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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**FORM 10-Q**

** **

**QuarterlyReport Under Section 13 or 15d of the Securities Exchange Act of 1934**

 

**For thequarterly period ended June 30, 2009**

** **

**Summer Infant, Inc.**

(Name of Registrant asSpecified in Its Charter)

 

**Commissionfile 001-33346**

 

| **Delaware**                              | ** ** | **20-1994619**                        |
|-------------------------------------------|------------|---------------------------------------|
| (State of Incorporation)                  |       | IRS Employment Number                 |
|                                      |       |                                  |
| **1275  Park East Drive**                 | ** ** | ** **                            |
| **Woonsocket,  RI 02895**                 | ** ** | **(401)  671-6550**                   |
| (Address  of principal executive offices) |       | (Registrant’s telephone  number) |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the last 90 days.  Yes x  No o.

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T  (§ 232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).  Yes o   No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.

 

| Large accelerated  filer o |   | Accelerated  filer o         |
|----------------------------|--------|------------------------------|
|                       |   |                         |
| Non-accelerated  filer o   |   | Smaller  reporting company x |

 

Indicate by check markwhether the registrant is a shell company as defined in Rule 12b-2 of theExchange Act.  Yes o   No x

 

As of July 15, 2009, there were 15,392,782shares outstanding (including unvested restricted shares) of the registrant’sCommon Stock, $.0001 par value per share.

 

 

 

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Tableof Contents

 

**Summer Infant, Inc.**

**Form 10Q**

**Table of Contents**

 
| ** **        | ** **                                                                                                                  | ** ** | **Page Number** |
|-------------------|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------|
| **Part 1.**  | **Financial  Information**                                                                                                  |       |                 |
|              |                                                                                                                        |       |                 |
| **Item 1.**       | **Condensed  Consolidated Financial Statements (unaudited)**                                                                |       |                 |
|              |                                                                                                                        |       |                 |
| ** **        | **Condensed  Consolidated Balance Sheets June 30, 2009 (unaudited) and  December 31, 2008**                       |       | **3**                |
|              |                                                                                                                        |       |                 |
|              | **Condensed Consolidated Statements of Income for the  three and six months endedJune 30,  2009 and 2008 (unaudited)** |       | **4**                |
|              | ** **                                                                                                                  |       |                 |
|              | **Condensed Consolidated Statements of Cash Flows for  the six months endedJune 30,  2009 and 2008 (unaudited)**       |       | **5**                |
|              |                                                                                                                        |       |                 |
| ** **        | **Notes to Condensed Consolidated Financial Statements**                                                                    |       | **6**                |
|              |                                                                                                                        |       |                 |
| **Item 2.**       | **Management’s  Discussion and Analysis of Financial Condition andResults of Operations**                              |       | **11**               |
|              |                                                                                                                        |       |                 |
| **Item 3.**       | **Quantitative  and Qualitative Disclosures About Market Risk**                                                             | ** ** | **N/A**              |
|              |                                                                                                                        |       |                 |
| **Item 4T.**      | **Controls and  Procedures**                                                                                                |       | **17**               |
|              |                                                                                                                        |       |                 |
| **Part II.** | **Other Information**                                                                                                       | ** ** | **18**               |
|              |                                                                                                                        |       | ** **           |
| **Item 1.**       | **Legal  Proceedings**                                                                                                      |       | ** **           |
| **Item 1A.**      | **Risk Factors**                                                                                                            |       | ** **           |
| **Item  2.**      | **Unregistered  Sales of Equity Securities and Use of Funds**                                                               |       | ** **           |
| **Item  3.**      | **Defaults  Upon Senior Securities**                                                                                        |       | ** **           |
| **Item 4.**       | **Submission of  Matters to a Vote of Security Holders**                                                                    |       | ** **           |
| **Item  5.**      | **Other  Information**                                                                                                      |       | ** **           |
| **Item 6.**       | **Exhibits**                                                                                                                |       | ** **           |
|              |                                                                                                                        |       | ** **           |
| **Signatures**    |                                                                                                                        | ** ** |

 

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**SummerInfant, Inc. and Subsidiaries**

**CondensedConsolidated Balance Sheets**

 

Notethat all dollar amounts presented in the table below are in thousands of USdollars except share amounts.

 
| ** **                                                                                             | ** ** | **June 30,  2009** | ** **    | **December 31,  2008** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------------|---------------|-----------------------------|------------|
| ** **                                                                                             | ** ** | **Unaudited**           | ** **    | ** **                  | ** ** |
| ASSETS                                                                                                 |       |                    |          |                        |       |
| CURRENT  ASSETS                                                                                        |       |                    |          |                        |       |
| Cash  and cash equivalents                                                                             |       | $                       |  2,457   |                        | $          |  988 |   |
| Trade  receivables, net of allowance for doubtful accounts                                             |       | 31,502                  |          | 29,358                      |       |
| Inventory,  primarily finished goods                                                                   |       | 26,909                  |          | 30,882                      |       |
| Prepaids  and other current assets                                                                     |       | 1,314                   |          | 1,495                       |       |
| Deferred  tax assets                                                                                   |       | 602                     |          | 602                         |       |
| TOTAL  CURRENT ASSETS                                                                                  |       | 62,784                  |          | 63,325                      |       |
| Property  and equipment, net                                                                           |       | 11,224                  |          | 11,212                      |       |
| Goodwill                                                                                               |       | 40,452                  |          | 40,452                      |       |
| Other  intangible assets, net                                                                          |       | 15,014                  |          | 15,130                      |       |
| Other  assets                                                                                          |       | 222                     |          | 416                         |       |
| TOTAL  ASSETS                                                                                          |       | $                       |  129,696 |                        | $          |  130,535 |   |
|                                                                                                   |       |                    |          |                        |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                             |       |                    |          |                        |       |
| CURRENT  LIABILITIES                                                                                   |       |                    |          |                        |       |
| Accounts  payable and accrued expenses                                                                 |       | $                       |  21,580  |                        | $          |  23,045 |   |
| Current  portion of long-term debt                                                                     |       | 2,300                   |          | 1,654                       |       |
| TOTAL  CURRENT LIABILITIES                                                                             |       | 23,880                  |          | 24,699                      |       |
| Long-term  debt, less current portion                                                                  |       | 35,530                  |          | 42,277                      |       |
| Other  liabilities                                                                                     |       | 3,614                   |          | —                      |       |
| Deferred  tax liabilities                                                                              |       | 1,348                   |          | 1,348                       |       |
| TOTAL  LIABILITIES                                                                                     |       | $                       |  64,372  |                        | 68,324     |   |
|                                                                                                   |       |                    |          |                        |       |
| COMMITMENTS  AND CONTINGENCIES (note 4)                                                                |       |                    |          |                        |       |
|                                                                                                   |       |                    |          |                        |       |
| STOCKHOLDERS’  EQUITY                                                                             |       |                    |          |                        |       |
| Common  Stock $.0001 par value, issued and outstanding 15,392,782 and 15,055,782  shares, respectively |       | 1                       |          | 1                           |       |
| Additional  paid in capital                                                                            |       | 54,594                  |          | 54,095                      |       |
| Retained  earnings                                                                                     |       | 11,043                  |          | 8,997                       |       |
| Accumulated  other comprehensive loss                                                                  |       | (314                    | )             | (882                        | )          |
| TOTAL  STOCKHOLDERS’ EQUITY                                                                       |       | 65,324                  |          | 62,211                      |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                       |       | $                       |  129,696 |                        | $          |  130,535 |   |

