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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended September 30, 2009**

 

**SummerInfant, Inc.**

(Name of Registrant as Specified in Its Charter)

 

**Commission file 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) |

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the last 90 days.  Yes x   Noo.

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T  (§232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files). Yes o    No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated 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 |

 

Indicateby check mark whether the registrant is a shell company as defined in Rule 12b-2of the Exchange Act.  Yes o   No x

 

Asof October 15, 2009, there were 15,598,957 shares outstanding (includingunvested restricted shares) of the registrant’s Common Stock, $.0001 par valueper share.

 

 

** **

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Table ofContents

 

**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 at  September 30, 2009 (unaudited) and December 31, 2008 (as restated)**         | **3**            |
|              |                                                                                                                               |             |
|              | **Condensed  Consolidated Statements of Income for the three and nine months ended September 30,  2009 and 2008 (unaudited)** | **4**            |
|              |                                                                                                                               |             |
|              | **Condensed Consolidated Statements of Cash Flows for  the nine months ended September 30, 2009 and 2008 (unaudited)**        | **5**            |
|              |                                                                                                                               |             |
| ** **        | **Notes to  Condensed Consolidated Financial Statements**                                                                          | **6**            |
|              |                                                                                                                               |             |
| **Item 2.**       | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                                    | **13**           |
|              |                                                                                                                               |             |
| **Item 3.**       | **Quantitative and Qualitative Disclosures About Market Risk**                                                                     | **N/A**          |
|              |                                                                                                                               |             |
| **Item  4T.**     | **Controls  and Procedures**                                                                                                       | **22**           |
|              |                                                                                                                               |             |
| **Part II.** | **Other  Information**                                                                                                             | **23**           |
|              |                                                                                                                               |             |
| **Item 1.**       | **Legal Proceedings**                                                                                                              | ** **       |
| **Item 1A.**      | **Risk  Factors**                                                                                                                  | **23**           |
| **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**                                                                                                                       | **23**           |
|              |                                                                                                                               | ** **       |
| **Signatures**    | **24**                                                                                                                             |

 

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**Summer Infant, Inc. and Subsidiaries**

**CondensedConsolidated Balance Sheets**

 

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

 
| ** **                                                                                            | ** ** | **September 30,******** 2009** | ** ** | **December 31,******** 2008** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                            | ** ** | **Unaudited**                            | ** ** | **Restated**                            | ** ** |
| ASSETS                                                                                                |       |                                     |       |                                    |       |
| CURRENT ASSETS                                                                                        |       |                                     |       |                                    |       |
| Cash and cash equivalents                                                                             |       | $                                        | 2,715      |                                    | $          | 988 |   |
| Trade receivables, net of allowance for doubtful  accounts                                            |       | 34,758                                   |       | 29,358                                  |       |
| Inventory                                                                                             |       | 28,702                                   |       | 30,882                                  |       |
| Prepaids and other current assets                                                                     |       | 1,381                                    |       | 1,495                                   |       |
| Deferred tax assets                                                                                   |       | 942                                      |       | 1,005                                   |       |
| TOTAL CURRENT ASSETS                                                                                  |       | 68,498                                   |       | 63,728                                  |       |
| Property and equipment, net                                                                           |       | 11,294                                   |       | 11,212                                  |       |
| Goodwill                                                                                              |       | 45,051                                   |       | 40,452                                  |       |
| Other intangible assets, net                                                                          |       | 15,681                                   |       | 15,130                                  |       |
| Other assets                                                                                          |       | 242                                      |       | 416                                     |       |
| TOTAL ASSETS                                                                                          |       | $                                        | 140,766    |                                    | $          | 130,938 |   |
|                                                                                                  |       |                                     |       |                                    |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                             |       |                                     |       |                                    |       |
| CURRENT LIABILITIES                                                                                   |       |                                     |       |                                    |       |
| Accounts payable and accrued expenses                                                                 |       | $                                        | 25,882     |                                    | $          | 23,045 |   |
| Current portion of long-term debt                                                                     |       | 3,507                                    |       | 1,654                                   |       |
| TOTAL CURRENT LIABILITIES                                                                             |       | 29,389                                   |       | 24,699                                  |       |
| Long-term debt, less current portion                                                                  |       | 35,578                                   |       | 42,277                                  |       |
| Other liabilities                                                                                     |       | 7,081                                    |       | 1,150                                   |       |
| Deferred tax liabilities                                                                              |       | 1,348                                    |       | 1,348                                   |       |
| TOTAL LIABILITIES                                                                                     |       | $                                        | 73,396     |                                    | $          | 69,474 |   |
|                                                                                                  |       |                                     |       |                                    |       |
| COMMITMENTS AND CONTINGENCIES (note 4)                                                                |       |                                     |       |                                    |       |
|                                                                                                  |       |                                     |       |                                    |       |
| STOCKHOLDERS’ EQUITY                                                                             |       |                                     |       |                                    |       |
| Common Stock $.0001 par value, issued and  outstanding 15,598,957 and 15,055,782 shares, respectively |       | 1                                        |       | 1                                       |       |
| Additional paid-in capital                                                                            |       | 55,188                                   |       | 54,095                                  |       |
| Retained earnings                                                                                     |       | 12,251                                   |       | 8,250                                   |       |
| Accumulated other comprehensive loss                                                                  |       | (70                                      | )          | (882                                    | )          |
| TOTAL STOCKHOLDERS’ EQUITY                                                                       |       | 67,370                                   |       | 61,464                                  |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                       |       | $                                        | 140,766    |                                    | $          | 130,938 |   |

