendment to the Credit Agreement executed to address, among other things, various defaults
resulting from both the charge recorded in the fourth quarter and year ended December 31, 2010, and
other circumstances discovered as a result of the LaJobi Investigation.
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.
As of March 31, 2011, the Company had cash and cash equivalents of $1.5 million compared to
$1.1 million at December 31, 2010. Cash and cash equivalents increased by $0.4 million during the
three months ending March 31, 2011 compared to the balance at December 31, 2010 primarily
reflecting fluctuations in debt repayment. As of March 31, 2011 and December 31, 2010, working
capital was $41.5 million and $43.2 million, respectively. The decrease in working capital for the
period ended March 31, 2011 primarily reflects a decrease in accounts receivable partially offset
by an increase in inventory as described below.
Net cash used in operating activities was $0.1 million during the three months ended March 31,
2011 compared to net cash provided by operating activities of $8.9 million during the three months
ended March 31, 2010. Operating activities reflected the net loss of $0.2 million in the first
three months of 2011, as compared to net income of $3.5 million in the first three months of 2010.
Cash used in operations for the three months ended March 31, 2011 also includes a $4.5 million
decrease in accounts payable and accrued
expenses as a result of timing of payments, an increase in inventory of $3.9 million and a net decrease of $5.2 million in
accounts receivable both primarily resulting from lower sales for the three month period.
28
Net cash used in investing activities was $0.4 million for the three months ended March 31
2011, as compared to $0.1 million for the three months ended March 31, 2010. The increase of $0.3
million was primarily due to increased capital expenditures in the three months ended March 31,
2011.
Net cash provided by financing activities was $1.1 million for the three months ended March
31, 2011 as compared to net cash used in financing activities of $7.6 million for the three months
ended March 31, 2010. The cash provided during the three months
ended March 31, 2011 primarily
reflects borrowing for working capital and the cash used for the three months ended March 31, 2010
primarily reflects the repayment of debt under the Credit Agreement.
Earnouts with respect to Acquisitions
A portion of the consideration of our April 2008 acquisitions of each of LaJobi and CoCaLo
included contingent earnout consideration based upon the achievement of certain performance
milestones. With respect to LaJobi, if the EBITDA of the Business, as defined in the agreement
governing the purchase (the LaJobi Earnout EBITDA) had grown at a compound annual growth rate
(CAGR) of not less than 4% during the three years ended December 31, 2010 (the Measurement
Date), determined in accordance with the agreement governing the purchase, LaJobi would pay to the
relevant sellers an amount (the LaJobi Earnout Consideration) equal to a percentage of the Agreed
Enterprise Value of LaJobi as of the Measurement Date (subject to acceleration under certain
limited circumstances), with the Agreed Enterprise Value defined as the product of (i) the LaJobi
Earnout EBITDA during the twelve (12) months ending on the Measurement Date, multiplied by (ii) an
applicable multiple (ranging from 5 to 9) depending on the specified levels of CAGR achieved. The
LaJobi Earnout Consideration could have ranged between $0 and a maximum of $15.0 million. In
addition, we agreed to pay 1% of the Agreed Enterprise Value to a financial institution (which had
been previously paid a finders fee in connection with the LaJobi purchase), payable in the same
manner and at the same time that any LaJobi Earnout Consideration is paid.
As a result of the accrual recorded in the fourth quarter and year ended December 31, 2010 for
anticipated customs duty (and interest thereon) owed by LaJobi to U.S. Customs (see Note 10 of
Notes to Unaudited Consolidated Financial Statements), and the facts and circumstances discovered
in our preparation for the Focused Assessment and in our related LaJobi Investigation (including
misconduct on the part of certain employees at LaJobi), we concluded that no LaJobi Earnout
Consideration (and therefore no finders fee) was payable. Accordingly, we did not record 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.
With respect to CoCaLo, we were obligated to pay to the relevant sellers the following earnout
consideration amounts (the CoCaLo Earnout Consideration) with respect to CoCaLos performance for
the aggregate three year period ending December 31, 2010: (i) $666,667 to be paid for the
achievement of specified initial performance targets with respect to each of net sales, gross
profit and specified CoCaLo EBITDA (the latter combined with specified Kids Line EBITDA) (the
Initial Targets), for a maximum payment of $2.0 million in the event of achievement of the
Initial Targets in all three categories; and (ii) up to an additional $666,667 to be paid, on a
sliding scale basis, for achievement in excess of the Initial Targets up to specified maximum
performance targets in each category, for a potential additional payment of $2.0 million in the
event of achievement of the maximum targets in all three categories. As the relevant performance
targets were not satisfied, no CoCaLo Earnout Consideration was payable.
