SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C.  20549





FORM 10-Q





(Mark One)


X

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2009ORTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from ________ to ________





Commission file number:
0-22635RC2 Corporation(Exact name of Registrant as specified in its charter)Delaware

36-4088307(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)1111 West 22nd Street, Suite 320, Oak Brook, Illinois  60523(Address of principal executive offices)Registrant’s telephone number, including area code:  630-573-7200





Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by 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
X

No





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


No





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 Exchange Act Rule 12b-2.





Large accelerated filer
[   ]

Accelerated filer
[X]Non-accelerated filer
[   ]

Smaller reporting company
[   ](Do not check if a smaller reporting company)


Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).





Yes


No
X





On July 24, 2009, there were outstanding 17,327,467 shares of the Registrant’s $0.01 par value common stock.





RC2 CORPORATION





FORM 10-Q





JUNE 30, 2009





INDEX






PART I – FINANCIAL INFORMATION


PageItem 1.
Condensed Consolidated Balance Sheets as of June 30, 2009
and December 31, 2008
3Condensed Consolidated Statements of Operations for the Three
Months and Six Months Ended June 30, 2009 and 2008
4Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2009 and 2008
5Notes to Condensed Consolidated Financial Statements
6Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
17Item 3.
Quantitative and Qualitative Disclosures about Market Risk
26Item 4.
Controls and Procedures
27
  PART II – OTHER INFORMATION
 Item 1.
Legal Proceedings
27Item 1A.
Risk Factors
28Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
28Item 3.
Defaults Upon Senior Securities
28Item 4.
Submission of Matters to a Vote of Security Holders
28Item 5.
Other Information
29Item 6.
Exhibits
29Signatures
30




2


PART I – FINANCIAL INFORMATION





Item 1.     Financial Statements





RC2 Corporation and Subsidiaries


Condensed Consolidated Balance Sheets


(Unaudited and in thousands)





June 30,
2009


December 31,
2008AssetsCash

$
31,776


$
32,095Accounts receivable, net


67,501



91,647Inventory


69,146



73,989Other current assets


19,996



19,562Total current assets


188,419



217,293Property and equipment, net


28,928



30,901Intangibles, net


82,699



82,504Other non-current assets


6,607



5,952Total assets

$
306,653


$
336,650Liabilities and stockholders’ equityAccounts payable and accrued expenses

$
56,083


$
73,986Current maturities of bank term loan


15,000



15,000Other current liabilities


2,441



2,508Total current liabilities


73,524



91,494Line of credit


---



20,120Bank term loan


52,500



60,000Other non-current liabilities


18,261



16,347Total liabilities


144,285



187,961Stockholders’ equity


162,368



148,689Total liabilities and stockholders’ equity

$
306,653


$
336,650





See accompanying notes to condensed consolidated financial statements.


3


RC2 Corporation and Subsidiaries


Condensed Consolidated Statements of Operations


(Unaudited and in thousands, except per share data)





For the three months ended
June 30,


For the six months ended
June 30,2009


2008


2009


2008Net sales

$
87,039


$
89,193


$
173,307


$
182,483Cost of sales


50,313



48,300



101,902



99,048Recall-related items


---



401



---



421Gross profit


36,726



40,492



71,405



83,014Selling, general andadministrative expenses


29,888



34,909



59,288



71,362Recall-related items


246



15,229



549



16,649Amortization of intangibleassets


165



226



361



451Operating income (loss)


6,427



(9,872
)


11,207



(5,448
)Interest expense


972



1,200



2,149



2,664Interest income


(106
)


(460
)


(191
)


(849
)Other expense (income)


202



390



925



(58
)Income (loss) beforeincome taxes


5,359



(11,002
)


8,324



(7,205
)Income tax expense (benefit)


2,030



(4,589
)


3,207



(2,793
)Net income (loss)

$
3,329


$
(6,413
)

$
5,117


$
(4,412
)Earnings (loss) per common share:Basic

$
0.19


$
(0.37
)

$
0.30


$
(0.25
)Diluted

$
0.19


$
(0.37
)

$
0.29


$
(0.25
)Weighted average shares outstanding:Basic


17,290



17,260



17,269



17,586Diluted


17,633



17,260



17,445



17,586





See accompanying notes to condensed consolidated financial statements.


4


RC2 Corporation and Subsidiaries


Condensed Consolidated Statements of Cash Flows


(Unaudited and in thousands)





For the six months ended June 30,2009


2008Cash flows from operating activitiesNet income (loss)

$
5,117


$
(4,412
)Depreciation and amortization


6,077



6,662Amortization of deferred financing costs


477



236Stock-based compensation


2,346



2,673Excess tax benefit on stock option exercises


(11
)


(39
)Loss on disposition of assets


78



12Changes in operating assets and liabilities


14,570



14,024Net cash provided by operating activities


28,654



19,156Cash flows from investing activitiesPurchase of property and equipment


(3,635
)


(4,951
)Proceeds from disposition of property and equipment


3



8Recovery of purchase price of acquisitions


270



13Increase in other non-current assets


(5
)


(69
)Net cash used in investing activities


(3,367
)


(4,999
)Cash flows from financing activitiesPayments on bank term loan


(7,500
)


---Net (payments) borrowings on line of credit


(20,120
)


8,000Issuance of stock upon option exercises


72



245Excess tax benefit on stock option exercises


44



39Issuance of stock under ESPP


11



83Purchase of treasury stock


---



(24,660
)Financing fees paid


(157
)


---Net cash used in financing activities


(27,650
)


(16,293
)Effect of exchange rate changes on cash


2,044



2,365Net (decrease) increase in cash


(319
)


229Cash and cash equivalents, beginning of year


32,095



57,809Cash and cash equivalents, end of period

$
31,776


$
58,038Supplemental information:Interest paid

$
1,776


$
2,410Income taxes paid


3,287



4,054Income tax refunds received

$
101


$
4,142





See accompanying notes to condensed consolidated financial statements.


5


RC2 Corporation and Subsidiaries


Notes to Unaudited Condensed Consolidated Financial Statements





Note 1 – Basis of Presentation





The unaudited condensed consolidated financial statements include the accounts of RC2 Corporation and its subsidiaries (the Company or RC2).  All intercompany transactions and balances have been eliminated.





The accompanying unaudited condensed consolidated financial statements have been prepared by management, and in the opinion of management, contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position of the Company as of June 30, 2009 and the results of operations and cash flows for
the three-month and six-month periods ended June 30, 2009 and 2008.





Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted.  It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and related notes
included in the Company’s Form 10-K for the year ended December 31, 2008.  The condensed consolidated balance sheet information as of December 31, 2008, appearing herein, is derived from the consolidated balance sheet in the Form 10-K.





Due to the seasonality of our business, the results of operations for interim periods are not necessarily indicative of the operating results for a full year.





Note 2 – Business Segments





The Company is a leading designer, producer and marketer of innovative, high-quality toys, collectibles, and infant and toddler products.