 

See notes to condensed consolidated financial statements

 

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**SummerInfant, Inc. and Subsidiaries**

**CondensedConsolidated Statements of Income**

 

Notethat all dollar amounts presented in the table below are in thousands of USdollars except share amounts.

 
| ** **                                        | ** ** | **Unaudited**                  | ** **   | **Unaudited**                | ** ** |
|---------------------------------------------------|------------|--------------------------------|--------------|------------------------------|------------|
| ** **                                        | ** ** | **For the three months ended** | ** **   | **For the six months ended** | ** ** |
| ** **                                        | ** ** | **June 30,**              | ** **   | **June 30,**            | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                        | ** ** | **2009**                       | ** **   | **2008**                     | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                        | ** ** | ** **                     | ** **   | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  revenues                                     |       | $                              |  38,361 |                         | $          |  33,982 |   | $ |  73,210 |   | $ | 62,407 |   |
| Cost  of goods sold                               |       | 24,744                         |         | 21,665                       |       | 47,936 |   | 40,154 |   |
| Gross  profit                                     |       | 13,617                         |         | 12,317                       |       | 25,274 |   | 22,253 |   |
| Selling,  general and administrative expenses (a) |       | 10,795                         |         | 9,573                        |       | 21,455 |   | 17,461 |   |
| Net  operating income                             |       | 2,822                          |         | 2,744                        |       | 3,819 |   | 4,792 |   |
| Interest  income (expense), net                   |       | (475                           | )            | (585                         | )          | (896 | ) | (967 | ) |
| Income  before provision for income taxes         |       | 2,347                          |         | 2,159                        |       | 2,923 |   | 3,825 |   |
| Income  tax expense                               |       | 704                            |         | 833                          |       | 877 |   | 1,495 |   |
| NET  INCOME                                       |       | $                              |  1,643  |                         | $          |  1,326 |   | $ |  2,046 |   | $ |  2,330 |   |
|                                              |       |                           |         |                         |       |   |   |   |   |
| NET  INCOME PER SHARE- BASIC                      |       | $                              | 0.11         |                         | $          | 0.09 |   | $ |  0.14 |   | $ |  0.16 |   |
| Weighted  average shares outstanding - basic      |       | 15,143,032                     |         | 14,917,738                   |       | 15,135,801 |   | 14,415,605 |   |
|                                              |       |                           |         |                         |       |   |   |   |   |
| NET  INCOME PER SHARE - DILUTED                   |       | $                              |  0.11   |                         | $          |  0.09 |   | $ |  0.13 |   | $ |  0.16 |   |
| Weighted  average shares outstanding- diluted     |       | 15,392,782                     |         | 14,917,738                   |       | 15,392,782 |   | 14,415,605 |   |

 

Seenotes to condensed consolidated financial statements.

 

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(a) Includesnon-cash stock compensation expense of $499 and $180 for the six months ended June 30,2009 and 2008, respectively, and expense of $134 and $90 for the three monthsended June 30, 2009 and 2008, respectively.  The total also includes non-capitalizabledeal-related fees of $214 for the three and six months ended June 30,2008.

 

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**SummerInfant, Inc. and Subsidiaries**

**Condensed Consolidated Statements ofCash Flows**

 

Notethat all dollar amounts presented in the table below are in thousands of USdollars except share amounts.

 
| ** **                                                                                                                          | ** ** | **Unaudited**                               | ** **  |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                                                                                                          | ** ** | **For the six months ended** | ** **  |
| ** **                                                                                                                          | ** ** | **June 30,  2009**                     | ** **  | **June 30,  2008** | ** ** |
|                                                                                                                                |       |                                        |        |   |   |
| Cash flows from operating  activities:                                                                                              |       |                                        |        |   |   |
| Net income                                                                                                                          |       | $                                           |  2,046 |   | $ |  2,330 |   |
| Adjustments to reconcile net income to net cash  used in operating activities                                                       |       |                                        |        |   |   |
| Depreciation and amortization                                                                                                       |       | 2,029                                       |        | 1,125 |   |
| Non-cash stock option expense                                                                                                       |       | 499                                         |        | 180 |   |
| Deferred taxes                                                                                                                      |       | —                                      |        | (243 | ) |
| Changes in assets and liabilities net of effects of  acquisition:                                                                   |       |                                        |        |   |   |
| Increase in accounts receivable                                                                                                     |       | (3,033                                      | )           | (2,806 | ) |
| (Increase) decrease in inventory                                                                                                    |       | 4,304                                       |        | (2,724 | ) |
| Increase (decrease) in accounts payable and accrued  expenses                                                                       |       | (544                                        | )           | 1,203 |   |
| Decrease in prepaids and other current assets                                                                                       |       | 213                                         |        | 437 |   |
| (Increase) decrease in other assets                                                                                                 |       | 194                                         |        | (50 | ) |
| Net cash provided by (used in) operating activities                                                                                 |       | 5,708                                       |        | (548 | ) |
| Cash flows from investing  activities:                                                                                              |       |                                        |        |   |   |
| Acquisitions of property and equipment                                                                                              |       | (1,897                                      | )           | (1,339 | ) |
| Acquisition of Basic Comfort, Inc.,  Kiddopotamus & Company and Summer Infant, Inc. net of cash  acquired of $61 |       | —                                      |        | (15,374 | ) |
| Net cash used in investing activities                                                                                               |       | (1,897                                      | )           | (16,713 | ) |
| Cash flows from financing  activities:                                                                                              |       |                                        |        |   |   |
| Net borrowings (repayments) on debt and other  long-term liabilities                                                                |       | (6,389                                      | )           | 18,500 |   |
| Proceeds from sale of building                                                                                                      |       | 3,903                                       |        | 0 |   |
| Net cash provided by (used in) financing activities                                                                                 |       | (2,486                                      | )           | 18,500 |   |
| Effect of exchange rate changes on cash and cash  equivalents                                                                       |       | 144                                         |        | (134 | ) |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                                                               |       | 1,469                                       |        | 1,105 |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                                                      |       | 988                                         |        | 1,771 |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                                                                            |       | $                                           |  2,457 |   | $ |  2,876 |   |
| Non cash investing  activities:                                                                                                     |       |                                        |        |   |   |
| Issuance of common stock in conjunction with the  acquisition of Basic Comfort, Inc., Kiddopotamus & Company  (2008)  |       | $                                           | —      |   | $ | 4,657 |   |
| New capital lease obligations                                                                                                       |       | $                                           |  234   |   | $ |  148 |   |

 

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**SUMMER INFANT, INC. AND SUBSIDIARIES**

** **

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

** **

**1.****                      ****SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

Theaccompanying interim condensed consolidated financial statements of SummerInfant, Inc. (the “Company”) are unaudited, but in the opinion ofmanagement, reflect all adjustments, consisting of normal recurring accruals,necessary for a fair presentation of the results for the interim periods.Accordingly, they do not include all information and notes required bygenerally accepted accounting principles for complete financial statements. Theresults of operations for interim periods are not necessarily indicative ofresults to be expected for the entire fiscal year or any other period. Thebalance sheet at December 31, 2008 has been derived from the auditedfinancial statements at that date but does not include all of the informationand footnotes required by accounting principles generally accepted in theUnited States of America for complete financial statements. These interimconsolidated financial statements should be read in conjunction with theCompany’s consolidated financial statements and notes for the year ended December 31,2008 filed on Form 10-K on March 25, 2009.