Debt Financings
Consolidated long-term debt at March 31, 2011 and December 31, 2010, consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Term Loan (Credit Agreement) |
|
$ |
50,750 |
|
|
$ |
54,000 |
|
Note Payable (CoCaLo purchase) |
|
|
533 |
|
|
|
526 |
|
|
|
|
|
|
|
|
Total |
|
|
51,283 |
|
|
|
54,526 |
|
Less current portion |
|
|
13,533 |
|
|
|
13,526 |
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
37,750 |
|
|
$ |
41,000 |
|
|
|
|
|
|
|
|
29
At March 31, 2011 and December 31, 2010, there was approximately $22.7 million and $18.6
million, respectively, borrowed under the Revolving Loan (defined below), which is classified as
short-term debt. At March 31, 2011 and December 31, 2010, Revolving Loan Availability was $27.2
million and $28.3 million, respectively.
As of March 31, 2011, 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
March 31, 2011, were as follows:
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2011 |
|
|
|
LIBOR Loans |
|
|
Base Rate Loans |
|
Revolving Loan |
|
|
3.01 |
% |
|
|
5.00 |
% |
Term Loan |
|
|
3.06 |
% |
|
|
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
March 31, 2011, 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 quarterly minimum Fixed Charge Coverage Ratio of 1.35:1.00; (b) a
quarterly maximum Total Debt to Covenant EBITDA Ratio of 2.75:1.00; and (c) an annual capital
expenditure limitation.
Due to the facts and circumstances discovered in connection with the LaJobi Investigation
(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 fees of approximately $131,000 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. The fees for the Amendment were recorded as expense
for the three months ended March 31, 2011.
30
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 (LaJobi or CoCaLo) was
limited to excess revolving loan availability being equal to or exceeding $9,000,000, and such
requirement with respect to the payment of any CoCaLo Earnout Consideration remains unchanged).
See Note 10 for a discussion of the LaJobi Earnout Consideration (and related finders fee) in
light of the LaJobi Events. No CoCaLo Earnout Consideration was earned and the final installment of
the CoCaLo Note was paid on April 2, 2011. 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 (LaJobi or CoCaLo),
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 were deemed to be in
compliance with all applicable financial covenants in the Credit Agreement as of December 31, 2010
(see discussion above). The Borrowers were in compliance with all applicable financial covenants as
of March 31, 2011.
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 resulted
in income of approximately $0.5 million for the three months ended March 31, 2010, which was
included in interest expense for such period.
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
$71,000 for the existing interest rate swap at March 31, 2011 was recorded as a component of
comprehensive income, and is expected to be reclassified into earnings within the next twelve
months (see Note 7 of Notes to Unaudited Consolidated Financial Statements above).
The 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.
31
Financing costs associated with the Revolving Loan and Term Loan are deferred and are
amortized over their contractual term. The fees for the Amendment ($131,000), were recorded as
expense in the consolidated statements of operations for the three months ended March 31,
2011.
Other Events and Circumstances Pertaining to Liquidity
A discussion of, among other things: (i) a voluntary bankruptcy petition filed by TRC; (ii)
the potential consequences thereof to KID and Licensor with respect to, among other things, the
consideration received in the Gift Sale and Royalties due under the License Agreement; (iii) the
Lease and the Demand Letter received by KID from the landlord in connection therewith; (iv)
Sublease Amounts owed by the Company to TRC and certain of its subsidiaries for previously leased
space in various jurisdictions; (v) amounts owed by Sassy to TRCs Canadian subsidiary; (vi) the
Focused Assessment of KIDs LaJobi subsidiary and charges recorded in connection therewith; (vii)
interim arrangements established with respect to payment practices for specified staff in Asian
jurisdictions; and (viii) a complaint filed against KID and certain of its officers and directors
in March of 2011 can be found in either the section captioned Recent Developments above or Note
10 of Notes to Unaudited Consolidated Financial Statements. Also see Earnouts with Respect to
Acquisitions for a discussion of the LaJobi Earnout Consideration in light of the Focused
Assessment and related LaJobi Investigation.
