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| RUS > SEC Filings for RUS > Form 10-K on 31-Mar-2009 | All Recent SEC Filings |
31-Mar-2009
Annual Report
discontinued operations, net of tax, for 2008 was $12.2 million, primarily
relating to lower sales and margins in 2008. Losses from discontinued
operations, net of tax, were $187,000 and $23.5 million in 2007 and 2006,
respectively.
As a result of the sale of the Gift Business, the Consolidated Statements
of Operations have been restated to show the Gift Business as discontinued
operations for the years ended December 31, 2008, 2007 and 2006. The
December 31, 2008 Consolidated Balance Sheet does not include the Gift Business
assets and liabilities, as a result of the consummation of the Gift Sale on
December 23, 2008. The Consolidated Balance Sheet as of December 31, 2007 has
not been restated to present the Gift Business within Discontinued Operations.
The Consolidated Statements of Cash Flows for the years ended December 31, 2008,
2007 and 2006 have not been restated. The accompanying notes to Consolidated
Financial Statements have been restated to reflect the discontinued operations
presentation described above for the basic financial statements.
Continuing Operations
Our infant and juvenile segment - which currently consists of Kids Line,
LaJobi, Sassy and CoCaLo - designs, manufactures through third parties, imports
and sells products in a number of complementary categories including, among
others: infant bedding and related nursery accessories (Kids Line and CoCaLo);
infant furniture and related products (LaJobi); and developmental toys and
feeding, bath and baby care items with features that address the various stages
of an infant's early years (Sassy). Our products are sold primarily to retailers
in North America, the UK and Australia, including large, national retail
accounts and independent retailers (including toy, specialty, food, drug,
apparel and other retailers), and military post exchanges. We maintain a direct
sales force and distribution network to serve our customers in the United
States, the UK and Australia, and sell through independent manufacturers'
representatives and distributors in certain other countries. International sales
from continuing operations, defined as sales outside of the United States,
including export sales, constituted 8.2%, 9.5% and 8.4% of our net sales for the
years ended December 31, 2008, 2007 and 2006, respectively. One of our
strategies is to increase our international sales, both in absolute terms and as
a percentage of total sales, as we expand our presence outside of the U.S.
Aside from funds supplied by senior lenders to consummate acquisitions,
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 the 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
incurred in connection with our acquisitions.
We do not ordinarily sell our products on consignment, and we ordinarily
accept returns only for defective merchandise. In certain instances, where
retailers are unable to resell the quantity of products that they have purchased
from us, we may, in accordance with industry practice, assist retailers in
selling such excess inventory by offering credits and other price concessions.
Our products are manufactured by third parties, principally located in the
PRC and other Eastern Asian countries. Our purchases of finished products from
these manufacturers are primarily denominated in U.S. dollars. Expenses for
these manufacturers are primarily denominated in Chinese Yuan. As a result, any
material increase in the value of the Yuan relative to the U.S. dollar, as
occurred in 2008 and 2007, would increase our expenses, and therefore, adversely
affects our profitability. Conversely, a small portion of our revenues is
generated by our subsidiaries in Australia and the U.K. and are denominated
primarily in those local currencies. Any material increase in the value of the
U.S. dollar relative to the value of the Australian dollar or British pound
would result in a decrease in the amount of these revenues upon their
translation into U.S. dollars for reporting purposes.
Additionally, if our suppliers experience increased raw materials, labor or
other costs, and pass along such cost increases to us through higher prices for
finished goods, our cost of sales would increase. To the extent we are unable to
pass such price increases along to our customers, our gross margins would
decrease. For example,
increased costs in the PRC, primarily for raw materials, labor, taxes and
currency, increased our cost of goods sold and reduced our gross margins in 2007
and 2008.
We have previously carried significant goodwill and intangible assets on
our balance sheet. We recorded, in our consolidated financial statements for the
fourth quarter and fiscal year ended December 31, 2008, non-cash impairment
charges to: (i) goodwill related to our continuing infant and juvenile
operations in the approximate amount of $130.2 million, in connection with our
annual assessment of goodwill in accordance with the Financial Accounting
Standards Board's Statement of Financial Accounting Standards ("SFAS") No. 142
("SFAS 142"); (ii) our Applause® trademark in connection with the Gift Sale of
$6.7 million; and (iii) intangible assets related to our continuing infant and
juvenile operations of $3.7 million, in connection with our annual assessment of
indefinite-life intangible assets in accordance with SFAS 142. We will continue
to evaluate the carrying amount of our indefinite-life intangible assets in
accordance with SFAS 142, and there can be no assurance that we will not incur
additional impairment charges in the future. See Note 5 of Notes to Consolidated
Financial Statements for details with respect to impairment changes incurred
during 2008. Due to current economic conditions and the impairment recorded on
all of our goodwill in the fourth quarter of 2008, we evaluated the useful life
of our Kids Line customer relationships intangible asset and determined that the
Kids Line customer relationships is a finite-lived asset and, as such, will be
amortized over a 20-year life. In connection with such determination, we
recorded $389,000 of amortization expense in the three months and year ended
December 31, 2008.