 

See notes to condensed consolidated financial statements

 

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**Summer Infant, Inc. and Subsidiaries**

**CondensedConsolidated Statements of Income**

 

Notethat all dollar amounts presented below are in thousands of US dollars except,per share amounts.

 
| ** **                                       | ** ** | **Unaudited**                   | ** ** | **Unaudited**                  | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| ** **                                       | ** ** | **For  the three months ended** | ** ** | **For  the nine months ended** | ** ** |
| ** **                                       | ** ** | **September 30,**          | ** ** | **September 30,**         | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                       | ** ** | **2009**                        | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                       | ** ** | ** **                      | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenues                                     |       | $                               | 40,984     |                           | $          | 35,575 |   | $ | 114,194 |   | $ | 97,982 |   |
| Cost of goods sold                               |       | 26,080                          |       | 23,109                         |       | 74,016 |   | 63,263 |   |
| Gross profit                                     |       | 14,904                          |       | 12,466                         |       | 40,178 |   | 34,719 |   |
| Selling, general and administrative expenses (a) |       | 11,879                          |       | 9,537                          |       | 33,334 |   | 26,998 |   |
| operating income                                 |       | 3,025                           |       | 2,929                          |       | 6,844 |   | 7,721 |   |
| Interest expense, net                            |       | (232                            | )          | (506                           | )          | (1,128 | ) | (1,473 | ) |
| Income before provision for income taxes         |       | 2,793                           |       | 2,423                          |       | 5,716 |   | 6,248 |   |
| Income tax expense                               |       | 838                             |       | 817                            |       | 1,715 |   | 2,312 |   |
| NET INCOME                                       |       | $                               | 1,955      |                           | $          | 1,606 |   | $ | 4,001 |   | $ | 3,936 |   |
|                                             |       |                            |       |                           |       |   |   |   |   |
| NET INCOME PER SHARE- BASIC                      |       | $                               | 0.13       |                           | $          | 0.11 |   | $ | 0.26 |   | $ | 0.27 |   |
| Weighted average shares outstanding - basic      |       | 15,319,546                      |       | 15,055,782                     |       | 15,198,042 |   | 14,627,137 |   |
|                                             |       |                            |       |                           |       |   |   |   |   |
| NET INCOME PER SHARE - DILUTED                   |       | $                               | 0.12       |                           | $          | 0.11 |   | $ | 0.26 |   | $ | 0.27 |   |
| Weighted average shares outstanding- diluted     |       | 16,009,543                      |       | 15,055,782                     |       | 15,607,590 |   | 14,627,137 |   |

 

Seenotes to condensed consolidated financial statements.

 

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(a) Includesnon-cash stock compensation expense of $632 and $270 for the nine months ended September 30,2009 and 2008, respectively, and $133 and $90 for the three months ended September 30,2009 and 2008, respectively.  The total also includes non-capitalizabledeal-related costs of $215 and $214 for the nine months ended September 30,2009 and 2008, respectively.

 

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**Summer Infant, Inc. and Subsidiaries**

**CondensedConsolidated Statements of Cash Flows**

 