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. To date, no payments have been made by KID in connection with the foregoing, nor is KID
aware of any remaining potential obligations described in the proceeding sentence (other than the Lease described above), but there can be
no assurance that payments will not be required of KID in the future with respect thereto.
In addition to the matters referred to above and discussed in the section entitled Recent
Developments above in Note 10 of Notes to Unaudited Consolidated Financial Statements, 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.
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 March 31, 2011,
and we anticipate the balance of the costs to be incurred in 2011 and the first half of 2012. Such
costs have been and are 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 Unaudited Consolidated
Financial Statements.
32
Contractual Obligations
The following table summarizes the Companys significant known contractual obligations as of
March 31, 2011 and the future periods in which such obligations are expected to be settled in cash
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
Operating Lease Obligations |
|
$ |
15,601 |
|
|
$ |
2,086 |
|
|
$ |
3,060 |
|
|
$ |
3,165 |
|
|
$ |
1,916 |
|
|
$ |
1,982 |
|
|
$ |
3,392 |
|
Purchase Obligations (1) |
|
|
44,055 |
|
|
|
44,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Repayment Obligations (2) |
|
|
50,750 |
|
|
|
9,750 |
|
|
|
13,000 |
|
|
|
28,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note Payable (3) |
|
|
533 |
|
|
|
533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on Debt Repayment
Obligations (4) |
|
|
2,323 |
|
|
|
1,053 |
|
|
|
1,056 |
|
|
|
214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty Obligations |
|
|
12,314 |
|
|
|
4,016 |
|
|
|
5,206 |
|
|
|
2,016 |
|
|
|
1,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations (5) |
|
$ |
125,576 |
|
|
$ |
61,493 |
|
|
$ |
22,322 |
|
|
$ |
33,395 |
|
|
$ |
2,992 |
|
|
$ |
1,982 |
|
|
$ |
3,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Companys purchase obligations consist primarily of purchase orders for inventory. |
|
(2) |
|
Reflects repayment obligations under the Credit Agreement. See Note 4 of Notes to Unaudited
Consolidated Financial Statements for a description of the Credit Amendment, including amounts and
dates of repayment obligations and provisions that create, increase and/or accelerate obligations
thereunder. Excludes, as of March 31, 2011, approximately $22.7 million borrowed under the
Revolving Loan. The estimated 2011 interest payment for this Revolving Loan using an assumed 3.01%
interest rate is $0.7 million. Such amounts are estimates only and actual interest payments could
differ materially. The Revolving Loan facility matures in April 2013, at which time any amounts
outstanding are due and payable. |
|
(3) |
|
Reflects the final installment on the CoCaLo Note, which was paid on April 2, 2011. |
|
(4) |
|
This amount reflects estimated interest payments on the long-term debt repayment obligations as
of March 31, 2011 calculated using an assumed interest rate of 3.06% and then-current levels of
outstanding long-term debt. Such amounts are estimates only and actual interest payments could
differ materially. This amount also excludes interest on amounts borrowed under the Revolving Loan
(discussed in footnote 2 above). |
|
(5) |
|
Does not include contingent obligations under the Lease (or contingent obligations under other
off-balance sheet arrangements or otherwise), as the amount if any and/or timing of their potential
settlement is not reasonably estimable. See Other Events and Circumstances Pertaining to
Liquidity above and Note 10 to the Notes to Unaudited Consolidated Financial Statements. In
connection with the acquisitions of LaJobi and CoCaLo, the Company has concluded that no CoCaLo
Earnout Consideration and no LaJobi Earnout Consideration (or related finders fee) was earned or
will become payable, therefore no amounts with respect thereto are included in the table above.
(See Earnouts with respect to Acquisitions above). These amounts are not included in the above
table, as the amount of their potential settlement is not reasonably estimable in accordance with
applicable accounting standards. |
Of the total income tax payable for uncertain tax positions of $718,000, we have classified
$681,000 as current as of March 31, 2011, as such amount is expected to be resolved within one
year. The remaining amount has been classified as a long-term liability and is not included in the
above table as the timing of its potential settlement is not reasonably estimable.