General Economic Conditions as they Impact Our Business
Economic conditions have recently deteriorated significantly in the United
States and many of the other regions in which we do business and may remain
depressed for the foreseeable future. Global economic conditions have been
challenged by slowing growth and the sub-prime debt devaluation crisis, causing
worldwide liquidity and credit concerns. Continuing adverse global economic
conditions in our markets may result in, among other things, (i) reduced demand
for our products, (ii) increased price competition for our products, and/or
(iii) increased risk in the collectibility of cash from our customers. See
Item 1A, "Risk Factors-The state of the economy may impact our business". In
addition, our operations and performance depend significantly on levels of
consumer spending, which have recently deteriorated significantly in many
countries and regions as a result of increases in energy costs, conditions in
the residential real estate and mortgage markets, stock market conditions, labor
and healthcare costs, access to credit, consumer confidence and other
macroeconomic factors affecting consumer spending behavior.
In addition, if internal funds are not available from our operations, we
may be required to rely on the banking and credit markets to meet our financial
commitments and short-term liquidity needs. Disruptions in the capital and
credit markets, as have been experienced during 2008, could adversely affect our
ability to draw on our bank revolving credit facility. Our access to funds under
that credit facility is dependent on the ability of the banks that are parties
to the facility to meet their funding commitments. Those banks may not be able
to meet their funding commitments to us if they experience shortages of capital
and liquidity or if they experience excessive volumes of borrowing requests from
us and other borrowers within a short period of time. Such disruptions could
require us to take measures to conserve cash until the markets stabilize or
until alternative credit arrangements or other funding for our business needs
can be arranged. See Item 1A, "Risk Factors-If the national and world-wide
financial crisis intensifies, potential disruptions in the credit markets may
adversely affect the availability and cost of short-term funds for liquidity
requirements and our ability to meet long-term commitments, which could
adversely affect our results of operations, cash flows, and financial
condition".
Company Outlook
Our growth in revenues from continuing operations in 2008 as compared to
2007 is attributable to the acquisitions of LaJobi and CoCaLo. Like many
companies in the businesses in which we operate, we continue to experience
margin pressure, primarily as a result of rising raw material prices, higher
expenses associated with manufacturing in Eastern Asia and currency fluctuations
between the U.S. dollar and the Chinese Yuan. We continue to seek to mitigate
this pressure, including through the development of new products that can
command higher pricing, the identification of alternative, lower-cost sources of
supply and, where possible, price increases. Particularly in the mass market,
our ability to increase prices is limited by market and competitive factors, and
while we have implemented selective price increases, we have generally focused
our efforts on maintaining (or increasing) shelf space at retailers and, as a
result, our market share.
The principal elements of our global business strategy include:
• focusing on design-led and branded product development at each of our
subsidiaries, to enable us to continue to introduce compelling new
products;
• pursuing organic growth opportunities to capture additional market share, including:
(i) expanding our product offerings into related categories;
(ii) increasing our existing product penetration (selling more products to existing customer locations);
(iii) increasing our existing store penetration (selling to more store locations within each large, national retail customer); and
(iv) expanding and diversifying our distribution channels, with particular emphasis on sales into international markets;
• 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 cooperative activities; and
• continuing efforts to manage costs within each of our businesses.
We believe that we have made substantial progress in successfully
implementing this strategy during 2008. As noted above, we acquired each of
LaJobi and CoCaLo on April 2, 2008, which enabled us to significantly expand our
infant and juvenile business and offer a more complete range of products for the
baby nursery. We also sold our Gift Business on December 23, 2008, enabling us
to focus our efforts and resources on our infant and juvenile business. In
addition, during 2008, we expanded our product line to offer products at a
broader variety of price points and also added several environmentally friendly
products. For example, Kids Line significantly increased its sales of Carter's®
brand bedding separates, while Kids Line and CoCaLo each introduced new organic,
eco-friendly brands. CoCaLo also expanded and refined its CoCaLo Couture brand,
which targets higher price points. LaJobi also developed a new brand - Nursery
101® - for introduction in 2009, which will represent products at a lower price
point than the rest of its line.