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

 
| ** **                                                                                                                                                   | ** ** | **Unaudited**                                 | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                                   | ** ** | **For the  nine months ended** | ** ** |
| ** **                                                                                                                                                   | ** ** | **September 30,******** 2009**      | ** ** | **September 30,******** 2008** | ** ** |
|                                                                                                                                                         |       |                                          |       |   |   |
| Cash flows from operating activities:                                                                                                                        |       |                                          |       |   |   |
| Net income                                                                                                                                                   |       | $                                             | 4,001      |   | $ | 3,936 |   |
| Adjustments to reconcile net income to net cash used  in operating activities                                                                                |       |                                          |       |   |   |
| Depreciation and amortization                                                                                                                                |       | 3,043                                         |       | 1,866 |   |
| Non-cash stock option expense                                                                                                                                |       | 632                                           |       | 270 |   |
| Deferred taxes                                                                                                                                               |       | 63                                            |       | (243 | ) |
| Change in fair value of interest rate swap                                                                                                                   |       | (211                                          | )          | — |   |
| Changes in assets and liabilities net of effects  of acquisition:                                                                                            |       |                                          |       |   |   |
| Increase in accounts receivable                                                                                                                              |       | (5,555                                        | )          | (4,489 | ) |
| (Increase) decrease in inventory                                                                                                                             |       | 3,703                                         |       | (7,020 | ) |
| Increase (decrease) in accounts payable and  accrued expenses                                                                                                |       | 838                                           |       | 3,083 |   |
| Decrease in prepaids and other current assets                                                                                                                |       | 139                                           |       | 85 |   |
| (Increase) decrease in other assets                                                                                                                          |       | 27                                            |       | (26 | ) |
| Net cash provided by (used in) operating  activities                                                                                                         |       | 6,680                                         |       | (2,538 | ) |
| Cash flows from investing activities:                                                                                                                        |       |                                          |       |   |   |
| Acquisitions of property and equipment                                                                                                                       |       | (2,633                                        | )          | (2,273 | ) |
| Acquisitions, net of cash acquired                                                                                                                           |       | (74                                           | )          | (16,586 | ) |
| Net cash used in investing activities                                                                                                                        |       | (2,707                                        | )          | (18,859 | ) |
| Cash flows from financing activities:                                                                                                                        |       |                                          |       |   |   |
| Net borrowings (repayments) on debt and other  long-term liabilities                                                                                         |       | (6,156                                        | )          | 21,467 |   |
| Proceeds from sale leaseback of building                                                                                                                     |       | 3,903                                         |       | — |   |
| Net cash provided by (used in) financing  activities                                                                                                         |       | (2,253                                        | )          | 21,467 |   |
| Effect of exchange rate changes on cash and cash  equivalents                                                                                                |       | 7                                             |       | (390 | ) |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                                                                                        |       | 1,727                                         |       | (320 | ) |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                                                                               |       | 988                                           |       | 1,771 |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                                                                                                     |       | $                                             | 2,715      |   | $ | 1,451 |   |
| Supplemental disclosure of cash flow information:                                                                                                            |       |                                          |       |   |   |
| Cash paid for interest                                                                                                                                       |       | $                                             | 1,263      |   | $ | 1,373 |   |
| Cash paid for income taxes                                                                                                                                   |       | $                                             | 541        |   | $ | 1,721 |   |
| Non cash investing and financing activities:                                                                                                                 |       |                                          |       |   |   |
| Issuance  of common stock in conjunction with the acquisition of Basic  Comfort, Inc., Kiddopotamus & Co., (2008) and Butterfly Living  (2009) |       | $                                             | 461        |   | $ | 4,657 |   |
| New capital lease obligations                                                                                                                                |       | $                                             | 271        |   | $ | 322 |   |

 

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**SUMMER INFANT, INC.  AND SUBSIDIARIES**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****                        ****SUMMARY OFSIGNIFICANT ACCOUNTING 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 restated consolidated financial statements and notes for the yearended December 31, 2008 filed on Form 10-K/A. Company's previouslyissued financial statements for the fourth quarter and full year 2008 should nolonger be relied upon because they contain errors under accounting principlesgenerally accepted in the United States relating to accounting for interestrate swap agreements.

 

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

 

*Restatement*

 

In2007 and 2008 the Company entered into various interest rate swap agreementsthat are required by the Company’s loan agreement with Bank of America.  The interest rate swaps are used to hedgeagainst potential increases in interest rates by locking in a portion of theoutstanding debt at a fixed rate.  Thefair value of the swaps was determined to be immaterial from the inception ofthe swaps until the fourth quarter of 2008. During the fourth quarter of 2008,the fair value declined due to the dislocation in the financial markets, butthis was not recorded by the Company. In addition, the Company concluded theswaps do not qualify for hedge accounting treatment. Therefore, the Company hasrestated its 2008 results to record an increase in net liabilities and areduction of stockholders’ equity (through an after-tax charge in the incomestatement) of approximately $0.7 million, which reflects the reduced fair valueof the swaps at December 31, 2008. This reduced stockholders’ equity from $62.2 million to $61.5 million atDecember 31, 2008.  As long as theCompany keeps these swaps in place until they terminate (as required by thebank), the fair value will be adjusted each quarter and will ultimately returnto zero.  The restatement of 2008 fourthquarter and annual results has no impact on operating income, EBITDA or cashflow of the Company. The 2009 impact of the change in fair value of theinterest rate swaps is recorded in the accompanying consolidated statement ofincome.