Off Balance Sheet Arrangements
As of March 31, 2011, there have been no material changes in the information provided under
the caption Off Balance Sheet Arrangements of Item 7 of the 2010 10-K, except as set forth below:
KID and U.S. Gift sent a notice of termination on December 22, 2008 to the landlord with
respect to the Lease. Although the Lease became the obligation of TRC (through its ownership of
U.S. Gift), KID remains potentially obligated for rental and other specified payments due
thereunder (to the extent they are owed but have not been paid by U.S. Gift) until the termination
of such Lease became effective (December 23, 2010). On April 27, 2011, KID received a letter on
behalf of the landlord under the Lease (the Demand Letter), demanding payment by KID of specified
amounts claimed to be owed to such landlord by U.S. Gift. The Demand Letter alleges, among other
things, that TRC has failed to pay specified rent and other additional charges in an aggregate
amount of approximately $5.9 million (including, among other things, approximately $3.8 million in
rent and other charges for periods subsequent to the effective date of the termination of the
Lease, for which KID does not believe it is responsible, and approximately $1.0 million in
specified repairs (Repair Charges)), and demands payment from KID for all such amounts.
33
To the extent that: (i) the rental and related amounts described in the Demand Letter as due
and owing by U.S Gift under the Lease for periods on or prior to the termination date thereof
(Pre-Termination Amounts) are in fact due and owing, and no further amounts in respect of the
Lease are paid by TRC or U.S. Gift; (ii) no accommodation with respect to Pre-Termination Amounts
is secured from the landlord; (iii) KIDs potential defenses to payment of Pre-Termination Amounts
are not accorded any weight, (iv) KID is not required to pay any rental or related amounts
specified in the Demand Letter other than Pre-Termination Amounts, and (v) no amounts paid in
respect thereof by KID are reimbursed by TRCs bankrupt estate, we currently estimate that KIDs
maximum potential liability for rental and related amounts under the Lease is approximately $1.0
million. With respect to the alleged Repair Charges, KID is currently unable to assess its
potential liability therefor, if any, under the Lease. As a result, the specific amount of any
payments that might potentially be required to be made by KID with respect to the Lease 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 TRCs estate under the purchase
agreement governing the Gift Sale as an unsecured creditor. As a result, KID may not recover any
such amounts in a timely manner, or at all.
CRITICAL ACCOUNTING POLICIES
The SEC has issued disclosure advice regarding critical accounting policies, defined as
accounting policies that management believes are both most important to the portrayal of the
Companys financial condition and results and require application of managements most difficult,
subjective or complex judgments, often as a result of the need to make estimates about the effects
of matters that are inherently uncertain.
Management is required to make certain estimates and assumptions during the preparation of its
consolidated financial statements that affect the reported amounts of assets, liabilities, revenue
and expenses, and related disclosure of contingent assets and liabilities. Estimates and
assumptions are reviewed periodically, and revisions made as determined to be necessary by
management. There have been no material changes to the Companys significant accounting estimates
and assumptions or the judgments affecting the application of such estimates and assumptions during
the period covered by this report from those described in the Companys 2010 10-K.
See Note 2 of Notes to Consolidated Financial Statements of the 2010 10-K for a summary of the
significant accounting policies used in the preparation of the Companys consolidated financial
statements. Also see Note 2 of Notes to Unaudited Consolidated Financial Statements herein.
Recently Issued Accounting Standards
See Note 11 of the Notes to Unaudited Consolidated Financial Statements for a discussion of
recently issued accounting pronouncements.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements. Additional
written and oral forward-looking statements may be made by us from time to time in Securities and
Exchange Commission (SEC) filings and otherwise. The Private Securities Litigation Reform Act of
1995 provides a safe-harbor for forward-looking statements. These statements may be identified by
the use of forward-looking words or phrases including, but not limited to, anticipate, project,
believe, expect, intend, may, planned, potential, should, will or would. We
caution readers that results predicted by forward-looking statements, including, without
limitation, those relating to our future business prospects, revenues, working capital, liquidity,
capital needs, interest costs and income are subject to certain risks and uncertainties that could
cause actual results to differ materially from those indicated in the forward-looking statements.
Specific risks and uncertainties include, but are not limited to, those set forth under Part I,
Item 1A, Risk Factors, of the 2010 10-K and Part II, Item 1A, Risk Factors, this Quarterly Report
on Form 10-Q. We undertake no obligation to publicly update any forward-looking statement, whether
as a result of new information, future events or otherwise.
|
|
|
ITEM 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As of March 31, 2011, there have been no material changes in the Companys market risks as
described in Item 7A of our 2010 10-K.