Effective December 2008, Sassy terminated its distribution agreement with
MAM Babyartikel GmbH, which accounted for approximately $22 million of sales in
2008 that will not recur in 2009, and also terminated its license agreement with
Leap Frog during 2008 due to unacceptable levels of sales and profitability
associated with this agreement. During the fourth quarter of 2008, Sassy
right-sized its operations in light of the termination of the MAM distribution
agreement. Under this plan, in addition to reducing approximately 30% of its
full-time workforce, Sassy repositioned its operations around its core strength
as a developmental product company and developed new products and packaging to
support this effort, the costs of which are not material.
Basis of Presentation
As discussed above, as a result of the sale of the Gift Business, the
Consolidated Statement of Operations for the year ended December 31, 2008 (and
the discussion below) presents the Gift Business as discontinued operations, and
all prior periods presented in the Consolidated Statements of Operations herein
and the discussion below have been restated to conform with such presentation.
In addition, the results of operations of LaJobi and CoCaLo, each of which was
acquired on April 2, 2008, are included in the consolidated results of
operations from and after the date of acquisition and, accordingly, the fiscal
year 2008 results include only nine months of activity from these acquired
entities. See "Liquidity and Capital Resources" below under the sections
captioned "Recent Acquisitions" and "Recent Disposition" for a more detailed
description of the LaJobi and CoCaLo acquisitions, as well as the Gift Sale.
Results of Operations
Year ended December 31, 2008 compared to year ended December 31, 2007
The Company's net sales for the year ended December 31, 2008 increased by
40.6% to $229.2 million, compared to $163.1 million for the year ended
December 31, 2007. This increase was attributable to the inclusion of sales
generated by LaJobi and CoCaLo since their respective acquisitions as of
April 2, 2008, partially offset by an approximately $1.8 million aggregate
decline in net sales for Kids Line and Sassy. The decline in Kids Line and Sassy
sales resulted primarily from weakness in retail markets due to the economic
slowdown and the resultant aggressive inventory management by retailers,
particularly in the fourth quarter of 2008.
Gross profit was $69.4 million, or 30.3% of net sales, for the year ended
December 31, 2008, as compared to gross profit of $51.7 million, or 31.7% of net
sales, for the year ended December 31, 2007. Gross profit margin was negatively
impacted in 2008 by: (i) competitive pricing pressures; (ii) increased cost of
goods sold resulting from higher raw material, labor and tax expenses incurred
by our suppliers, as well as the unfavorable impact of foreign currency exchange
rates; (iii) increased costs associated with product safety and compliance
testing; (iv) a shift in product mix (primarily due to higher sales of licensed
products that carry lower margins); and (iv) an aggregate impairment charge to
infant and juvenile tradenames of $3.7 million, or approximately 1.6% of net
sales, recorded in the fourth quarter of 2008 in connection with the Company's
testing of intangible assets under SFAS 142. Gross profit for fiscal 2007 was
negatively impacted by aggregate impairment charges (incurred in the third and
fourth quarters of 2007) of $10 million (or 6.1% of net sales) related to the
MAM Agreement.
Selling, general and administrative expense was $51.5 million, or 22.5% of
net sales, for the year ended December 31, 2008, compared to $34.8 million, or
21.3% of net sales, for the year ended December 31, 2007. Selling, general and
administrative expense increased in absolute terms due to: (i) the inclusion
from April 2, 2008 of the results of operations from the LaJobi and CoCalo
acquisitions, which costs were not included in the results of operations in
2007; and (ii) an increase in non-cash share-based compensation expense that was
approximately $1.4 million higher in 2008 as compared to 2007.
As a result of our annual goodwill impairment test required by SFAS
No. 142, Goodwill and Other Intangible Assets, during the fourth quarter of
2008, we concluded that our goodwill was fully impaired and, as a result,
recorded an aggregate non-cash impairment charge to goodwill of $130.2 million
in the fourth quarter of 2008. The majority of the goodwill originated from the
purchase of Kids Line in 2004. We also recorded an impairment charge on the
Applause®tradename in the amount of $6.7 million in connection with the sale of
the Gift Business.
Other expense was $9.4 million for the year ended December 31, 2008
compared to $3.7 million for the year ended December 31, 2007, an increase of
$5.7 million. This increase was primarily attributable to increased interest and
interest-related charges, which resulted from additional borrowing costs
associated with the acquisitions of LaJobi and CoCaLo, the related write-off of
deferred financing and other costs incurred in connection with the expanded
credit facility necessitated by such acquisitions ($0.7 million) and unfavorable
changes ($2.1 million) in the fair value of an interest rate swap agreement
required by such expanded credit facility.