 

Allsignificant intercompany accounts and transactions have been eliminated in thecondensed consolidated financial statements.

 

*Incometaxes.*

 

The provision forincome taxes is based on the Company’s estimated annualized effective tax ratefor the year.

 

Effective January 1,2007, the Company adopted the provisions of FASB Interpretation No. 48 (“FIN48”), “Accounting for Uncertainty in Income Taxes — An Interpretation of FASBStatement No. 109.” FIN 48 provides detailed guidance for the financialstatement recognition, measurement and disclosure of uncertain tax positionsrecognized in the financial statements in accordance with SFAS No. 109.Tax positions must meet a “more-likely-than-not” recognition threshold at theeffective date to be recognized upon the adoption of FIN 48 and in subsequentperiods. Upon the adoption of FIN 48, the Company had no unrecognized taxbenefits. During the second quarter of 2009, the Company recognized noadjustments for uncertain tax benefits.

 

Income taxes are computed using the asset and liability method ofaccounting. Under the asset and liability method, a deferred tax asset orliability is recognized for estimated future tax effects attributable totemporary differences and carryforwards. The measurement of deferred income taxassets is adjusted by a valuation allowance, if necessary, to recognize futuretax benefits only to the extent, based on available evidence, it is more likelythan not such benefits will be realized. The Company recognizes interest and penalties, if any, related touncertain tax positions in selling, general and administrative expenses. No interest and penalties related to uncertain tax positions were accrued at June 30,2009. The tax years 2005 through 2008 remain open to examination by the majortaxing jurisdictions in which the Company operates. The Company expects nomaterial changes to unrecognized tax positions within the next twelve months.

* *

*Use of Estimates*

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect certain reported amounts and disclosures.Accordingly, actual results could differ from those estimates.

* *

*Net Income Per Share*

 

Basic earnings pershare for the Company is computed by dividing net income by theweighted-average number of shares of common stock outstanding during theperiod. The number of common shares outstanding includes 249,750 unvested restrictedshares that were issued in the first quarter of 2009. Options to purchase1,452,600 and 1,040,000 shares of the Company’s common stock were not includedin the calculation, due to the fact that these options were anti-dilutive forthe three and six months ended June 30, 2009 and 2008, respectively.

 

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*Acquisitions*

 

The pro forma results forthe six (6) months ended June 30, 2008, assuming the Basic Comfortand Kiddopotamus transactions had closed on January 1, 2008 are as follows(in thousands of US dollars, except per share data):

 
| ** **                   | ** ** | **2008**       | ** ** |
|------------------------------|------------|----------------|------------|
| Net revenues                 |       | $              | 68,336     |   |
| Net income                   |       | $              | 2,797      |   |
| Earnings  per share: diluted |       | 0.19 per share |       |

 

*NewAccounting Pronouncements*

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fairvalue measurements. SFAS No. 157 applies under other accountingpronouncements that require or permit fair value measurements, and accordingly,does not require any new fair value measurements. SFAS No. 157 iseffective for fiscal years beginning after November 15, 2007. The Companyadopted SFAS 157 for its financial assets and liabilities. The adoption ofSFAS 157 did not have a material impact on the Company’s financialposition or results of operations.

 

In December 2007,the FASB issued Statement of Financial Accounting Standards No. 141(R), “BusinessCombinations”, or SFAS No. 141(R). This statement establishes principlesand requirements for how the acquirer of a business recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumed,and any non-controlling interest in the acquiree. SFAS No. 141(R) alsoprovides guidance for recognizing and measuring the goodwill acquired in thebusiness combination and determines what information to disclose to enableusers of the financial statements to evaluate the nature and financial effectsof the business combination. The provisions of SFAS No. 141(R) areeffective for financial statements issued for fiscal years beginning after December 15,2008. The Company adopted this statement, as applicable on January 1,2009. The adoption of SFAS 141(R) did not have a material impact onthe Company’s financial position or results of operations.

 

In December 2007,the FASB issued Statement of Financial Accounting Standards No. 160, “Non-controllingInterests in Consolidated Financial Statements-An Amendment to AccountingResearch Bulletin (“ARB”) No. 51”, or SFAS No. 160. This statementamends ARB No. 51, “Consolidated Financial Statements”, to establishaccounting and reporting standards for the non-controlling interest in asubsidiary and for the deconsolidation of a subsidiary. This statement alsoamends certain of ARB No. 51’s consolidation procedures for consistencywith the requirements of SFAS No. 141(R). In addition, SFAS No. 160also includes expanded disclosure requirements regarding interests of theparent and its non-controlling interest. The provisions of SFAS No. 160are effective for financial statements issued for fiscal years beginning after December 15,2008. The Company adopted this statement, as applicable on January 1,2009. The adoption of SFAS 160 did not have a material impact on theCompany’s financial position or results of operations.

 

In February 2008,the FASB issued Staff Position (“FSP”) No. 157-1 and FSP No. FSP157-2. FSP No. 157-1 removes certain leasing transactions from the scopeof SFAS No. 157. FSP No. 157-2 partially defers the effective date ofSFAS No. 157 for one year for certain nonfinancial assets and nonfinancialliabilities that are recognized at fair value on a nonrecurring basis. UnderFSP No. 157-2, the effective date for non-financial assets and liabilitiesthat are recognized at the fair value on a nonrecurring basis will be for fiscalyears beginning after November 15, 2008. FSP No. 157-2 is effectivefor the Company on January 1, 2009. The adoption of this pronouncement did not have a material impact on theCompany’s financial position or results of operations.

 

In April 2008,the FASB issued FSP No. FAS 142-3, “Determination of the Useful Lifeof Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends thefactors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder SFAS No. 142, “*Goodwill and OtherIntangible assets* “(SFAS No. 142”). The intent of the positionis to improve the consistency between the useful life of a recognizedintangible asset under SFAS No. 142 and the period of expected cash flowsused to measure the fair value of the asset under SFAS No. 141 (R). FSPFAS 142-3 is effective for fiscal years beginning after December 15,2008 and is effective for the Company January 1, 2009.  The adoption of this pronouncement did not havea material impact on the Company’s financial position or results of operations.

 

In June 2008,the FASB issued EITF No. 03-6-1, “Determining Whether Instruments Grantedin Share-Based Payment Transactions Are Participating Securities” (“EITF 03-6-1”).  EITF 03-6-1 states that unvested share-basedpayment

 

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awards that containnonforfeitable rights to dividends or dividend equivalents are “participatingsecurities” as defined in EITF 03-6-1, Participating Securities and the Two-Class Methodunder FASB Statement No. 128, and therefore should be included incomputing earnings per share using the two-class method.  According to EITF-03-6-1, a share-basedpayment award is a participating security when the award includesnonforfeitable rights to dividends or dividend equivalents. The EITF waseffective for the Company beginning January 1, 2009.  The adoption of EITF 03-6-1 did not have amaterial impact on the financial statements.