The Company’s reportable segments under Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures About Segments of an Enterprise and Related Information,” are North America and International.  The North America segment includes the United States, Canada and Mexico.  The International segment
includes non-North America markets.





Segment performance is measured at the operating income (loss) level.  Segment assets are comprised of all assets, net of applicable reserves and allowances.  Certain assets and resources are jointly used between the North America and International segments.  Intercompany allocations of such uses are not made.





6


Results are not necessarily those that would be achieved if each segment were an unaffiliated business enterprise.  Information by segment and a reconciliation to reported amounts for the three months ended and six months ended June 30, 2009 and 2008, are as follows:





Three Months Ended June 30,(in thousands)

2009


2008Net sales:North America

$
64,953


$
62,300International


22,228



27,069Sales and transfers between segments


(142
)


(176
)Combined total

$
87,039


$
89,193Operating income (loss):North America

$
3,342


$
(9,885
)International


3,110



27Sales and transfers between segments


(25
)


(14
)Combined total

$
6,427


$
(9,872
)





Six Months Ended June 30,(in thousands)

2009


2008Net sales:North America

$
132,724


$
135,266International


40,906



47,655Sales and transfers between segments


(323
)


(438
)Combined total

$
173,307


$
182,483Operating income (loss):North America

$
6,475


$
(7,660
)International


4,780



2,215Sales and transfers between segments


(48
)


(3
)Combined total

$
11,207


$
(5,448
)





(in thousands)

June 30,
2009


December 31,
2008Total assets:North America

$
208,544


$
235,499International


98,109



101,151Combined total

$
306,653


$
336,650





7


Under the enterprise-wide disclosure requirements of SFAS No. 131, the Company reports net sales by product category and by distribution channel.  The Company groups its products into two product categories: mother, infant and toddler products, and preschool, youth and adult products.  The following table presents consolidated
net sales by product category and by distribution channel for the three months and six months ended June 30, 2009 and 2008:





Three Months Ended June 30,(in thousands)

2009


2008Mother, infant and toddler products

$
45,627


$
41,545Preschool, youth and adult products


41,412



47,648Net sales

$
87,039


$
89,193Chain retailers

$
64,184


$
60,858Specialty retailers, wholesalers, OEM dealers andother


22,855



28,335Net sales

$
87,039


$
89,193





Six Months Ended June 30,(in thousands)

2009


2008Mother, infant and toddler products

$
92,970


$
87,766Preschool, youth and adult products


80,337



94,717Net sales

$
173,307


$
182,483Chain retailers

$
131,564


$
129,972Specialty retailers, wholesalers, OEM dealers andother


41,743



52,511Net sales

$
173,307


$
182,483





Note 3 – Intangible Assets





The components of intangible assets, net are as follows:





(in thousands)

June 30,
2009


December 31,
2008Gross amounts of amortizable intangible assets:Customer relationships

$
8,582


$
8,582Other


4,351



4,32112,933



12,903Accumulated amortization of amortizable intangible assets:Customer relationships


1,055



939Other


3,715



3,4714,770



4,410Intangible assets not subject to amortization:Licenses and trademarks


74,536



74,011Total intangible assets, net

$
82,699


$
82,504





8


Other amortizable intangible assets consist primarily of patents, non-compete agreements and trademarks and licenses.  Amortization expense related to amortizable intangible assets for 2009 is estimated to be approximately $0.6 million.





Note 4 – Income Taxes





The uncertain tax positions were $3.5 million and $3.6 million as of June 30, 2009 and December 31, 2008.  At June 30, 2009 and December 31, 2008, approximately $2.9 million and $2.5 million, respectively, of the total gross unrecognized tax benefits represent the amount that, if recognized, would affect the effective income tax
rate in future periods.  The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of multiple state and foreign jurisdictions.  The Company has substantially concluded all U.S. federal income tax matters for years through 2004.  Substantially all material state and local and foreign income tax matters have been concluded for years through 2004.  U.S. federal income tax returns for 2005 through 2007 are currently open for examination.  In
the next twelve months, the Company expects to reduce the unrecognized tax position reserves by approximately $1.2 million, primarily due to the settlement of various state and international income tax audits and court cases and the closing of various statutes.  The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense.  During the six months ended June 30, 2009, the Company recorded an adjustment to interest of $0.2
million and $0.1 million for potential penalties, related to these unrecognized tax benefits.  In total, as of June 30, 2009 and December 31, 2008, the Company has recorded a liability for interest of $2.2 million and $2.0 million, respectively, and a liability for potential penalties of $0.5 million and $0.3 million, respectively.





Note 5 – Debt





On November 3, 2008, the Company entered into a new credit facility to replace its previous credit facility.  The credit facility is comprised of a term loan and provides for borrowings up to $70.0 million under a revolving line of credit.  The total borrowing capacity available under the credit facility is subject to a
formula based on the Company’s leverage ratio, as defined in the credit agreement.  The term loan and the revolving line of credit both have a scheduled maturity date of November 1, 2011.  Under this credit facility, the term loan and the revolving line of credit bear interest, at the Company’s option, at a base rate or at LIBOR, plus applicable margins, which are based on the Company’s leverage ratio.  Applicable margins vary between 2.25% and 3.25% on LIBOR borrowings
and 1.25% and 2.25% on base rate borrowings.  At June 30, 2009, the applicable margins in effect were 2.75% for LIBOR borrowings and 1.75% for base rate borrowings.  Principal payments on the term loan are $3.8 million per calendar quarter, with the remaining principal of $33.8 million due on November 1, 2011.  The Company is also required to pay a commitment fee which varies from 0.45% and 0.50% per annum on the average daily unused portion of the revolving line of credit.  At
June 30, 2009, the commitment fee in effect was 0.50% per annum.





9


Under the terms of the new credit facility, the Company is required to comply with certain financial and non-financial covenants.  Among other restrictions, the Company is restricted in its ability to pay dividends, buy back its stock, incur additional debt and make acquisitions above certain amounts.  The credit facility
also includes a clean down provision that limits the maximum amount of borrowings under the revolving line of credit for a period of 60 consecutive days during the first four calendar months.  The clean down provision limits are $27.5 million for a period of 60 consecutive days during the first four calendar months of 2010 and $25.0 million for a period of 60 consecutive days during the first four calendar months of 2011.  The Company has met its clean down provision for the year 2009.  On
June 30, 2009, the Company had $67.5 million outstanding on this credit facility and no borrowings under its revolving line of credit.  Additionally at June 30, 2009, the Company had $70 million available on its revolving line of credit and was in compliance with all covenants.





Note 6 – Commitments and Contingencies





The Company leases office and warehouse/distribution space under various non-cancelable operating lease arrangements, which expire through November 30, 2019.





The Company markets a significant portion of its products under licenses from other parties.  These licenses are limited in scope and duration and authorize the sale of specific licensed products generally on a nonexclusive basis.  The Company has license agreements with, among others, various entertainment, publishing
and media companies, automotive and truck manufacturers, and agricultural and construction vehicle and equipment manufacturers.  The Company is a party to more than 300 license agreements with terms generally of two to three years.  Many of the license agreements include minimum guaranteed royalty payments that the Company must pay whether or not it meets specified sales targets.  The Company believes it either achieved its minimum guarantees or has accrued for the costs related
to these guarantees for the six months ended June 30, 2009 and 2008.