 

*New Accounting Pronouncements*

 

The FASB Accounting StandardsCodificationTM (Codification) is the source of authoritative accountingprinciples recognized by the FASB to be applied by nongovernmental entities inthe preparation of financial statements in conformity with GAAP. Rules andinterpretive releases of the Securities and Exchange Commission (SEC) underauthority of federal securities laws are also sources of authoritative GAAP forSEC registrants. The adoption of the codification had no impact on theCompany’s financial position, results of operations or cash flows.

 

In December 2007, theFASB issued new rules on noncontrolling interests in consolidatedfinancial statements.  The relevantcontent addresses consolidation rules for noncontrolling interests. Itapplies to all entities that prepare consolidated financial statements, exceptfor not-for-profit organizations, but will *affect*only those entities that have an outstanding noncontrolling interestin one or more subsidiaries or**thatdeconsolidate a subsidiary. The Company adopted the guidance in this topic asof January 1, 2009, with no material impact.

 

InMarch 2008, the FASB issued a pronouncement pertaining to disclosuresabout derivative instruments and hedging activities.  The relevant content enhances the disclosurerequirements for derivative instruments and related hedged items accounted forunder FASB ASC 815 and how derivative instruments and related hedged itemsaffect an entity’s financial position, financial performance and cashflows.  The Company adopted the guidancein this topic as of January 1, 2009, with no material impact. See significantaccounting policies section for additional disclosures.

 

InDecember 2007, the FASB issued guidance on changes in the accounting forand reporting of business acquisitions.**Theobjective is to provide consistency to the accounting and financial reportingof business combinations by using only one method, the purchase method. ThisStatement has been applied prospectively to business combinations for which theacquisition date is on or after January 1, 2009 and has been applied tothe 2009 acquisition discussed below.

 

TheCompany does not believe that any other recently issued, but not yet effective,accounting standards will have a material effect on the Company’s consolidatedfinancial position, results of operations, or cash flows.

 

*Fair Value Measurements*

 

EffectiveJanuary 1, 2008, we adopted the new standard regarding fair value which establishesa new framework for measuring fair value and expands related disclosures.Broadly, the framework requires fair value to be determined based on theexchange price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for theasset or liability in an orderly transaction between market participants. Thestandard established a three-level valuation hierarchy based upon observableand non-observable inputs.

 

Observableinputs reflect market data obtained from independent sources, whileunobservable inputs reflect our market assumptions. Preference is given toobservable inputs. These two types of inputs create the following fair valuehierarchy:

 
| Level 1 – |         Quoted  prices for identical instruments in active markets.                                                                                                                                                                                                 |
|--------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                     |                                                                                                                                                                                                                                                                                                        |
| Level 2 – |         Quoted  prices for similar instruments in active markets; quoted prices for identical  or similar instruments in markets that are not active; and model-derived  valuations whose inputs are observable or whose significant value drivers are  observable. |
|                     |                                                                                                                                                                                                                                                                                                        |
| Level 3 – |         Significant  inputs to the valuation model are unobservable.                                                                                                                                                                                                |

 

Wemaintain policies and procedures to value instruments using the best and mostrelevant data available. In addition, we utilize risk management resources thatreview valuation, including independent price validation.

 

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TheCompany recognizes fair value swaps using Level 2 inputs; the fair value of theinterest rate swaps as of September 30, 2009 and December 31, 2008 wasa liability of $939,000 and $1,150,000, respectively.

 

Inthe third quarter of 2009, Company recorded an increase in fair value of itsinterest rate swap.  The effect was anincrease in the fair value of the swaps of approximately $211,000, and adecrease in interest expense of $211,000.  The impact of the change in fair value duringthe first and second quarters of 2009 was not material.

 

Weuse derivatives for risk management purposes. As a matter of policy, we do notuse derivatives for speculative purposes. This is a key requirement in our loanagreement to mitigate interest rate risk.

 

Thenotional amounts under the interest rate swap agreements total $20 million,which is approximately 53% of the Company’s total outstanding bank debt atSeptember 30, 2009.