 

In May 2009,the FASB issued SFAS No. 165, “Subsequent Events” (“FAS 165”), whichestablishes general standards of accounting and disclosure for events thatoccur after the balance sheet date but before financial statements areissued.  The Company adopted theprovisions of FAS 165 for the quarter ended June 30, 2009.  The adoption of FAS 165 did not have amaterial effect on the consolidated financial statements.

 

In June 2009,the FASB issued FAS 168, “The FASB Accounting Standards Codification and theHierarchy of Generally Accepted Accounting Principles”.  FAS 168 will become the source ofauthoritative U.S. generally accepted accounting principles, superceding allthen-existing non-SEC accounting and reporting standards. This statement iseffective for financial statements issued for interim and annual periods endingafter September 15, 2009.  TheCompany does not expect the adoption of FAS 168 to have an impact on theCompany’s results of operations, financial condition, or cash flows.

 

The Company does not believe that any other recentlyissued, but not yet effective accounting standards will have a material effecton the Company’s consolidated financial position, results of operations, orcash flows.

** **

**2.****                      ****DEBT**

* *

*Credit Facilities*

 

On April 10, 2008, the Company entered into two new three-yearsecured credit facilities (the “Loan Agreement”) with Bank of America, N.A., asAdministrative Agent, and each of the financial institutions as signatory tothe Loan Agreement.  The Loan Agreementprovides for a $36,000,000 working capital revolving credit facility and a$10,000,000 non-restoring acquisition credit facility.  The new credit facilities mature on June 30,2011.  The Company and its subsidiaries,Summer Infant (USA), Inc., Summer Infant Europe Limited, Summer InfantAsia Limited and Summer Infant Canada, Limited are the borrowers under thisLoan Agreement.

 

The Company’s ability to borrow under the Loan Agreement is subject toits ongoing compliance with a  number offinancial and other covenants, including the following: (i) that  the Company and its subsidiaries maintain anet worth of $50,000,000 plus the  sum of50% of net income  earned in each fiscalyear, (ii) that the Company and its subsidiaries maintain a ratio of totalfunded debt  to EBITDA of not greaterthan 3.50:1.00, and (iii) that the Company and  its subsidiaries maintain a ratio ofoperating cash flow  to debt service ofnot less than 1.25:1.00.  Furthermore, ifthe Company’s ratio of total funded debt to EBITDA is greater than 3.25:1.00for any fiscal year, the aggregate amount that may be borrowed under the LoanAgreement will be determined by reference to a borrowing base.  The Company is in compliance with allcovenants as of June 30, 2009.

 

These new credit facilities bear interest at a floating rate based on aspread over LIBOR ranging from 150 basis points to 200 basis points, dependingupon the ratio of the Company’s total funded debt to EBITDA.  As of June 30, 2009, the blendedinterest rate for these credit facilities was 3.81%. In addition, these newcredit facilities have an unused line fee based on the unused amount of thecredit facilities equal to 25 basis points.

 

The Loan Agreement also contains customary events of default, including across default provision and a change of control provision.  In the event of a default, all of theobligations of the Company and its subsidiaries under the loan Agreement may bedeclared immediately due and payable.  For certain events of default relating to insolvency and receivership,all outstanding obligations become due and payable.

 

**3.****                      ****SALE — LEASEBACK**

 

OnMarch 24, 2009 the Company entered into a definitive agreement with FaithRealty II, LLC, a Rhode Island limited liability company (“Faith Realty”) (themembers of which are Jason Macari, the current Chairman of the board ofDirectors and President of the Company, and his spouse), pursuant to whichFaith Realty will purchase the corporate headquarters of 

 

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theCompany located at 1275 Park East Drive, Woonsocket, Rhode Island (the “Headquarters”)and subsequently lease the Headquarters back to Summer USA (collectively, the “Transactions”).  Pursuant to the terms of that certainPurchase and Sale Agreement between Summer USA and Faith Realty, dated as of March 24,2009, Faith Realty purchased the Headquarters for $4,052,500 and then leasedthe Headquarters back to Summer USA for an annual rent of $390,000 during theinitial seven (7) year term of the lease, payable monthly and inadvance.  The lease will expire on theseventh (7th) anniversary of its commencement unless an option period isexercised by Summer USA.  At that time,Summer USA will have the opportunity to extend the lease for one (1) additionalperiod of five (5) years.  If SummerUSA elects to extend the term of the lease for an additional five (5) years,the annual rent for the first two (2) years of the extension term shall beequal to $429,000 and for the final three (3) years of the extension termshall be equal to $468,000.  In addition,during the first six (6) months of the last lease year of the initial termof the lease Summer USA has the option to repurchase the Headquarters for$4,457,750 (110% of the initial sale price). The Transactions were consummated concurrently with the execution of thedefinitive agreements.  With the majorityof the proceeds of the sale of the headquarters Summer USA paid off theconstruction loan relating to the Headquarters. Mr. Macari has given a personal guarantee to secure the FaithRealty debt on its mortgage; therefore, due to his continuing involvement inthe building transaction and the Company’s option to repurchase the building,the building will remain on the books of the Company and the transaction hasbeen recognized as a financing, with no gain. In Q1 of 2009 the Company recorded a finance obligation under OtherLiabilities of $3,902,000 in regards to this transaction, of which $228,000 wasrecorded as a current liability.  Thisobligation is reduced each month as the rent payment is made to Faith Realty.

 

OnFebruary 25, 2009, the Company’s board of Directors (with Mr. Macariand Mr. Gibree abstaining from such action) approved the Transactions,subject to the negotiation and execution of definitive agreements within theparameters approved by the Board.  Inconnection therewith, the board granted a potential waiver, to the extentnecessary, if at all, of the conflict of interest provisions of the Company’sModel code of Ethics, effective upon execution of definitive agreements withinthe parameters approved by the Board.  Inconnection with granting such potential waiver, the Board of Directors engagedindependent counsel to review the proposed Transactions and an independentappraiser to ascertain (i) the value of the Headquarters and (ii) themarket rent for the Headquarters.  Inreaching its conclusion that the Transactions are fair to the Company, theBoard of Directors considered a number of factors, including Summer USA’sability to repurchase the headquarters at 110% of the initial sale price at theend of the initial term.

 

Inaddition, the Company’s Audit Committee approved the Transactions (as a relatedparty transaction) and the potential waiver and recommended the matter to avote of the entire Board of Directors (which approved the transaction).

 

4.                        **COMMITMENTS ANDCONTINGENCIES**

* *

*Litigation*

 

The Company is aparty to routine litigation and administrative complaints incidental to itsbusiness.  Management does not believe that the resolution of any or allof such routine litigation and administrative complaints is likely to have amaterial adverse effect on the Company’s financial condition or results ofoperations.

 

5.                        **STOCKOPTIONS AND RESTRICTED SHARES**

 

Summer has granted stock options under its 2006 Performance Equity Plan(“2006 Plan”).  Under the 2006 Plan,awards may be granted to participants in the form of Non-Qualified StockOptions, Incentive Stock Options, Restricted Stock, Deferred Stock, StockReload Options and other stock-based awards. Subject to the provisions of the plan, awards may be granted toemployees, officers, directors, advisors and consultants who are deemed to haverendered or are able to render significant services to us or our subsidiariesand who are deemed to have contributed or to have the potential to contributeto our success.  Incentive stock optionsmay only be awarded to individuals who are our employees at the time of grant.