Note 7 – Legal Proceedings





See Note 12 – Product Recalls for a description of certain legal proceedings with respect to the products subject to the 2007 recalls.





The Company also has certain contingent liabilities resulting from litigation and claims incident to the ordinary course of business.  Management believes that the probable resolution of such contingencies will not materially affect the Company’s financial position or results of operations.





Note 8 – Common Stock





Authorized and outstanding shares and the par value of the Company’s voting common stock are as follows:





(in thousands, except par value)

Authorized
Shares


Par
Value


Shares
Outstanding at
June 30,
2009


Shares
Outstanding at
December 31,
2008Voting common stock


28,000



$ 0.01



17,318



17,245





10


At December 31, 2008, the Company held 5.9 million shares of its common stock in treasury.  During the six months ended June 30, 2009 and 2008, the Company sold a total of 11,758 shares and 3,965 shares, respectively, out of treasury to Company employees under the Employee Stock Purchase Plan (ESPP) for $0.1 million and $0.1 million,
respectively.





The Company’s Board of Directors authorized the adoption of a program to repurchase up to $150.0 million of the Company’s common stock through December 31, 2008.  Under this program, shares could be repurchased from time to time in open market transactions or privately negotiated transactions at the Company’s discretion,
subject to market conditions and other factors.  Shares repurchased by the Company are held as treasury shares.  During the six months ended June 30, 2008, the Company repurchased 1.2 million shares for $24.7 million under this program.  These repurchases were funded with borrowings on the Company’s revolving line of credit and with cash flow from operations.





Note 9 – Stock-Based Payment Arrangements





At June 30, 2009, the Company has three stock incentive plans, two of which are dormant, and an ESPP. Amounts recognized in the condensed consolidated financial statements with respect to these stock-based payment arrangements for the three months and six months ended June 30, 2009 and 2008, are as follows:





Three Months Ended June 30,(in thousands)

2009


2008Total expense recognized for stock-basedpayment plans

$
1,179


$
1,315Amount of related income tax benefit recognized indetermining net income

$
358


$
496





Six Months Ended June 30,(in thousands)

2009


2008Total expense recognized for stock-basedpayment plans

$
2,346


$
2,673Amount of related income tax benefit recognized indetermining net income

$
798


$
1,008





Stock-based compensation expense is included in cost of sales and selling, general and administrative expenses in the accompanying condensed consolidated statements of operations for the three months and six months ended June 30, 2009 and 2008.





11


Restricted stock awards, options to purchase stock or stock-settled stock appreciation rights (SARs) may be granted under the current stock incentive plan.  A summary of stock option and SARs activity for the Company’s stock incentive plans for the six months ended June 30, 2009, is as follows:





Number
of Shares


Weighted
Average
Exercise
Price


Weighted
Average
Remaining Contractual
Life


Aggregate
Intrinsic
Value
(000)Outstanding, beginning of year


1,921,142


$
22.80Changes during the period:Granted


998,300



5.19Exercised


8,000



5.49Forfeited


25,577



21.83Expired


70,752



26.48Cancelled


124,600



35.87Outstanding, end of period


2,690,513


$
15.62



7.4


$
10,368Exercisable and vested as ofJune 30, 2009


1,104,617


$
20.50Expected to vest


1,556,410



12.25Total vested and expected to vest


2,661,027


$
15.67



7.4


$
10,215





The total fair value of options and SARs vested during the six months ended June 30, 2009, was $3.7 million.  As of June 30, 2009, there was $9.5 million of total unrecognized compensation cost related to nonvested stock-based compensation arrangements granted under the Company’s stock incentive plans for stock options and
SARs.  That cost is expected to be recognized over a weighted average period of 2.7 years.





Restricted stock awards require no payment from the grantee.  The related compensation cost of each award is calculated using either the market price on the grant date or the market price on the last day of the reported period and is expensed equally over the vesting period which is generally over two to three years.  A
summary of restricted stock awards for the Company’s stock incentive plans for the six months ended June 30, 2009, is as follows:





Number
of Shares


Weighted
Average
Fair Value

Weighted
Average
Remaining Contractual
LifeUnvested restricted stock awards, beginning of year


57,851


$
21.90Changes during the period:Granted


53,656



10.72Vested


20,271



27.89Forfeited


---



---Unvested restricted stock awards, end of period


91,236


$
14.28

2.2





12


As of June 30, 2009, there was $1.1 million of total unrecognized compensation cost related to nonvested stock-based compensation arrangements granted under the Company’s stock incentive plans for restricted stock awards.  That cost is expected to be recognized over a weighted average period of 2.2 years.





Note 10 – Related Party Transactions





The Company purchased some of its finished goods during the six months ended June 30, 2008, from a company in which a relative of a Company stockholder and former director of the Company has an ownership interest.  The former director completed his board of directors tenure in May 2008.





Note 11 – Employee Benefit Plans





The Company maintains a funded, noncontributory defined benefit pension plan (the Plan) that covers a select group of the Company’s workforce covered by a collective bargaining agreement who were hired prior to January 1, 2002.  The Plan provides defined benefits based on the employees’ years of service.





The components of net periodic benefit cost for the three months and six months ended June 30, 2009 and 2008, are as follows:





Three Months Ended June 30,(in thousands)

2009


2008Service cost

$
32


$
25Interest cost


222



214Expected return on plan assets


(243
)


(278
)Amortization of prior service costs


5



5Amortization of net loss


58



48Net periodic benefit cost

$
74


$
14





Six Months Ended June 30,(in thousands)

2009


2008Service cost

$
63


$
50Interest cost


445



427Expected return on plan assets


(486
)


(555
)Amortization of prior service costs


10



10Amortization of net loss


116



95Net periodic benefit cost

$
148


$
27





The Company did not make any contributions to the Plan during the six months ended June 30, 2009, and currently does not expect to make any additional contributions during the remainder of the fiscal 2009 year.





13


Note 12 – Product Recalls





During 2008, the Company reached a settlement in the various class action lawsuits against the Company which arose from or relate to the Company’s recall of certain products in June 2007 and September 2007.  With the final approval of the settlement agreement and the end of the claim period, the class action lawsuits relating
to the June 2007 and September 2007 recalls have been resolved.  The Company may be subject to individual claims for personal injuries or other claims or government inquiries (including the inquiry by the Consumer Product Safety Commission (CPSC) described in the next paragraph) relating to the 2007 recalls.  No assurances can be given as to the outcome of any such claims or government inquiries.





During 2008, the Company received an inquiry from the CPSC for information regarding the recalls of certain products in June 2007 and September 2007 for the purpose of assessing whether the CPSC may impose a fine on the Company.  The Company is responding to this inquiry, and at this time, the CPSC has not yet imposed a fine upon
the Company.