 

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Thefollowing table provides information about the fair value of our derivatives,by contract type, identifying those derivatives not accounted for as hedges:

 
| ** **                   | ** ** | **At September 30,  2009** | ** ** | **At December 31,  2008** | ** ** |
|------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| ** **                   | ** ** | **Fair value**                  | ** ** | **Fair value**                 | ** ** |
| ** **                   | ** ** | **Liabilities**                 | ** ** | **Liabilities**                | ** ** |
|                         |       |                            |       |                           |       |
| **Derivatives**              |       |                            |       |                           |       |
| Interest rate swap contracts |       | $                               | 939,000    |                           | $          | 1,150,000 |   |
|                              |            |                                 |            |                                |            |  |  |

 

Theabove liability is classified in the caption “other liabilities” and the gainsand losses are classified in “interest expense” in the accompanying financialstatements since the swaps do not qualify for hedge accounting.

 

*Income taxes.*

 

Theprovision for income taxes is based on the Company’s estimated annualizedeffective tax rate for the year.

 

Incometaxes are computed using the asset and liability method of accounting. Underthe asset and liability method, a deferred tax asset or liability is recognizedfor estimated future tax effects attributable to temporary differences andcarryforwards. The measurement of deferred income tax assets is adjusted by avaluation allowance, if necessary, to recognize future tax benefits only to theextent, based on available evidence, it is more likely than not such benefitswill be realized.  Uncertain tax positions are recognized if they meet “morelikely than not” criteria.  The Companyrecognizes interest and penalties, if any, related to uncertain tax positionsin selling, general and administrative expenses.  No interest andpenalties related to uncertain tax positions were accrued at September 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*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect certain reported amounts and disclosures.Accordingly, actual results could differ from those estimates.

 

*Net Income Per Share*

 

Dilutedearnings per share 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 242,250 (includingforfeitures) unvested restricted shares that were issued in the first quarterof 2009. The calculation of diluted earnings per share also includes 360,497equivalent shares from stock options and 87,250 vested restricted shares usingthe treasury method in the shares outstanding.

 

In2008, all outstanding stock options were excluded from earnings per sharecalculations due to the fact that these options were anti-dilutive.

 

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* *

**2.****                                    ****Acquisition**

 

On July 17, 2009, the Company entered into an Asset PurchaseAgreement (the “Acquisition Agreement”) to acquire Butterfly Living, LLC (“Butterfly”),under which the Company acquired certain assets and liabilities of Butterfly,an innovative manufacturer of infant cribs, headquartered in Pennsylvania.

 

The Company accounted for the acquisition under new guidance effectiveJanuary 1, 2009.

 

Total purchase price recorded in connection with the acquisition wasapproximately $4.1 million, including approximately $3.6 million representingthe estimated fair value of contingent consideration to be paid quarterlythrough 2013 based on the achievement of certain financial targets.  Approximately $74,000 was paid in cash uponclosing.

 

The Company funded the cash portion of the total net purchase pricefrom cash on hand. The total stock consideration of $461,000 was deposited inescrow to secure the post-closing indemnification obligations of the formerButterfly stockholders under the terms of the agreement.

 

The following table summarizes the estimatedpreliminary fair values of the assets acquired and liabilities assumed at thedate of acquisition of Butterfly by Summer (amounts in thousands of USdollars):

 
| Inventory                                         |   | $      | 1,147  |   |
|---------------------------------------------------|--------|--------|--------|--------|
| Other  Intangible Assets                          |   | 812    |   |
| Goodwill                                          |   | 4,599  |   |
| Accounts  Payable and accrued liabilities assumed |   | (2,452 | )      |
| Total  purchase consideration                     |   | $      | 4,106  |   |

 

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TheCompany has made a preliminary allocation of the excess purchase price to aspecific intangible asset (customer list); this allocation was based on aninitial analysis of the various intangible assets being acquired by Summer.  The Company is in the process of finalizingits allocation and expects to retrospectively adjust its allocation in thefourth quarter of 2009.

 

The estimated earn-out liability was calculatedusing a discount rate of 3.27% to discount the $4 million potential futureliability to a present value of $3.8 million, then reduced for certain closingadjustments.  Management has concludedthat the full $4 million earn out should be recorded at this time (net ofpresent value) based upon current sales generated by Butterfly products as wellas projections of future business.

 

Managementbelieves the pro forma  impact of theacquisition is not material.

 

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**3.****                        ****DEBT**

 

*Credit Facilities*

 

OnApril 10, 2008, the Company entered into two three-year secured creditfacilities (the “Loan Agreement”) with Bank of America, N.A., as AdministrativeAgent, and each of the financial institutions as signatory to the LoanAgreement.  The Loan Agreement provides for a $36,000,000 working capitalrevolving credit facility and a $10,000,000 non-restoring acquisition creditfacility.  The credit facilities mature on June 30, 2011.  TheCompany 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.