 

Effective January 1, 2006, the Company adopted the fair valuerecognition provisions of SFAS 123(R), using the modified prospectivetransition method.  The adoption of SFAS123(R) resulted in share-based compensation expense for the 

 

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threeand six months ended June 30, 2009 of approximately $365,000 and $499,000,respectively.  There were 475,000 stockoptions granted during the six months ended June 30, 2009.  As of June 30, 2009, there were1,452,600 stock options outstanding.  Inaddition, there were 349,000 restricted shares issued to employees during thesix months ended June 30, 2009. The key assumptions used in theBlack-Scholes valuation for the options granted in 2009 were as follows:

 
| Expected  life of options | - | 4  years |
|---------------------------|---|----------|
| Volatility                | - | 35%      |
| Discount  rate            | - | 2.49%    |

 

 

6.                        **SUBSEQUENTEVENT- ACQUISITION**

 

On July 17, 2009, the Company acquired certain assets and assumedcertain liabilities of Butterfly Living, Inc., a developer and distributorof infant cribs.  The purchase priceincludes potential earn out payments over the next 4.5 years which could totalup to $5,000,000 over that time frame if all targets are reached.

 

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**ITEM 2.  SUMMER’S MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Thestatements contained in this Report on Form 10-Q, that are not purelyhistorical, are forward-looking information and statements within the meaningof Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. These include statements regarding ourexpectations, intentions, or strategies regarding future matters. Allforward-looking statements included in this document are based on informationavailable to us on the date hereof. It is important to note that our actualresults could differ materially from those projected in such forward-lookingstatements contained in this Form 10-Q. The forward-looking statementscontained herein are based on current expectations that involve numerous risksand uncertainties.  These risks includethe concentration of the Company’s business with retail customers; the abilityof the Company to compete in the industry; the Company’s dependence on keypersonnel; the Company’s reliance on foreign suppliers; and other risks asdetailed in the Company’s Annual Report on Form 10-K for the fiscal yearended December 31, 2008, and subsequent filings with the Securities andExchange Commission All these matters are difficult or impossible to predictaccurately, many of which may be beyond our control. Although we believe thatthe assumptions underlying our forward-looking statements are reasonable, anyof the assumptions could be inaccurate and, therefore, there can be noassurance that the forward-looking statements included in this Form 10-Qwill prove to be accurate.*

 

Theinformation contained in this section has been derived from Summer’sconsolidated financial statements and should be read together with theconsolidated financial statements and related notes included elsewhere in thisfiling.

 

Thefollowing discussion is intended to assist in the assessment of significantchanges and trends related to the results of operations and financial conditionof Summer Infant, Inc. This discussion and analysis should be read inconjunction with Summer’s consolidated financial statements and notes theretoincluded herein. Summer’s business has grown organically in all of its markets.Summer derives its revenues from the sale of health, safety and wellnessproducts for infants and toddlers. Summer’s revenue is driven by its ability to design and market desirableproducts, identify business opportunities and secure new and renew existingdistribution channels. Summer’s income from operations is derived from itsability to generate revenue and collect cash in excess of labor and other costsof providing its products and selling, general and administrative costs.

 

*Summary of critical accountingpolicies and estimates*

 

TheCompany’s critical accounting policies are disclosed in the Company’s AnnualReport on Form 10-K.  There havebeen no material changes to these policies during the first six months of 2009.This summary of critical accounting policies of Summer is presented to assistin understanding Summer’s consolidated financial statements. The consolidatedfinancial statements and notes are representations of Summer’s management,which is responsible for their integrity and objectivity. These accountingpolicies conform to accounting principles generally accepted in the UnitedStates of America and have been consistently applied in the preparation of theconsolidated financial statements.

 

Summermakes certain estimates and assumptions that affect the reported amounts ofassets and liabilities and the reported amounts of revenues and expenses. Theaccounting policies described below are those Summer considers critical inpreparing its financial statements. Some of these policies include significantestimates made by management using information available at the time theestimates were made. However, these estimates could change materially ifdifferent information or assumptions were used.

 

*Nature of operations*

 

Summeris engaged in the design, marketing and distribution of juvenile products.  The majority of its revenues are derived fromretail customers in North America. The Company also maintains a research and developmentstaff in Asia (no revenues are generated directly out of Asia).

 

*Income taxes*

 

The provision for incometaxes is based on our estimated annualized effective tax rate for the year. EffectiveJanuary 1, 2007, we adopted the provisions of FASB Interpretation No. 48(“FIN 48”), “Accounting for Uncertainty in Income Taxes — An Interpretation ofFASB Statement No. 109.” FIN 48 provides detailed guidance for thefinancial statement recognition, measurement and disclosure of uncertain taxpositions recognized in the financial statements in accordance with SFAS No. 109.Tax positions must meet a “more-likely-than-not” recognition threshold at theeffective 

 

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date to be recognizedupon the adoption of FIN 48 and in subsequent periods. Upon the adoption of FIN48, we had no unrecognized tax benefits. During the second quarter of 2009, werecognized no adjustments for uncertain tax benefits.

 

Income taxes are computedusing the asset and liability method of accounting. Under the asset andliability method, a deferred tax asset or liability is recognized for estimatedfuture tax effects attributable to temporary differences and carry-forwards.The measurement of deferred income tax assets is adjusted by a valuationallowance, if necessary, to recognize future tax benefits only to the extent,based on available evidence, it is more likely than not such benefits will berealized.  We recognize interest andpenalties, if any, related to uncertain tax positions in selling, general andadministrative expenses.  No interest and penalties related to uncertaintax positions were accrued at June 30, 2009. The tax years 2005 through2008 remain open to examination by the major taxing jurisdictions in which weoperate. We expect no material changes to unrecognized tax positions within thenext twelve months.

 

**Company Overview**

 

Summeris a designer, marketer, and distributor of branded juvenile health, safety andwellness products which are sold principally to large North American and UKretailers.  Summer currently has morethan 70 proprietary products in various product categories including nurseryaudio/video monitors, safety gates, durable bath products, bed rails, infantthermometers and related health and safety products, booster and potty seatsand bouncers.

 

Summer’sstrategy is to grow its sales through a variety of methods, including:

 

·                  increased product penetration (more products at each store);

 

·                  Increased store penetration (more stores within each retail customer);

 

·                  New products (at existing and new customers);

 

·                  New mass merchant retail customers;

 

·                  New distribution channels (food and drug chains, price clubs, homecenters, and web-based retailers);

 

·                  New geographies (international expansion); and

 

·                  New product categories

 

Summerhas been able to grow its annual revenues by over $100,000,000 over the pastseven years through a combination of all of the above factors. Each year it hasbeen able to expand the number of products into its main distribution channel,mass merchant retailers, and has also added new customers each year. Therefore,even without new product introductions, Summer could grow its business by simplyselling more of its existing product line to existing customers.

 

For2009 and beyond, the growth strategy of Summer will be to continue to developand sell new products to its existing customer base, sell new and existingproducts to new customers (or expand relationships with existing customers), andto expand in the UK and in other geographic regions (including Japan, Mexicoand Australia, among others).