The Company recorded charges related to the 2007 recalls of $0.2 million and $15.7 million for the three months ended June 30, 2009 and 2008, respectively, and $0.5 million and $17.1 million for the six months ended June 30, 2009 and 2008, respectively.  The Company has $3.6 million and $6.0 million of accrued recall-related items
included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets at June 30, 2009 and December 31, 2008, respectively.  These items are based on the latest estimates of retailer inventory returns, consumer product replacement costs, shipping costs and fines and penalties as of the date of this filing, as well as additional replacement costs or refunds, claims administration and unpaid legal fees to defend recall-related matters incurred to date.  It
is reasonably possible that actual costs associated with the recalls and related litigation could differ significantly from the estimates recorded.





Note 13 – Reclassifications





Certain prior year amounts have been reclassified to conform to the current year presentation.





Note 14 – Use of Estimates





The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.





14


Note 15 – Fair Value





In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”  This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  This Statement applies under other accounting pronouncements
that require or permit fair value measurement.  However, this Statement does not require any new fair value measurements.  This Statement was effective for the financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which provided for a one year deferral of the effective date of SFAS
No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually.  In accordance with FSP No. FAS 157-2, as of January 1, 2008, the Company adopted the provisions of SFAS No. 157 with respect to its financial assets and liabilities that are measured at fair value within the financial statements, and as of January 1, 2009, the Company adopted the provisions of SFAS No. 157 with respect to its non-financial
assets and non-financial liabilities.  The adoption of SFAS No. 157 did not have a material impact on the Company’s financial statements.





Note 16 – Comprehensive Income (Loss)





The Company reports comprehensive income (loss) in accordance with SFAS No. 130, “Reporting Comprehensive Income.”  SFAS No. 130 requires companies to report all changes in equity during a period, except those resulting from investment by owners and distributions to owners, in a financial statement for the period in which
they are recognized.  Comprehensive income (loss) for the six months ended June 30, 2009 and 2008, is calculated as follows:





Six Months Ended June 30,(in thousands)
2009

2008Net income (loss)

$
5,117


$
(4,412
)Other comprehensive income – foreign currencytranslation adjustments


7,234



3,574Comprehensive income (loss)

$
12,351


$
(838
)





15


Note 17 – Earnings (Loss) Per Common Share





The Company computes earnings (loss) per common share in accordance with SFAS No. 128, “Earnings Per Share.”  Under the provisions of SFAS No. 128, basic earnings (loss) per common share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period.  Diluted
earnings (loss) per common share is computed by dividing net income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period.  The following table discloses the components of earnings (loss) per common share as required by SFAS No. 128:








Three Months Ended June 30,2009


2008Net income (loss)

$
3,329


$
(6,413
)Weighted average common and commonequivalent shares outstanding:Weighted average common shares outstanding


17,290



17,260Add effect of diluted securities – assumed
exercise of stock options and SARs and
vesting of restricted stock awards


343



---Weighted average common and commonequivalent shares outstanding


17,633



17,260Earnings (loss) per common share:Basic

$
0.19


$
(0.37
)Diluted

$
0.19


$
(0.37
)





Six Months Ended June 30,2009


2008Net income (loss)

$
5,117


$
(4,412
)Weighted average common and commonequivalent shares outstanding:Weighted average common shares outstanding


17,269



17,586Add effect of diluted securities – assumed
exercise of stock options and SARs and
vesting of restricted stock awards


176



---Weighted average common and commonequivalent shares outstanding


17,445



17,586Earnings (loss) per common share:Basic

$
0.30


$
(0.25
)Diluted

$
0.29


$
(0.25
)





16


Options and SARs to purchase 1,385,464 shares and 2,011,952 shares of common stock were outstanding during the three months ended June 30, 2009 and 2008, respectively, but were not included in the computation of diluted earnings (loss) per common share because the options and SARs were anti-dilutive.  Options and SARs to purchase
1,385,464 shares and 2,011,952 shares of common stock were outstanding during the six months ended June 30, 2009 and 2008, respectively, but were not included in the computation of diluted earnings (loss) per common share because the options and SARs were anti-dilutive.  Additionally, unvested restricted stock awards of 57,851 were not included in the computation of diluted earnings (loss) per common share for the three months and six months ended June 30, 2008.  As the actual results for
the three months and six months ended June 30, 2008, generated a net loss, any potential common shares would be antidilutive, and accordingly, were excluded from the diluted earnings (loss) per common share calculation.





Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations





The following is a discussion and analysis of the Company’s financial condition, results of operations, liquidity and capital resources.  The discussion and analysis should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and notes thereto included elsewhere herein.





RESULTS OF OPERATIONS





Operating Highlights





Net sales for the three months ended June 30, 2009, decreased 2.5% compared to net sales for the three months ended June 30, 2008.  Gross profit margin decreased to 42.2% for the three months ended June 30, 2009, from 45.4% for the three months ended June 30, 2008.  Selling, general and administrative expenses, as a percentage
of net sales, decreased to 34.4% for the three months ended June 30, 2009, from 39.1% for the three months ended June 30, 2008.  Operating income was $6.4 million for the three months ended June 30, 2009, compared to an operating loss of $9.9 million for the three months ended June 30, 2008.  As a percentage of net sales, operating income was 7.4% for the three months ended June 30, 2009, compared to an operating loss of 11.1% for the three months ended June 30, 2008.





Net sales for the six months ended June 30, 2009, decreased 5.0% compared to net sales for the six months ended June 30, 2008.  Gross profit margin decreased to 41.2% for the six months ended June 30, 2009, from 45.5% for the six months ended June 30, 2008.  Selling, general and administrative expenses, as a percentage
of net sales, decreased to 34.2% for the six months ended June 30, 2009, from 39.1% for the six months ended June 30, 2008.  Operating income was $11.2 million for the six months ended June 30, 2009, compared to an operating loss of $5.4 million for the six months ended June 30, 2008.  As a percentage of net sales, operating income was 6.5% for the six months ended June 30, 2009, compared to an operating loss of 3.0% for the six months ended June 30, 2008.





The results for the three months and six months ending June 30, 2008, include a one-time payment of $15.0 million to a licensor, in exchange for a release from indemnification claims that were related to certain 2007 recalls.  This payment is included in recall-related items in the accompanying condensed consolidated statements of
operations.





17


Three Months Ended June 30, 2009, Compared to Three Months Ended June 30, 2008





Net sales.  Net sales for the three months ended June 30, 2009, decreased $2.2 million, or 2.5%, to $87.0 million from $89.2 million for the three months ended June 30, 2008.  Net sales in our North America segment increased 4.3% and net sales in
our international segment decreased 17.9%, which includes an 18.1% negative impact in changes from currency exchange rates.





Net sales in our mother, infant and toddler products category increased 9.8%, primarily driven by higher sales in our infant and toddler feeding and care product lines marketed under The First Years® brand, which were partially offset by sales declines in our infant and toddler play and gear product lines.  Net sales in our
preschool, youth and adult products category decreased 13.1%, primarily due to softness across almost all product lines.