34
|
|
|
ITEM 4. |
|
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rules 13a-15(e) or 15d-15(e) of
the Securities Exchange Act of 1934, as amended (the Exchange Act) that are designed to ensure
that information required to be disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms and that such information is accumulated and communicated to our
management, including our principal executive officer and principal financial officer (together,
the Certifying Officers), to allow for timely decisions regarding required disclosure.
In designing and evaluating disclosure controls and procedures, management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable, not
absolute assurance of achieving the desired objectives.
Under the supervision and with the participation of management, including the Certifying
Officers, we carried out an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to paragraph (b) of Exchange Act Rules 13a-15 or 15d-15
as of March 31, 2011. Based upon that evaluation, the Certifying Officers have concluded that our
disclosure controls and procedures are effective as of March 31, 2011.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection
with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 or 15d-15 that occurred
during the fiscal quarter ended March 31, 2011 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting. However, the Company
has initiated certain enhancements to its processes and procedures in areas where import duty
underpayments were found, and will continue to review its internal controls for areas of potential improvement.
PART II OTHER INFORMATION
|
|
|
ITEM 1. |
|
LEGAL PROCEEDINGS |
On April 21, 2011, TRC and its domestic subsidiaries filed petitions for relief under Chapter
7 of the United States Bankruptcy Code. The cases are being adjudicated in the United States
Bankruptcy Court for the District of New Jersey, in In re The Russ Companies, Inc., et al Case No.
11-22474-DHS. KID is an investor in and creditor of TRC. The bankruptcy filing did not include KID.
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., by one plaintiff on behalf of a putative class
of all those who purchased or otherwise acquired KIDs common stock 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. Further details with respect to this complaint, including the claims stated therein, can be found in Note 10 of Notes to
Unaudited Consolidated Financial Statements. 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 its existence. See Risk Factors - We are currently party to litigation that
could be costly to defend and distracting to management of the 2010 10-K.
There have been no material changes to the risk factors set forth in Part I, Item 1A, Risk
Factors, of the Companys 2010 10-K, other than as set forth below.
We may be unable to recover all or any portion of amounts owed to us by TRC as a result of the
filing by TRC and its domestic subsidiaries of a voluntary petition for bankruptcy protection under
the United States Bankruptcy Code (the Code).
On April 21, 2011, TRC, the acquirer of our former gift business, and TRCs domestic
subsidiaries, filed a voluntary petition under Chapter 7 of the Code in the United States
Bankruptcy Court for the District of New Jersey. As a subordinated lien holder with respect to the
Seller Note, KID may be able to recover a portion of amounts owed thereunder from TRCs estate to
the extent assets remain available for such payment under the Code after payment in full of TRCs
senior lender. In addition, Licensor may be able to recover a portion of Royalties owed to it
under the License Agreement from TRCs estate to the extent assets remain available under the Code
for payment to TRCs general unsecured creditors. Any such recoveries may benefit from all or a
portion of any amounts that KID might be required to pay to TRC as described in the following risk
factor. However, KID and/or Licensor may experience significant delays in obtaining any recovery
of amounts owed to them by TRC, may obtain only limited recovery, or may obtain no recovery at all.
We may be obligated to make certain payments to TRC and/or its subsidiaries as a result of or
in connection with its bankruptcy filing.
35
On April 27, 2011, KID received a letter on behalf of the landlord under the Lease (the
Demand Letter), demanding payment by KID of specified amounts claimed to be owed to such landlord
by U.S. Gift. The Demand Letter alleges, among other things, that TRC has failed to pay specified
rent and other additional charges in an aggregate amount of approximately $5.9 million (including,
among other things, approximately $3.8 million in rent and other charges for periods subsequent to
the effective date of the termination of the Lease, for which KID does not believe it is
responsible, and approximately $1.0 million in specified repairs (Repair Charges), and demands
payment from KID for all such amounts.