 

Summer’sgrowth strategy has included acquisitions.

 

On March 31,2008, Summer acquired substantially allof the assets of Basic Comfort, Inc., a leading manufacturer andsupplier of infant comfort and safety products, including infant sleeppositioners, infant head supports and portable changing pads.

 

On April 18,2008, Summer acquired Kiddopotamus & Company, a leading manufacturerand supplier of infant nursery, travel and feeding accessories.

 

On July 17, 2009, the Company acquired certainassets of Butterfly Living, Inc., a developer and distributor of infant cribs.

 

Summerintends to pursue additional potential acquisition candidates in order toobtain new innovative products, new product categories, new retail customers ornew sales territories.  There areapproximately 400 active juvenile product companies, of which approximately 300have less than $10,000,000 in sales. In addition, there are various productcategories that Summer does not currently compete in, including car seats,strollers, walkers, and other categories. Summer may look to develop its ownproducts in these categories or attempt to gain entrance into these categoriesthrough acquisitions.

 

AsSummer continues to grow through internal initiatives and any additional futureacquisitions, it will incur additional expenses.  Two of the key areas in which such increasedexpenses will likely occur are sales and product development. In order to growsales, Summer will likely hire additional sales personnel to service newgeographic territories, focus existing resources on specific parts of theUnited States market and retain product line specialists to drive sales of newand existing 

 

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products in specificareas in which Summer believes it can readily increase sales. Productdevelopment expenses will increase as Summer develops new products in existingand new categories. As a result of its acquisition strategy, Summer will facevarious challenges such as the integration of the acquired companies’ productlines, employees, marketing requirements and information systems. Ongoinginfrastructure investment also may be required to support realized growth,including expenditures with respect to upgraded and expanded informationsystems and enhancing the company’s management team.

 

*Sales*

 

Summer’ssales are primarily derived from the sale of juvenile health, safety andwellness products and are recognized upon transfer of title of product toSummer’s customers. Summer’s products are marketed through several distributionchannels including chain retailers, specialty retailers and direct toconsumers.

 

Approximately95% of sales are currently made to customers in North America, with theremaining 5% made to customers in the UK. Sales are made utilizing standardcredit terms of 30 to 90 days. Summer generally accept returns only fordefective merchandise.

 

*Cost of goods sold and otherexpenses*

 

Summer’sproducts are manufactured by third parties, with approximately 80-85% of thedollar value of products being manufactured in China and the majority of thebalance being manufactured in Massachusetts. Cost of goods sold primarilyrepresents purchases of finished products from these third party manufacturers.The remainder of Summer’s cost of goods sold includes tooling depreciation,freight-in from suppliers and miscellaneous charges from contractmanufacturers. Substantially all of Summer’s purchases are made in US dollars,therefore most of this activity is not subject to currency fluctuations. IfSummer’s suppliers experience increased raw materials, labor or other costs andpass along such cost increases through higher prices for finished goods, Summer’scosts of sales would increase, and to the extent we are unable to pass suchprice increases along to Summer’s customers, Summer’s gross margins woulddecrease.

 

Selling,general and administrative expenses primarily consist of payroll, insurance,professional fees, royalties, freight out to customers, product developmentcosts, advertising and marketing expenses (including co-op advertisingallowances as negotiated with certain customers) and sales commissions. Severalof these items fluctuate with sales, some based on sales to particularcustomers and others based on sales of particular products.

 

Thereare not significant variations in seasonal demand for Summer’s products. Salesto its retail customers are generally higher in the time frame when retailerstake initial shipments of new products; these orders usually incorporate enoughproduct to fill each store plus additional amounts to be kept at the customer’sdistribution center. The timing of these initial shipments varies by customerdepending on when they finalize store layouts for the upcoming year, andwhether there are any mid-year product introductions.

 

**Results of Operations**

 

**Summer Infant and Subsidiaries**

**Consolidated Statements of Income**

**For the Three and Six Months Ending June 30,2009 and 2008**

**(In thousands)**

 
| ** **                                                                                                                                           | ** ** | **Three  Months  Ended June 30,  2009** | ** ** | **Three  Months  Ended June 30,  2008** | ** ** | **Six  Months Ended  June 30, 2009** | ** ** | **Six  Months Ended  June 30, 2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                                           | ** ** | **(unaudited)**                              | ** ** | **(unaudited)**                              | ** ** | **(unaudited)**                           | ** ** | **(unaudited)**                           | ** ** |
| Net Sales                                                                                                                                            |       | $                                            | 38,361     |                                         | 100.0      | %                                         | $          | 33,982                                    |       | 100.0 | % | $ | 73,210 |   | 100.0 | % | $ | 62,407 |   | 100.0 | % |
| Cost of Goods Sold                                                                                                                                   |       | 24,744                                       |       | 64.5                                         | %          | 21,665                                    |       | 63.8                                      | %          | 47,936 |   | 65.5 | % | 40,154 |   | 64.3 | % |
| Gross Profit                                                                                                                                         |       | 13,617                                       |       | 35.5                                         | %          | 12,317                                    |       | 36.2                                      | %          | 25,274 |   | 34.5 | % | 22,253 |   | 35.7 | % |
| OPERATING EXPENSES                                                                                                                                   |       |                                         |       |                                         |       |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses (excluding  depreciation, amortization, non-capitalizable deal fees and non-cash stock  option expense) |       | 9,633                                        |       | 25.1                                         | %          | 8,615                                     |       | 25.3                                      | %          | 18,927 |   | 25.8 | % | 15,942 |   | 25.6 | % |
|                                                                                                                                                 |       |                                         |       |                                         |       |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| EBITDA(a)                                                                                                                                            |       | $                                            | 3,984      |                                         | 10.4       | %                                         | $          | 3,702                                     |       | 10.9 | % | $ | 6,347 |   | 8.7 | % | $ | 6,311 |   | 10.1 | % |

 

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(a)          See non-GAAP discussion below regarding thecomputation of EBITDA.

 

*Three months ended June 30, 2009 compared with threemonths ended June 30, 2008*

 

Netsales increased from approximately $33,982,000 in the three months ended June 30,2008 to approximately $38,361,000 for the three months ended June 30,2009, an increase of approximately 13%. This sales increase was primarilyattributable to increased distribution of Summer’s products throughout Summer’scustomer base, plus new product introductions. Increases were noted in most of the significant customers.

 

Grossprofit increased from approximately $12,317,000 for the three months ended June 30,2008 to approximately $13,617,000 for the three months ended June 30,2009.  The gross profit as a percentageof sales decreased to 35.5% from 36.2% in the prior year.  The decrease as a percentage of sales is dueto increased costs of finished goods from the Company’s vendors in Asia and theUS.  The increase in these costs is dueto increased raw material and labor costs, in addition to the devaluation ofthe US dollar relative to the Chinese RMB.

 

Selling,general and administrative expenses increased from approximately $8,615,000 forthe three months ended June 30, 2008 to approximately $9,633,000 for thethree months ended June 30, 2009. This increase was primarily attributableto increases in headcount, higher variable selling expenses due to the increasein sales, and costs associated with the opening of new distribution centers tosupport the increase in sales.  Selling,general and administrative expenses decreased to 25.1% of net sales in thethree months ended June 30, 2009 from 25.3% of net sales in the threemonths ended June 30, 2008.  Thisdecrease as a percentage of sales was primarily due to the leveraging of theCompany’s fixed cost structure over a larger sales base.