Gross profit.  Gross profit decreased $3.8 million, or 9.4%, to $36.7 million for the three months ended June 30, 2009, from $40.5 million for the three months ended June 30, 2008.  As a percentage of net sales, gross profit margin decreased to
42.2% for the three months ended June 30, 2009, from 45.4% for the three months ended June 30, 2008, primarily due to less favorable product mix shift within our mother, infant and toddler products category and to a lesser extent as a result of the mix shift between our preschool, youth and adult products category and our mother, infant and toddler products category, unfavorable foreign exchange rate fluctuations and higher product costs, which more than offset cost improvement initiatives and price increases.  Our
quarterly gross margins can be affected by the mix of product that is shipped during each quarter.  Our mother, infant and toddler products category has higher sales of non-licensed products that carry lower selling prices and gross margins that vary significantly and cause quarterly fluctuations, based on the timing of these individual shipments throughout the year.  There were no major changes in the components of cost of sales.





Selling, general and administrative expenses.  Selling, general and administrative expenses decreased $5.0 million, or 14.3%, to $29.9 million for the three months ended June 30, 2009, from $34.9 million for the three months ended June 30, 2008.  Selling,
general and administrative expenses, as a percentage of net sales, decreased to 34.4% for the three months ended June 30, 2009, from 39.1% for the three months ended June 30, 2008.  The decrease in selling, general and administrative expenses is primarily due to the impact of the Company’s operating cost reduction plan implemented in the fourth quarter of 2008 and to a lesser extent foreign currency rate fluctuations and lower variable costs.





Operating income (loss).  Operating income was $6.4 million for the three months ended June 30, 2009, compared to an operating loss of $9.9 million for the three months ended June 30, 2008.  As a percentage of net sales, operating income was 7.4%
for the three months ended June 30, 2009, compared to an operating loss of 11.1% for the three months ended June 30, 2008.  Operating income (loss) for the three months ended June 30, 2009 and 2008, includes $0.2 million and $15.7 million, respectively, of recall-related items.





Interest expense.  Interest expense of $1.0 million and $1.2 million for the three months ended June 30, 2009 and 2008, respectively, relates primarily to borrowings under our credit facility.  The decrease in interest expense is due to lower average
debt outstanding, partially offset by higher debt issuance cost amortization.





Interest income and Other expense (income), net.  Interest income decreased to $0.1 million for the three months ended June 30, 2009 from $0.5 million for the three months ended June 30, 2008, primarily as a result of lower investible cash balances on hand
and lower interest rates.


18


Other expense, net decreased to $0.2 million for the three months ended June 30, 2009, from $0.4 million for the three months ended June 30, 2008, primarily as a result of lower foreign currency transaction losses.





Income tax expense (benefit).  Income tax expense (benefit) for the three months ended June 30, 2009 and 2008, includes provisions for federal, state and foreign income taxes at an effective rate of 37.9% and (41.7)%, respectively, including discrete items.  Discrete
items include significant, infrequent, unusual or non-recurring items.





Six Months Ended June 30, 2009, Compared to Six Months Ended June 30, 2008





Net sales.  Net sales for the six months ended June 30, 2009, decreased $9.2 million, or 5.0%, to $173.3 million from $182.5 million for the six months ended June 30, 2008.  Net sales in our North America segment decreased 1.9% and net sales in
our international segment decreased 14.2%, which includes a 22.3% negative impact in changes from currency exchange rates.





Net sales in our mother, infant and toddler products category increased 5.9%, primarily driven by higher sales in our infant and toddler feeding and care product lines marketed under The First Years® brand, which were partially offset by sales declines in our infant and toddler play product lines.  Net sales in our preschool,
youth and adult products category decreased 15.2%, primarily due to softness across almost all product lines.





Gross profit.  Gross profit decreased $11.6 million, or 14.0%, to $71.4 million for the six months ended June 30, 2009, from $83.0 million for the six months ended June 30, 2008.  As a percentage of net sales, gross profit margin decreased to 41.2%
for the six months ended June 30, 2009, from 45.5% for the six months ended June 30, 2008, primarily due to less favorable product mix, unfavorable foreign exchange rates, and higher product costs, which more than offset cost improvement initiatives and price increases.  There were no major changes in the components of cost of sales.





Selling, general and administrative expenses.  Selling, general and administrative expenses decreased $12.1 million, or 16.9%, to $59.3 million for the six months ended June 30, 2009, from $71.4 million for the six months ended June 30, 2008.  Selling,
general and administrative expenses, as a percentage of net sales, decreased to 34.2% for the six months ended June 30, 2009, from 39.1% for the six months ended June 30, 2008.  The decrease in selling, general and administrative expenses is primarily due to the impact of the Company’s operating cost reduction plan implemented in the fourth quarter of 2008 and to a lesser extent, foreign currency rate fluctuations and lower variable costs.





Operating income (loss).  Operating income was $11.2 million for the six months ended June 30, 2009, compared to an operating loss of $5.4 million for the six months ended June 30, 2008.  As a percentage of net sales, operating income was 6.5% for
the six months ended June 30, 2009, compared to an operating loss of 3.0% for the six months ended June 30, 2008. Operating income (loss) for the six months ended June 30, 2009 and 2008, includes $0.5 million and $17.1 million, respectively, of recall-related items.





Interest expense.  Interest expense of $2.1 million and $2.7 million for the six months ended June 30, 2009 and 2008, respectively, relates primarily to borrowings under our credit facility.  The decrease in interest expense is due to lower average
debt outstanding, which more than offset higher debt issuance cost amortization.


19


Interest income and Other expense (income), net.  Interest income decreased to $0.2 million for the six months ended June 30, 2009 from $0.8 million for the six months ended June 30, 2008, primarily as a result of lower investible cash balances on hand and
lower interest rates.  Other expense, net increased to $0.9 million for the six months ended June 30, 2009, from other (income), net of $(0.1) million for the six months ended June 30, 2008, primarily as a result of unfavorable currency transaction losses.





Income tax expense (benefit).  Income tax expense (benefit) for the six months ended June 30, 2009 and 2008, includes provisions for federal, state and foreign income taxes at an effective rate of 38.5% and (38.8)%, respectively, including discrete items.  Discrete
items include significant, infrequent, unusual or non-recurring items.





LIQUIDITY AND CAPITAL RESOURCES





The Company’s operations provided net cash of $28.7 million and $19.2 million for the six months ended June 30, 2009 and 2008, respectively.  Cash flows from operations were favorably impacted by accounts receivable and inventory decreases of $25.5 million and $8.0 million, respectively, during the six months ended June 30, 2009,
primarily due to the increased focus on working capital and seasonality of the Company’s business.  These decreases were partially offset by a decrease in accounts payable and accrued expenses of $20.2 million, primarily due to seasonally lower sales volume and lower inventory purchases and freight expense.





Net cash used in investing activities was $3.4 million and $5.0 million for the six months ended June 30, 2009 and 2008, respectively.  The decrease in net cash used in investing activities is primarily due to lower capital expenditures.  Capital expenditures for the six months ended June 30, 2009, were $3.6 million, of
which $2.8 million were for molds and tooling.