 

TheCompany’s ability to borrow under the Loan Agreement is subject to its ongoingcompliance with a  number of financial and other covenants, including thefollowing: (i) that  the Company and its subsidiaries maintain a networth of $50,000,000 plus the  sum of 50% of net income  earned ineach fiscal year, (ii) that the Company and its subsidiaries maintain aratio of total funded debt  to EBITDA, as defined, of not greater than3.50:1.00, and (iii) that the Company and  its subsidiaries maintaina ratio of operating cash flow  to debt service of not less than1.25:1.00.  Furthermore, if the Company’s ratio of total funded debt toEBITDA, as defined, is greater than 3.25:1.00 for any fiscal year, theaggregate amount that may be borrowed under the Loan Agreement will bedetermined by reference to a borrowing base.  The Company is in compliancewith all covenants as of September 30, 2009.

 

Aspart of the loan agreement Summer Infant was required to enter into two swapagreements.  Summer was also required topay down approximately $158,086 per month on the acquisition loan beginning in May 2009.

 

Swap#1 Effective Notional amount $10,000,000 has a fixed rate of 2.92% plus 150basis points (based on the effective spread with the bank); this swapterminates in November 2010.

 

Swap#2 Effective Notional amount $6,000,000 has a fixed rate of 3.5% plus 150 basispoints (based on the effective spread with the bank); this swap terminates in April 2011.

 

Inaddition, Summer Infant in June of 2007 entered into a $4,000,000construction loan for the corporate offices located in Woonsocket, RI that was repaidas a part of the sale/leaseback transaction in March 2009.  Surviving this transaction was a swapagreement tied to the original construction loan. This swap agreement wasfolded into the Revolving Credit Facility, whereby a portion of the outstandingbalance of the Revolving Credit Facility is fixed at 7.06%.  Summer will continue to pay the fixed rate was7.06% interest per month based upon the amortization schedule agreed to at theloan origination until the swap contract terminates in June 2012. (SeeNote 3)

 

TheLoan Agreement also contains customary events of default, including a crossdefault provision and a change of control provision.  In the event of adefault, all of the obligations of the Company and its subsidiaries under the loanAgreement may be declared immediately due and payable.   For certainevents of default relating to insolvency and receivership, all outstandingobligations become due and payable.

 

**4.****                        ****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 Chief Executive Officer of the Company, and his spouse), pursuantto which Faith Realty purchased the corporate headquarters of

 

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theCompany located at 1275 Park East Drive, Woonsocket, Rhode Island (the “Headquarters”),for $4,052,500 and subsequently leased the Headquarters back to Summer USA foran annual rent of $390,000 during the initial seven year term of thelease, payable monthly and in advance.  The lease will expire on theseventh anniversary of its commencement unless an option period is exercised bySummer USA.  At that time, Summer USA will have the opportunity to extendthe lease for one additional period of five years.  If Summer USA electsto extend the term of the lease for an additional five years, the annualrent for the first two years of the extension term shall be equal to $429,000and for the final three years of the extension term shall be equal to$468,000.  In addition, during the first six months of the last leaseyear of the initial term of the lease, Summer USA has the option to repurchasethe Headquarters for $4,457,750 (110% of the initial sale price).  Withthe majority of the proceeds of the sale of the headquarters Summer USA paidoff the construction loan relating to the Headquarters.  Mr. Macarihas given a personal guarantee to secure the Faith Realty debt on its mortgage;therefore, due to his continuing involvement in the building transaction andthe Company’s option to repurchase the building, the building remains on thebooks of the Company and the transaction has been recognized as a financinglease, with no gain.  In the first quarter of 2009 the Company recorded afinance obligation under Other Liabilities of $3,902,000 in regards to thistransaction, of which $8,000 was recorded as a current liability.  Thisobligation is reduced each month (along with a charge to interest expense) asthe 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 sale leaseback transaction.  In connection therewith, the board granted apotential waiver, to the extent necessary, if at all, of the conflict ofinterest provisions of the Company’s Model code of Ethics, effective uponexecution of definitive agreements within the parameters approved by theBoard.  In connection with granting such potential waiver, the Board ofDirectors engaged independent counsel to review the sale leaseback transactionand an independent appraiser to ascertain (i) the value of theHeadquarters and (ii) the market rent for the Headquarters.  Inreaching its conclusion that the sale leaseback transaction are fair to theCompany, the Board of Directors considered a number of factors, includingSummer USA’s ability to repurchase the headquarters at 110% of the initial saleprice at the end of the initial term.

 

Inaddition, the Company’s Audit Committee approved the sale leaseback transaction(as a related party transaction) and the potential waiver and recommended thematter to a vote of the entire Board of Directors (which approved the transaction).