 

EBITDA(as defined) increased from approximately $3,702,000 for the three months endedJune 30, 2008 to approximately $3,984,000 for the three months ended June 30,2009, an increase of approximately 8%. This increase was primarily attributableto the increased sales and gross profit dollars as described above.

 

*Six months ended June 30, 2009 compared with six monthsended June 30, 2008*

 

Netsales increased from approximately $62,407,000 in the six months ended June 30,2008 to approximately $73,210,000 for the six months ended June 30, 2009,a 17% increase. This sales increase was primarily attributable to increaseddistribution of Summer’s products throughout Summer’s customer base, plus newproduct introductions.  Increases werenoted in most of the significant customers. In addition, the year to date sales in 2009 includes six months of activityfor the products acquired from Kiddopotamus and Basic Comfort (businesses whichwere acquired in March and April of 2008), while the prior yearnumbers only include approximately three months of activity for these products,which accounts for approximately $5,000,000 of the year to date increase.

 

Grossprofit increased from approximately $22,253,000 for the six months ended June 30,2008 to approximately $25,274,000 for the six months ended June 30,2009.  The gross profit as a percentageof sales decreased to 34.5% from 35.7% in the prior year.  The decrease as a percentage of sales is dueto increased costs of finished goods from the Company’s vendors in Asia and theUS.  The increase in these costs is dueto increased raw material and labor costs, in addition to the devaluation ofthe US dollar relative to the Chinese RMB.

 

Selling,general and administrative expenses increased from approximately $15,942,000for the six months ended June 30, 2008 to approximately $18,927,000 forthe six months ended June 30, 2009. This increase was primarilyattributable to increases in headcount, higher variable selling expenses due tothe increase in sales, and costs associated with the opening of newdistribution centers to support the increase in sales.  Selling, general and administrative expensesincreased to 25.8% of net sales in the six months ended June 30, 2009 from25.6% of net sales in the six months ended June 30, 2008.

 

EBITDAtabled from approximately $6,311,000 for the six months ended June 30,2008 to approximately equal to the $6,347,000 for the six months ended June 30,2009.

 

**Liquidity and Capital Resources**

 

Summergenerally funds its operations and working capital needs through cash generatedfrom operations and borrowings under its credit facilities.

 

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Summer’ssales have increased significantly over the past several years. For the yearended December 31, 2003, net sales were $17,600,000. For the year ended December 31,2008, net sales exceeded $132,000,000. This sales growth has led to asubstantial increase in working capital requirements, specifically accountsreceivable and inventory. The typical cash flow cycle is as follows:

 

·                  Inventory is purchased to meet expected demand plus a safety stock.Since the majority of Summer’s vendors are based in Asia, inventory takes fromfour to six weeks to arrive from Asia to the various distribution points Summermaintains in the US and the UK. Payment terms for these vendors average 60 daysfrom the date the product ships from Asia, therefore Summer is generally payingfor the product a short time after it is physically received in the US. Theincreased sales Summer has experienced result in increased levels of inventory,and therefore an increase in the amount of cash required to fund its inventorylevel.

 

·                  Sales to customers generally have payment terms of 30 to 60 days. Theincreased sales have resulted in an increase in the level of accountsreceivable, and therefore have increased the amount of cash required to fundworking capital.

 

Summerhad traditionally been able to fund its increased working capital through linesof credit with banks.

 

Themajority of capital expenditures for Summer are for tools related to newproduct introductions. Summer receives indications from retailers generallyaround the middle of each year as to what products the retailer will be takinginto its product line for the upcoming year. Based on these indications, Summerwill then acquire the tools required to build the products. The majority ofthese expenditures are therefore made in the third and fourth quarters of eachyear so that initial shipments of products can be made in December and January (thetypical time frame for new product shipments). In most cases the payments forthe tools are spread out over a three to four month period.

 

Forthe six months ended June 30, 2009, net cash provided by operatingactivities was $5,708,000.  This wasprimarily due to the net income generated year to date, in addition to thesignificant reduction in inventory due to improved working capital management.

 

Netcash used in investing activities was $1,897,000, which primarily relates tocash paid for additions to property, plant and equipment.

 

Netcash used in financing activities was $2,486,000, which relates to repaymentson the construction loan with funds provided by the sale/leaseback of Summer’sprinciple offices in Woonsocket, Rhode Island and repayments of the line ofcredit due to positive cash flow.

 

Basedon the above factors, the net cash increase for the six months ended June 30,2009 was $1,469,000, resulting in a cash balance of $2,457,000 at June 30,2009.

 

Summerbelieves that its cash on hand and current banking facilities are sufficient tofund its cash requirements for at least the next 12 months. However, unforeseencircumstances, such as softness in the retail industry or deterioration in thebusiness of a significant customer, could create a situation where Summercannot access all of the available lines of credit due to not having sufficientassets or EBITDA. In addition, there is no assurance that Summer will meet allof its bank covenants in the future, or that its lenders will grant waivers ifthere are covenant violations.

 

Summer’sstrategy for funding its business going forward is a combination of increasedprofitability, and if necessary, negotiation of increased borrowing lines asrequired with traditional lenders.

 

On April 10, 2008, Summer entered into two new three-year securedcredit facilities (the “Loan Agreement”) with Bank of America, N.A., asAdministrative Agent, and each of the financial institutions a signatory to theLoan Agreement.  The Loan Agreementprovides for a $36,000,000 working capital revolving credit facility and a$10,000,000 non-restoring acquisition credit facility.  The new credit facilities mature on June 30,2011.

 

Summer and its subsidiaries, Summer Infant (USA), Inc. Summer InfantEurope Limited, Summer Infant Asia Limited and Summer Infant Canada, Limitedare the borrowers under this Loan Agreement. These new credit facilities are secured by all assets of Summer and itssubsidiaries.  These new creditfacilities replace Summer’s prior line of credit, and are being usedprincipally to fund growth opportunities and for working capital purposes.

 

Summer’s ability to borrow under the Loan Agreement is subject to itsongoing compliance with a number of financial and other covenants, includingthe following: (i) that Summer and its subsidiaries maintain a new worthof $50,000,000 plus the sum of 50% of net income earned in each fiscal year, (ii) thatSummer and its subsidiaries maintain a

 

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ratio of total funded debt to EBITDA of not greater than 3.50:1.00, and (iii) thatSummer and its subsidiaries maintain a ratio of operating cash flow to debtservice of not less than 1.25:1,00. Furthermore, if Summer’s ratio of total funded debt to EBITDA is greaterthan 3.25:1.00 for any fiscal year, the aggregate amount that may be borrowedunder the Loan Agreement will be determined by reference to a borrowing base.

 

These new credit facilities bear interest at a floating rate based on aspread over LIBOR ranging from 150 basis points to 200 basis points, dependingupon the ratio of the Company’s total funded debt to EBITDA.  As of June 30, 2009, the blendedinterest rate for these credit facilities was 3.81%.  In addition, these new credit facilities havean unused line fee based on the unused amount of the credit facilities equal to25 basis points.