Net cash used in financing activities was $27.7 million and $16.3 million for the six months ended June 30, 2009 and 2008, respectively.  The increase in net cash used in financing activities is primarily due to payments made on the Company’s term loan and revolving line of credit during the six months ended June 30, 2009.  The
Company made payments on its term loan and revolving line of credit of $7.5 million and $20.1 million, respectively, during the six months ended June 30, 2009.





Cash decreased $0.3 million during the six months ended June 30, 2009.





On November 3, 2008, the Company entered into a new credit facility to replace its previous credit facility.  The credit facility is comprised of a term loan and provides for borrowings up to $70.0 million under a revolving line of credit.  The total borrowing capacity available under the credit facility is subject
to a formula based on the Company’s leverage ratio, as defined in the credit agreement.  The term loan and the revolving line of credit both have a scheduled maturity date of November 1, 2011.  Under this credit facility, the term loan and the revolving line of credit bear interest, at the Company’s option, at a base rate or at LIBOR, plus applicable margins, which are based on the Company’s leverage ratio.  Applicable margins vary between 2.25% and 3.25% on LIBOR borrowings
and 1.25% and 2.25% on base rate borrowings.  At June 30, 2009, the applicable margins in effect were 2.75% for LIBOR borrowings and 1.75% for base rate borrowings.  Principal payments on the term loan are $3.8 million per calendar quarter, with the remaining principal of $33.8 million due on November 1, 2011.  The Company is also required to pay a commitment fee which varies from 0.45% and 0.50% per annum on the average daily unused portion of the revolving line of credit.  At
June 30, 2009, the commitment fee in effect was 0.50% per annum.




20


Under the terms of the new credit facility, the Company is required to comply with certain financial and non-financial covenants.  Among other restrictions, the Company is restricted in its ability to pay dividends, buy back its stock, incur additional debt and make acquisitions above certain amounts.  The credit facility
also includes a clean down provision that limits the maximum amount of borrowings under the revolving line of credit for a period of 60 consecutive days during the first four calendar months.  The clean down provision limits are $27.5 million for a period of 60 consecutive days during the first four calendar months of 2010 and $25.0 million for a period of 60 consecutive days during the first four calendar months of 2011.  The Company has met its clean down provision requirement for the year
2009.  On June 30, 2009, the Company had $67.5 million outstanding on this credit facility and was in compliance with all covenants.  At June 30, 2009, the Company had $70.0 million available on its revolving line of credit.





The Company has met its working capital needs through funds generated from operations and available borrowings under its line of credit.  The Company’s working capital requirements fluctuate during the year based on the seasonality related to sales.  Due to seasonal increases in demand for the Company’s products,
working capital financing requirements are usually highest during the third and fourth quarters.  The Company expects that capital expenditures during 2009, principally for molds and tooling, will be in the range of $10.0 million to $11.0 million.





The Company believes that its cash flows from operations, cash on hand and available borrowings will be sufficient to meet its working capital and capital expenditure requirements and provide the Company with adequate liquidity to meet anticipated operating needs for 2009.  However, if the Company’s capital requirements vary
materially from those currently planned, the Company may require additional debt or equity financing beyond the available borrowings under its senior credit facility.  There can be no assurance that financing, if needed, would be available on terms acceptable to the Company, if at all.





21


CRITICAL ACCOUNTING POLICIES AND ESTIMATES





The Company makes certain estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses.  The accounting policies described below are those the Company considers critical in preparing its consolidated financial statements.  These policies include significant
estimates made by management using information available at the time the estimates are made.  However, as described below, these estimates could change materially if different information or assumptions were used.





Allowance for doubtful accounts.  The allowance for doubtful accounts represents adjustments to customer trade accounts receivable for amounts deemed uncollectible.  The allowance for doubtful accounts reduces gross trade receivables to their estimated
net realizable value.  The Company’s allowance is based on management’s assessment of the business environment, customers’ financial condition, historical trends, customer payment practices, receivable aging and customer disputes.  The Company has purchased credit insurance that covers a portion of its receivables from major customers.  The Company will continue to proactively review its credit risks and adjust its customer terms to reflect the current environment.





Inventory.  Inventory, which consists primarily of finished goods, has been written down for excess quantities and obsolescence, and is stated at the lower of cost or market.  Cost reasonably approximates the first-in, first-out method and includes
all costs necessary to bring inventory to its existing condition and location.  Market represents the lower of replacement cost or estimated net realizable value.  Inventory write-downs are recorded for damaged, obsolete, excess and slow-moving inventory.  The Company’s management uses estimates to record these write-downs based on its review of inventory by product category, length of time on hand, sales projections and order bookings.  Changes in public and consumer
preferences and demand for product or changes in customer buying patterns and inventory management, as well as discontinuance of products or product lines, could impact the inventory valuation.





Impairment of long-lived assets, goodwill and other intangible assets.  Long-lived assets have been reviewed for impairment based on Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets.”  This Statement requires that an impairment loss be recognized whenever the carrying value of an asset exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of that asset, excluding future interest costs the entity would recognize as an expense when incurred.  Goodwill and other intangible assets have been reviewed for impairment based on SFAS No. 142, “Goodwill and Other Intangible Assets.”  Under this
Statement, goodwill and other intangible assets that have indefinite useful lives are not amortized, but rather tested at least annually for impairment.  In the fourth quarter of 2008, the Company recorded an impairment charge, writing-off its entire balance of goodwill.  The next test for impairment on its other indefinite lived intangibles will be as of October 1, 2009, and will be completed in the fourth quarter of 2009.  The Company’s management reviews for indicators that
might suggest an impairment loss could exist.  Testing for impairment requires estimates of expected cash flows to be generated from the use of the assets.  Various uncertainties, including changes in consumer preferences, deterioration in the political environment, continued adverse conditions in the capital markets or changes in general economic conditions, could impact the expected cash flows to be generated by an asset or group of assets.  Intangible assets that have finite useful
lives are amortized over their useful lives.





22


Income taxes.  The Company records current and deferred income tax assets and liabilities.  Management considers all available evidence in evaluating the realizability of the deferred tax assets and records valuation allowances against its deferred
tax assets as needed.  Management believes it is more likely than not that the Company will generate sufficient taxable income in the appropriate carry-forward periods to realize the benefit of its deferred tax assets, except for those deferred tax assets for which an allowance has been provided.





In accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,”  management considers certain tax exposures and all available evidence when evaluating and estimating tax positions and tax benefits, which may require periodic adjustments and
which may not accurately anticipate actual outcomes.  If the available evidence were to change in the future, an adjustment to the tax-related balances may be required.  Estimates for such tax contingencies are classified in other current liabilities and other non-current liabilities in the accompanying condensed consolidated balance sheets.