To the extent that: (i) the rental and related amounts described in the Demand Letter as due
and owing by U.S Gift under the Lease for periods on or prior to the termination date thereof
(Pre-Termination Amounts) are in fact due and owing, and no further amounts in respect of the
Lease are paid by TRC or U.S. Gift; (ii) no accommodation with respect to Pre-Termination Amounts
is secured from the landlord; (iii) KIDs potential defenses to payment of Pre-Termination Amounts
are not accorded any weight, (iv) KID is not required to pay any rental or related amounts
specified in the Demand Letter other than Pre-Termination Amounts, and (v) no amounts paid in
respect thereof by KID are reimbursed by TRCs bankrupt estate, we currently estimate that KIDs
maximum potential liability for rental and related amounts under the Lease is approximately $1.0
million. With respect to the alleged Repair Charges, KID is currently unable to assess its
potential liability therefor, if any, under the Lease. As a result, the specific amount of any
payments that might potentially be required to be made by KID with respect to the Lease 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 TRCs estate under the purchase
agreement governing the Gift Sale as an unsecured creditor. As a result, KID may not recover any
such amounts in a timely manner, or at all.
Previous discussions between KID and TRC included, among other things, a potential offset of
amounts owed by KID to TRC and certain of its subsidiaries for the sublease of office and warehouse
space (and related services) under a transition services agreement (Sublease Amounts) against
Royalties owed by TRC to Licensor under the License Agreement. In connection with such
discussions, the parties had an arrangement whereby KID ceased cash payments of Sublease Amounts,
with the expectation that such amounts would be offset by Royalties owed to Licensor. KID has
accrued all Sublease Amounts on its financial statements as and when they became due (totaling an
aggregate amount of approximately $1.7 million). As a result, to the extent KID becomes obligated
to pay any Sublease Amounts, such payment would reduce cash, but would not impact our statement of
operations. Any Sublease Amounts required to be paid are expected to be financed through our
Revolving Loan.
In addition, KIDs Sassy subsidiary currently owes TRCs Amrams subsidiary approximately
$274,000 pursuant to a distribution agreement executed in connection with the Gift Sale, which
amount is subject to offset in the approximate amount of $110,000 pursuant to the terms of such
agreement.
State statutes allow courts, under certain specific circumstances, to void purchase
transactions in the event of the bankruptcy of the purchaser.
Under current provisions of state bankruptcy, fraudulent transfer and/or fraudulent conveyance
laws, the Gift Sale (or the transfer of the Retained IP from U.S. Gift to Licensor, or other
component transactions of or related to the Gift Sale) may be voided or cancelled, and damages
imposed on KID, if, among other things, TRC, at the time the relevant transaction was consummated,
received less than reasonably equivalent value for the consideration paid, and either was insolvent
or rendered insolvent by reason of such transaction. The measures of insolvency for purposes of
fraudulent transfer or conveyance laws vary depending upon the particular law applied in any
proceeding to determine whether a fraudulent transfer or conveyance has occurred. With respect to
the Gift Sale (including the transfer of the Retained IP from U.S. Gift to Licensor, and other
component transactions of or related to the Gift Sale), we believe that, on the basis of historical
financial information, operating history and other factors, TRC did receive reasonably equivalent
value for the consideration paid by TRC, and that TRC was neither insolvent prior or subsequent to
the consummation of the transactions. 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 the Gift Sale
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 former gift business to TRC. We may remain
contingently liable to third parties for some obligations of the gift business, including the Lease
discussed above, 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. Our financial
condition and results of operations could be adversely affected if we receive any such third-party
claims. See We may be obligated to make
certain payments to TRC and/or its subsidiaries as a result of or in connection with its
bankruptcy filing above for a description of a Demand Letter received by KID from the landlord
under the Lease.
36
Exhibits to this Quarterly Report on Form 10-Q.
|
|
|
|
|
|
31.1 |
|
|
Certification of CEO required by Section 302 of the Sarbanes Oxley Act of 2002. |
|
|
|
|
|
|
31.2 |
|
|
Certification of CFO required by Section 302 of the Sarbanes Oxley Act of 2002. |
|
|
|
|
|
|
32.1 |
|
|
Certification of CEO required by Section 906 of the Sarbanes Oxley Act of 2002. |
|
|
|
|
|
|
32.2 |
|
|
Certification of CFO required by Section 906 of the Sarbanes Oxley Act of 2002. |
Items 2, 3, 4 and 5 are not applicable and have been omitted.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
KID BRANDS, INC.
(Registrant)
|
|
|
By /s/ Guy A. Paglinco
|
|
Date: May 10, 2011 |
Guy A. Paglinco |
|
|
Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer) |
|
38
EXHIBIT INDEX
|
|
|
|
|
|
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. |
39