 

The Loan Agreement also contains customary events of default, including across default provision and a change of control provision.  In the event of a default, all of theobligations of the Company and its subsidiaries under the loan Agreement may bedeclared immediately due and payable.  For certain events of default relating to insolvency and receivership,all outstanding obligations become due and payable.

 

TheCompany was in compliance with all covenants under its line of credit as of June 30,2009.

 

Webelieve that Summer’s cash flows from operations, cash on hand, and available borrowingswill be sufficient to meet Summer’s working capital and capital expenditurerequirements and provide us with adequate liquidity to meet anticipatedoperating needs for at least the next 12 months. Summer’s cash requirements forthe period beyond that are expected to be met by the continued use of bankfacilities to meet working capital requirements.

 

**Non-GAAP Discussion**

 

Inaddition to its GAAP results, Summer considers non-GAAP measures of itsperformance. EBITDA, as defined below, is an important supplemental financialmeasure of Summer’s performance that is not required by, or presented inaccordance with, GAAP. EBITDA represents net income (loss) before income taxes,minority interest in net income of affiliates, interest expense, non-cash stockoption expense, and depreciation and amortization. Summer’s management usesEBITDA as a financial measure to assess the ability of its assets to generatecash sufficient to pay interest on its indebtedness, meet capital expenditureand working capital requirements, and otherwise meet its obligations as theybecome due. Summer’s management believes that the presentation of EBITDAprovides useful information regarding Summer’s results of operations becausethey assist in analyzing and benchmarking the performance and value of Summer’sbusiness. Summer believes that EBITDA is useful to stockholders as a measure ofcomparative operating performance, as it is less susceptible to variances inactual performance resulting from depreciation and amortization and morereflective of changes in pricing decisions, cost controls and other factorsthat affect operating performance.

 

EBITDAalso is used by Summer’s management for multiple purposes, including:

 

·                  To calculate and support various coverage ratios with Summer’s lenders;

 

·                  To allow lenders to calculate total proceeds they are willing to loanto Summer based on its relative strength compared to other competitors; and

 

·                  to more accurately compare Summer’s operating performance from periodto period and company to company by eliminating differences caused byvariations in capital structures (which affect relative interest expense), taxpositions and amortization of intangibles.

 

Inaddition, EBITDA is an important valuation tool used by potential investorswhen assessing the relative performance of a company in comparison to othercompanies in the same industry. Although Summer uses EBITDA as a financialmeasure to assess the performance of its business, there are materiallimitations to using a measure such as EBITDA, including the difficultyassociated with using it as the sole measure to compare the results of onecompany to another and the inability to analyze significant items that directlyaffect a company’s net income or operating income because it does not includecertain material costs, such as interest and taxes, necessary to operate itsbusiness. In addition, Summer’s calculation of EBITDA may not be consistentwith similarly titled measures of other companies and should be viewed inconjunction with measures that are computed in accordance with GAAP. Summer’smanagement compensates for these limitations in considering EBITDA inconjunction with its analysis of other GAAP financial measures, such as netincome.

 

Thefollowing table presents a reconciliation of the Summer EBITDA to net income,its most directly comparable GAAP financial measure, on a historical basis, forthe periods presented:

 

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**Reconciliation of unaudited EBITDA to Net Income (in $000’s):**

 
| ** **                           | ** ** | **Six Months Ended  June 30** | ** ** |
|--------------------------------------|------------|----------------------------------------------|------------|
| ** **                           | ** ** | **2009**                                     | ** ** | **2008** | ** ** |
|                                 |       |                                         |       |   |   |
| Net  income                          |       | $                                            | 2,046      |   | $ | 2,330 |   |
|                                 |       |                                         |       |   |   |
| Income  taxes                        |       | 877                                          |       | 1,495 |   |
|                                 |       |                                         |       |   |   |
| Non-cash  stock option expense       |       | 499                                          |       | 180 |   |
|                                 |       |                                         |       |   |   |
| Non-capitalizable  deal-related fees |       | —                                       |       | 214 |   |
|                                 |       |                                         |       |   |   |
| Interest  expense                    |       | 896                                          |       | 967 |   |
|                                 |       |                                         |       |   |   |
| Depreciation  and amortization       |       | 2,029                                        |       | 1,125 |   |
|                                 |       |                                         |       |   |   |
| EBITDA,  as defined                  |       | $                                            | 6,347      |   | $ | 6,311 |   |

 

**ITEM 4T.  Controls andProcedures**

 

*(a) Evaluationof Disclosure Controls and Procedures*

 

As required by Rule 13a-15under the Securities Exchange Act of 1934, as of the end of the period coveredby this Quarterly Report, Summer carried out an evaluation, under thesupervision and with the participation of its Chief Executive Officer and itsChief Financial Officer, of the effectiveness of our disclosure controls andprocedures, as of June 30, 2009. Summer’s Principal Executive Officer andPrincipal Financial Officer have concluded, based on their evaluation, that asof the end of the period covered by this report, the Company’s controls andprocedures were effective as of June 30, 2009.

 

*(b) Changesin Internal Control Over Financial Reporting*

 

There was no change inSummer’s internal control over financial reporting that occurred during theperiod covered by this Quarterly Report that has materially affected, or isreasonably likely to materially affect, Summer’s internal control overfinancial reporting.

 

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**PART II.  OTHER INFORMATION**

 

**ITEM 1A.Risk Factors**

 

There have been nomaterial changes pertaining to risk factors that were contained in the AnnualReport on Form 10-K for the year ended December 31, 2008, filed on March 25,2009, and amended by Amendment No. I, filed on April 30, 2009.

 

**ITEM4.  Submission of Matters to a Vote ofSecurity Holders**

 

The Company’s Annual Meeting of Shareholders was heldon June 10, 2009.  There was onematter presented to shareholders for a vote; total shares voted were11,560,485, and the results of the voting were as follows:

 

1.               Election of directors - to elect threedirectors to serve for three years, with terms expiring in 2012:

 

Steve Gibree — Votes for:      10,924,203; votes withheld 636,282

Martin Fogelman — Votesfor:  8,802,303; votes withheld 2,758,182

Richard Wenz — Votesfor:  9,478,181; votes withheld 2,082,314

 

Each individual was,therefore, elected to the Board of Directors to serve three-year terms.

 

**ITEM 6.Exhibits**

 

31.1 Chief ExecutiveOfficer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

 

31.2 Chief FinancialOfficer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

 

32.1 Certification ofJason Macari, Chief Executive Officer of Summer Infant, Inc., pursuant to18 U.S.C Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

32.2 Certification ofJoseph Driscoll, Chief Financial Officer of Summer Infant, Inc., pursuantto 18 U.S.C Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

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**Signatures**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
| **Summer  Infant, Inc.** |                    |
|-------------------------------|-------------------------|
|                          |                    |
|                          |                    |
| August 11, 2009          |                    |
|                          |                    |   |
|                          | /s/ Jason Macari        |   |
|                          | Jason Macari            |   |
|                          | Chief Executive Officer |   |
|                          |                    |   |
|                          |                    |   |
| August 11, 2009          |                    |
|                          |                    |   |
|                          | /s/ Joseph Driscoll     |   |
|                          | Joseph Driscoll         |   |
|                          | Chief Financial Officer |   |

 

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