Product recalls.  The Company establishes a reserve for product recalls on a product-specific basis during the period in which the circumstances giving rise to the recall become known and estimable.  Facts underlying the recall, including, among
others, estimates of retailer inventory returns, consumer replacement costs, shipping costs and fines and penalties are considered when establishing a product recall reserve.  The Company also considers additional replacement costs or refunds, donations, notice charges, claims administration, licensor indemnification claims and plaintiffs’ legal fees related to settlement of the class action lawsuits.  The Company’s legal costs to defend recall-related matters are expensed as incurred.  When
facts or circumstances become known that would indicate that the recall reserve is either not sufficient to cover or exceeds the estimated product recall expenses, the reserve is adjusted, as appropriate.





Accrued allowances.  The Company ordinarily accepts returns only for defective merchandise.  In certain instances, where retailers are unable to resell the quantity of products that they have purchased from the Company, the Company may, in accordance
with industry practice, assist retailers in selling excess inventory by offering credits and other price concessions, which are typically evaluated and issued annually.  Other allowances can also be issued primarily for defective merchandise, volume programs and co-op advertising.  All allowances are accrued throughout the year, as sales are recorded.  The allowances are based on the terms of the various programs in effect; however, management also takes into consideration historical
trends and specific customer and product information when making its estimates.  For the volume programs, the Company generally sets a volume target for the year with each participating customer and issues the discount if the target is achieved.  The allowance for the volume program is accrued throughout the year, and if it becomes clear to management that the target for the participating customer will not be reached, the Company will change the estimate for that customer as required.





Accrued royalties.  Royalties are accrued based on the provisions in licensing agreements for amounts due on net sales during the period, as well as management estimates for additional royalty exposures.  Royalties vary by product category and are
generally paid on a quarterly basis.  Multiple royalties may be paid to various licensors on a single product.  Royalty expense is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.





Stock-based compensation.  The Company accounts for stock-based compensation in accordance with SFAS No. 123R, “Share-Based Payment.”  The Company elected to use the modified prospective application of SFAS No. 123R for awards issued
prior to January 1, 2006.


23





The fair value of stock options and SARs granted under the stock incentive plans is estimated on the date of grant based on the Black-Scholes option pricing model.  The Company calculates the expected volatility factor using Company-specific volatility as the Company believes that its actual volatility is a good indicator of expected
future results.  The Company uses historical data to estimate stock option exercise and employee departure behavior in the Black-Scholes option pricing model.  The expected term of stock options and SARs granted represents the period of time that stock options and SARs granted are expected to be outstanding.  The risk-free rate for the period within the contractual term of the stock option or SAR is based on the U.S. Treasury yield curve in effect at the time of grant.





The fair value of restricted stock awards granted under the stock incentive plan is calculated either using the market price on the grant date or the market price on the last day of the reported period.





Recently Issued Accounting Pronouncements





In December 2007, the FASB issued SFAS No. 141 (revised 2007) (141R), “Business Combinations.”  This Statement replaces SFAS No. 141, “Business Combinations.”  This Statement establishes principles and requirements of how the acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008.  The Company adopted this Statement on January 1, 2009. The adoption of SFAS No. 141R did not have a material impact on the Company’s financial statements.




In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”  This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  This Statement applies under other accounting pronouncements
that require or permit fair value measurement.  However, this Statement does not require any new fair value measurements.  This Statement is effective for the financial statements issued for the fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which provided a one year deferral of the effective date of SFAS
No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually.  In accordance with FSP FAS 157-2, the Company adopted the provisions of SFAS No. 157 with respect to its financial assets and liabilities that are measured at fair value within the financial statements as of January 1, 2008, and with respect to its non-financial assets and non-financial liabilities as of January 1, 2009.  The
adoption of SFAS No. 157 did not have a material impact on the Company’s financial statements.






24


FORWARD LOOKING STATEMENTS





Certain statements contained in this report are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as "anticipate,'' "estimate,'' "believe,'' "could,'' "expect,'' "intend,'' "may,'' "planned,''
"potential,'' "should,'' "will,'' "would'' or the negative of those terms or other words of similar meaning. Such forward-looking statements are inherently subject to known and unknown risks and uncertainties. The Company's actual results and future developments could differ materially from the results or developments expressed in, or implied by, these forward-looking statements.  Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include,
but are not limited to, the following:  the Company is dependent upon continuing licensing arrangements with owners of popular and classic licensed properties such as Thomas & Friends, Bob the Builder, Winnie the Pooh, John Deere and Sesame Street, vehicle manufacturers, agricultural
equipment manufacturers and other licensors;  the effect on the Company’s business of the expected termination of the license of the Take Along Thomas & Friends die-cast product line at the end of 2009; risks related to product recalls or product liability claims, compliance with product safety standards and the effect of recalls on the Company’s relationship with licensors, including the effect on renewal and retention of licenses;
uncertainty and potential adverse changes in the general economic conditions in the Company's markets, including fluctuating oil prices, declining consumer confidence, unemployment, fluctuations in stock markets, contraction of credit availability, bankruptcy or liquidity problems with our customers or other factors affecting economic conditions generally; currency exchange rate fluctuations, including in the Chinese renminbi, the Hong Kong dollar, the British pound sterling, the Australian dollar, the Euro or
the Canadian dollar, could increase the Company’s expenses or reduce the U.S. dollar value of the Company’s assets denominated in foreign currencies, including funds the Company needs to transfer to the U.S.; the effect of the reduced borrowing capacity in the Company’s new credit facility on the Company’s ability to access sufficient working capital, the risk that the Company may not have sufficient cash flows to comply with the payment terms of the new credit facility and the Company’s
ability to comply with more restrictive covenants in the new credit facility; increases in the cost of raw materials, labor and other costs to manufacture the Company’s products could increase the Company’s cost of sales and reduce the Company’s gross margins; competition in the markets for the Company's products may increase significantly;  the Company is dependent upon the continuing willingness of leading retailers to purchase and provide shelf space for the Company's products; the Company
may not be able to collect outstanding accounts receivable from its major retail customers; the Company relies upon a limited number of independently owned factories located in China to manufacture a significant portion of its products; the Company may not be able to manufacture, source and ship new and continuing products on a timely basis; the Company is dependent upon timely shipping of product and unloading of product through West Coast ports as well as timely rail/truck delivery to the Company’s warehouse
and/or customers’ warehouses; customers and consumers may not accept the Company’s products at prices sufficient for the Company to profitably recover development, manufacturing, marketing, royalty and other costs; the inventory policies of retailers, together with increased reliance by retailers on quick response inventory management techniques, may increase the risk of underproduction of popular items, overproduction
of less popular items and failure to achieve tight shipping schedules; the risk of future write-downs of intangible assets; and the Company may experience unanticipated negative results of litigation.  Such uncertainties and other risks that may affect the Company’s performance are discussed further in Part I, Item 1A, “Risk Factors,” in the Company's Form 10-K for the year ended December 31, 2008.  The Company undertakes no obligation to make any revisions to the forward-looking
statements contained in this report or to update them to reflect events or circumstances occurring after the date of this report.