(Loss) income from continuing operations before income tax was a loss of
$128.4 million for the year ended December 31, 2008 compared to income of
$13.2 million for the year ended December 31, 2007. This decrease of
$141.6 million was primarily the result of the $130.2 million goodwill
impairment charge discussed
above, the impairment on the Applause® tradename of $6.7 million as a result of
the sale of the Gift Business, and the impairment in other tradenames of
$3.7 million, resulting in aggregate impairment charges of $140.6 million
recorded in the year ended December 31, 2008, as well as the $5.7 million
increase in interest and interest related charges. The 2007 results include a
$10 million impairment charge recorded in connection with the MAM Agreement and
a $0.9 million write-off of a note receivable from a 2004 disposition.
The income tax benefit on continuing operations for the year ended
December 31, 2008 was $29.0 million as compared to an income tax expense on
continuing operations of $4.1 million in 2007. The Company recorded a current
federal tax benefit of approximately $1.8 million primarily related to a
decrease in tax reserves associated with the expiration of the statute of
limitations in various jurisdictions during 2008, partially offset by foreign
tax expense of approximately $0.6 million on profitable foreign operations, and
state income tax expense of approximately $0.6 million on profitable operations
in LaJobi. The Company recorded a federal deferred tax benefit of approximately
$19 million related to the deferred tax asset associated with tax amortization
of intangible assets relating to the Kids Line, Sassy, Applause, LaJobi and
CoCaLo acquisitions. These deferred tax assets are indefinite in nature for
accounting purposes. In addition, the Company recorded an additional tax benefit
of approximately $9.4 million related to the reversals of valuation allowances
related to various tax reserves, foreign tax credit carryforwards, contribution
carryforwards and state NOL carryforwards, which the Company has determined that
it no longer needs as a result of the disposition of the Gift Business, which
generated losses. The Company has recorded valuation allowances against that
portion of its deferred tax assets where management believes it is more likely
than not that the Company will not be able to realize such deferred tax assets.
As a result of the foregoing, (loss) income from continuing operations for
the year ended December 31, 2008 was a loss of $99.3 million, compared to income
from continuing operations of $9.1 million, for the year ended December 31,
2007.
Loss from discontinued operations, net of tax, was $12.2 million in 2008
as compared to $187,000 in 2007. This loss resulted from the sale of the Gift
Business as of December 23, 2008, and consists of three components: a loss from
discontinued operations; a gain on disposition; and the related income tax
provision or benefit. Net sales for the Gift Business were $124.0 million and
$168.1 million for the years ended December 31, 2008 and 2007, respectively. The
lower sales in 2008 were primarily attributable to decreases in sales of Shining
Stars® products as compared to the prior year, and further weakness in the gift
market as a result of the continuing economic slowdown. Gross profit margins for
the Gift Business were 40.0% for the year ended December 31, 2008 as compared to
43.8% for the year ended December 31, 2007, as a result of the impact of certain
unusual charges during the second quarter of 2008 in the aggregate amount of
$2.9 million, which charges consisted of an inventory charge ($1.6 million), the
non-cash write-down of Shining Stars website development expenses ($1.0 million)
and a gift segment impairment charge ($0.3 million). As a percentage of sales,
selling general and administrative expenses for the Gift Business were 65.0% in
2008 compared to 44.8% in 2007. The primary reason for this increase was an
additional impairment charge of $6.7 million to write down fixed assets, which
was recorded in the second quarter of 2008, and the effect of fixed costs on a
reduced sale base. As a result of the foregoing factors, the loss from
discontinued operations was $17.3 million in 2008 as compared to $1.4 million
for 2007. The gain on disposition was $0.9 million for the year ended
December 31, 2008. This gain resulted from a valuation of the fair value of the
consideration received in the Gift Sale of approximately $19.8 million, recorded
as Note Receivable of $15.3 million and Investments of $4.5 million, which was
offset by deferred revenue of $5.0 million from licensing arrangements entered
into with the buyer of the Gift Business (the "License Agreement") as compared
to the book value of net assets exchanged. We currently anticipate that the
revenue received from the License Agreement will continue to be recorded as
deferred revenue throughout all or substantially all of the five year term of
the License Agreement. The income tax provision (benefit) from discontinued
operations was a benefit of $4.1 million in 2008 as compared to a benefit of
$1.2 million in 2007.
As a result of the foregoing, net loss for the year ended December 31, 2008
was a loss of $111.6 million, or $(5.23) per diluted share, compared to net
income of $8.9 million, or $0.42 per diluted share, for the year ended
December 31, 2007
Year ended December 31, 2007 compared to year ended December 31, 2006
The Company's net sales for the year ended December 31, 2007 increased by
10.9% to $163.1 million, compared to $147.1 million for the year ended
December 31, 2006. The net sales increase was attributable primarily to new and
varied product introductions, including a successful introduction of Carters®
branded infant bedding at Kids Line. Results of operations for 2007 and 2006 do
not include the results of LaJobi and CoCaLo, which were acquired in April 2008.
. . .
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