 

5.                          **COMMITMENTS AND CONTINGENCIES**

 

*Litigation*

 

TheCompany is a party to routine litigation and administrative complaintsincidental to its business.  Management does not believe that theresolution of any or all of such routine litigation and administrativecomplaints is likely to have a material adverse effect on the Company’sfinancial condition or results of operations.

 

6.                          **STOCK OPTIONS AND RESTRICTED SHARES**

 

Summerhas granted stock options under its 2006 Performance Equity Plan (“2006 Plan”). Under the 2006 Plan, awards may be granted to participants in the form ofNon-Qualified Stock Options, Incentive Stock Options, Restricted Stock,Deferred Stock, Stock Reload Options and other stock-based awards. Subject to the provisions of the plan, awards may be granted to employees,officers, directors, advisors and consultants who are deemed to have renderedor are able to render significant services to us or our subsidiaries and whoare deemed to have contributed or to have the potential to contribute to oursuccess.  Incentive stock options may only be awarded to individuals whoare our employees at the time of grant.

 

TheCompany accounts for stock compensation by recognizing in the income statementthe fair value of the stock option at the date of grant over the vestingperiod.  Stock compensation expense forthe three and nine months ended September 30, 2009 was approximately$133,000 and $632,000, respectively.  As of September 30, 2009, therewere 2,010,800 stock options outstanding.  In addition, there were 349,000restricted shares issued to employees during the nine months ended September 30,2009 of which 87,250 are vested. The key assumptions used in the Black-Scholesvaluation for the options granted in 2009 were as follows:

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

 

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**ITEM2.  SUMMER’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

 

*The statements contained in this Report on Form 10-Q,that are not purely historical, are forward-looking information and statementswithin the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities 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 include the concentration of the Company’sbusiness with retail customers; the ability of the Company to compete in theindustry; the Company’s dependence on key personnel; the Company’s reliance onforeign suppliers; and other risks as detailed in the Company’s Annual Reporton Form 10-K for the fiscal year ended December 31, 2008, andsubsequent filings with the Securities and Exchange Commission All thesematters are difficult or impossible to predict accurately, many of which may bebeyond our control. Although we believe that the assumptions underlying ourforward-looking statements are reasonable, any of the assumptions could beinaccurate and, therefore, there can be no assurance that the forward-lookingstatements included in this Form 10-Q will 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 itsability to design and market desirable products, identify businessopportunities and secure new and renew existing distribution channels. Summer’sincome from operations is derived from its ability to generate revenue andcollect cash in excess of labor and other costs of providing its products andselling, general and administrative costs.

 

*Summary of critical accounting policies and estimates*

 

TheCompany’s critical accounting policies are disclosed in the Company’s AnnualReport on Form 10-K.  There have been no material changes to thesepolicies during 2009, except for the adoption of new guidance regardingbusiness combinations which was applicable to the Butterfly Living acquisition.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.

 

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*Nature of operations*

 

Summeris engaged in the design, marketing and distribution of juvenileproducts.  The majority of its revenues are derived from retail customersin North America. The Company also maintains a research and development staffin Asia (no revenues are generated directly out of Asia).

 

**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 more than 70 proprietary products invarious product categories including nursery audio/video monitors, safetygates, durable bath products, bed rails, infant thermometers and related healthand safety products, booster and potty seats and bouncers.

 

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

 

·                     increasedproduct penetration (more products at each store);

 

·                     Increased storepenetration (more stores within each retail customer);

 

·                     New products(at existing and new customers);

 

·                     New massmerchant retail customers;

 

·                     Newdistribution channels (food and drug chains, price clubs, home centers, andweb-based retailers);

 

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·                     New geographies(international expansion); and

 

·                     New productcategories

 

·                     Acquisitions

 

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 bysimply selling more of its existing product line to existing and new 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).

 

OnMarch 31, 2008, Summer acquired substantially all of the assets of BasicComfort, Inc., a leading manufacturer and supplier of infant comfort andsafety products, including infant sleep positioners, infant head supports andportable changing pads.

 

OnApril 18, 2008, Summer acquired Kiddopotamus & Company, a leadingmanufacturer and supplier of infant nursery, travel and feeding accessories.

 

OnJuly 17, 2009, the Company acquired certain assets of Butterfly Living, Inc.,a developer and distributor of infant cribs.

 

Summerintends to pursue additional potential acquisition candidates to obtain newinnovative products, new product categories, new retail customers or new salesterritories.  There are approximately 400 active juvenile productcompanies, of which approximately 300 have less than $10,000,000 in sales. Inaddition, there are various product categories that Summer does not currentlycompete in, including car seats, strollers, walkers, and other categories.Summer may look to develop its own products in these categories or attempt togain entrance into these categories through acquisitions.