25




Item 3.  Quantitative and Qualitative Disclosures about Market Risk





The Company’s exposure to market risk is limited to interest rate risk associated with the Company’s credit facility and foreign currency exchange rate risk associated with the Company’s foreign operations.





Based on the Company’s interest rate exposure on variable rate borrowings at June 30, 2009, a one percentage point increase in average interest rates on the Company’s borrowings would increase future interest expense by $0.1 million per month and a five percentage point increase would increase future interest expense by approximately
$0.3 million per month.  The Company determined these amounts based on $67.5 million of variable rate borrowings at June 30, 2009, multiplied by 1.0% and 5.0%, respectively, and divided by twelve.  The Company is currently not using any interest rate collars, hedges or other derivative financial instruments to manage or reduce interest rate risk.  As a result, any increase in interest rates on the Company’s variable rate borrowings would increase interest expense and reduce
net income.





The Company’s net sales are primarily denominated in U.S. dollars, with 21.7% of net sales for the six months ended June 30, 2009, denominated in British pounds sterling, Australian dollars, Euros and Canadian dollars.  The Company’s purchases of finished goods from Chinese manufacturers are primarily denominated in Hong
Kong dollars.  Expenses for these manufacturers are primarily denominated in Chinese renminbi.  During July 2005, China revalued the Chinese renminbi, abandoning the former model of pegging the Chinese renminbi to the U.S. dollar.  As a result, any material increase in the value of the Chinese renminbi relative to the U.S. dollar would increase the Company’s expenses, and therefore, could adversely affect the Company’s profitability.  The Hong Kong dollar is
currently pegged to the U.S. dollar.  If the Hong Kong dollar ceased to be pegged to the U.S. dollar, a material increase in the value of the Hong Kong dollar relative to the U.S. dollar would increase our expenses, and therefore, could adversely affect our profitability.  A 10.0% change in the exchange rate of the U.S. dollar with respect to the Hong Kong dollar for the six months ended June 30, 2009, would have changed the total dollar amount of our gross profit by 10.5%.  A 10.0%
change in the exchange rate of the U.S. dollar with respect to the translation of financial reporting denominated in British pounds sterling, the Australian dollar or the Euro for the six months ended June 30, 2009, individually would have not had a significant impact on the Company’s earnings.  The Company is also subject to exchange rate risk relating to transfers of funds or other transactions denominated in British pounds sterling, Australian dollars, Canadian dollars or Euros from its foreign
subsidiaries to the United States, such as for purchases of inventory by certain of our foreign subsidiaries, effectively in U.S. dollars.  A 10.0% change in the exchange rate of the U.S. dollar with respect to the British pound sterling, the Australian dollar and the Canadian dollar for the six months ended June 30, 2009, would have changed the total dollar amount of our gross profit by 1.3%, 0.8% and 1.1%, respectively.  The Company is not currently using and has not historically used hedges
or other derivative financial instruments to manage or reduce exchange rate risk.





26


Item 4.  Controls and Procedures





The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms, and that the information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.  The Company carried out an evaluation as of June 30, 2009, under the supervision and with the
participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2009, at reaching a level of reasonable assurance.  In designing and evaluating
the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  The Company has designed its disclosure controls and procedures to reach a level of reasonable assurance of achieving the desired control objectives.





There was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.





PART II.  OTHER INFORMATION





Item 1.  Legal Proceedings





During 2008, the Company reached a settlement in the various class action lawsuits against the Company which arose from or relate to the Company’s recall of certain products in June 2007 and September 2007.  With the final approval of the settlement agreement and the end of the claim period, the class action lawsuits relating
to the June 2007 and September 2007 recalls have been resolved.  The Company may be subject to individual claims for personal injuries or other claims or government inquiries (including the inquiry by the Consumer Product Safety Commission (CPSC) described in the next paragraph) relating to the 2007 recalls.  No assurances can be given as to the outcome of any such claims or government inquiries.





During 2008, the Company received an inquiry from the CPSC for information regarding the recalls of certain products in June 2007 and September 2007 for the purpose of assessing whether the CPSC may impose a fine on the Company.  The Company is responding to this inquiry, and at this time, the CPSC has not yet imposed a fine upon
the Company.





27


The Company has certain contingent liabilities resulting from litigation and claims incident to the ordinary course of business.  Management believes that the probable resolution of such contingencies will not materially affect the financial position or the results of the Company’s operations.





Item 1A.  Risk Factors





There have been no material changes from the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” of our Form 10-K for the year ended December 31, 2008.  Please refer to that section for disclosures regarding the risks and uncertainties relating to our business.





Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds





(a)     Not applicable.





(b)     Not applicable.





(c)     Not applicable.





Item 3.  Defaults Upon Senior Securities





Not applicable.





Item 4.  Submission of Matters to a Vote of Security Holders





The annual meeting of stockholders of the Company was held on May 7, 2009.  The matters voted upon, including the number of votes cast for, against or withheld, as well as the number of abstentions, as to each such matter, were as follows:





Proposal I (Election of Directors)





FOR

WITHHELDRobert E. Dods
15,190,776

444,116John S. Bakalar
15,187,255

447,637John J. Vosicky
9,458,165

6,176,727Curtis W. Stoelting
15,191,167

443,725Paul E. Purcell
15,248,458

386,434Daniel M. Wright
15,251,653

383,239Thomas M. Collinger
9,486,774

6,148,118Michael J. Merriman, Jr.
9,407,439

6,227,453Linda A. Huett
15,234,646

400,246Peter J. Henseler
15,218,886

416,006





Proposal II (Ratification of KPMG LLP as auditors for the Company for the fiscal year ending December 31, 2009.)





FOR
AGAINST
ABSTAIN15,481,801
115,299
37,792




28









Item 5.

Other InformationNot applicable.Item 6.

Exhibits3.1

Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarterended March 31, 2002 (File No. 0-22635) filed by the Company with the Securities andExchange
Commission on May 14, 2002).3.2

First Amendment to the Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Reporton Form 10-Q for the quarter ended March 31, 2002 (File No. 0-22635) filed by theCompany
with the Securities and Exchange Commission on May 14, 2002).3.3

Certificate of Ownership and Merger changing the Company’s name to RacingChampions Ertl Corporation (incorporated by reference to Exhibit 3.3 of the Company’sQuarterly Report on Form
10-Q for the quarter ended March 31, 2002 (File No. 0-22635)filed by the Company with the Securities and Exchange Commission on May 14, 2002).




3.4

Certificate of Ownership and Merger changing the Company’s name to RC2 Corporation(incorporated by reference to Exhibit 3.4 of the Company’s Quarterly Report on Form10-Q for the quarter
ended March 31, 2003 (File No. 0-22635) filed by the Company with the Securities and Exchange Commission on May 14, 2003).3.5

Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 3.5 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 (File No. 0-22635) filed by the Company with the Securities and Exchange Commission on May 10, 2004).31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
 ___________________




*
This certification is not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.






29


SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized.





Dated this 28th day of July, 2009.


RC2 CORPORATION
  /s/ Curtis W. Stoelting
   /s/ Peter A. Nicholson