 

AsSummer continues to grow through internal initiatives and any additional futureacquisitions, it will incur additional expenses.  Two of the key areas inwhich such increased expenses will likely occur are sales and productdevelopment. To grow sales, Summer will likely hire additional sales personnelto service new geographic territories, focus existing resources on specificparts of the United States market and retain product line specialists to drivesales of new and existing

 

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productsin specific areas in which Summer believes it can readily increase sales.Product development expenses will increase as Summer develops new products inexisting and new categories. As a result of its acquisition strategy, Summerwill face various challenges such as the integration of the acquired companies’product lines, employees, marketing requirements and information systems.Ongoing infrastructure investment also may be required to support realizedgrowth, including expenditures with respect to upgraded and expandedinformation systems and enhancing the company’s management team.

 

*Revenues*

 

Summer’srevenues 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 revenues 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 other expenses*

 

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.

 

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**Results of Operations**

 

**Summer Infant and Subsidiaries**

**Consolidated Statements of Income**

**For the Three and Nine Months Ending September 30,2009 and 2008**

**(In thousands)**

 
| ** **                                                                                                                         | ** ** | **Three  Months******** Ended Sept. 30,******** 2009** | ** ** | **Three  Months******** Ended Sept. 30,******** 2008** | ** ** | **Nine  Months Ended******** Sept. 30, 2009** | ** ** | **Nine  Months Ended******** Sept. 30, 2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                                                         | ** ** | **(unaudited)**                                                       | ** ** | **(unaudited)**                                                       | ** ** | **(unaudited)**                                         | ** ** | **(unaudited)**                                         | ** ** |
| Net Revenues                                                                                                                       |       | $                                                                     | 40,984     |                                                                  | 100.0      | %                                                       | $          | 35,575                                                  |       | 100.0 | % | $ | 114,194 |   | 100.0 | % | $ | 97,982 |   | 100.0 | % |
| Cost of goods sold                                                                                                                 |       | 26,080                                                                |       | 63.6                                                                  | %          | 23,109                                                  |       | 65.0                                                    | %          | 74,016 |   | 64.8 | % | 63,263 |   | 64.6 | % |
| Gross profit                                                                                                                       |       | 14,904                                                                |       | 36.4                                                                  | %          | 12,466                                                  |       | 35.0                                                    | %          | 40,178 |   | 35.2 | % | 34,719 |   | 35.4 | % |
|                                                                                                                               |       |                                                                  |       |                                                                  |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses  (excluding depreciation, amortization, deal fees and non-cash stock option  expense) |       | 10,517                                                                |       | 25.7                                                                  | %          | 8,706                                                   |       | 24.4                                                    | %          | 29,444 |   | 25.8 | % | 24,648 |   | 25.1 | % |
|                                                                                                                               |       |                                                                  |       |                                                                  |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Adjusted EBITDA(a)                                                                                                                 |       | $                                                                     | 4,387      |                                                                  | 10.7       | %                                                       | $          | 3,760                                                   |       | 10.6 | % | $ | 10,734 |   | 9.4 | % | $ | 10,071 |   | 10.3 | % |

 

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

 

*Three months ended September 30, 2009 comparedwith three months ended September 30, 2008*

 

Netrevenues increased from $35,575,000 in the three months ended September 30,2008 to $40,984,000 for the three months ended September 30, 2009, anincrease of approximately 15%. This increase was primarily attributable toincreased distribution of Summer’s products throughout Summer’s customer base,plus new product introductions.  Many of the significant customers of theCompany showed year over year increases in revenues.

 

Grossprofit increased from $12,466,000 for the three months ended September 30,2008 to $14,904,000 for the three months ended September 30, 2009. The gross profit as a percentage of revenues increased to 36.4% from 35.0% inthe prior year.

 

Selling,general and administrative expenses increased from $8,706,000 for the threemonths ended September 30, 2008 to $10,517,000 for the three months ended September 30,2009. This increase was primarily attributable to increases in headcount,higher variable selling expenses due to the increase in revenues, and costsassociated with the opening of new distribution centers to support the increasein revenues.  Selling, general and administrative expenses increased to25.7% of net revenues in the three months ended September 30, 2009 from24.5% of net revenues in the three months ended September 30, 2008.

 

AdjustedEBITDA (as defined) increased from $3,760,000 for the three months ended September 30,2008 to $4,387,000 for the three months ended September 30, 2009, anincrease of approximately 17%. This increase was primarily attributable to theincreased revenues and gross profit dollars as described above.

 

*Nine months ended September 30, 2009 comparedwith nine months ended September 30, 2008*

 

Netrevenues increased from $97,982,000 in the nine months ended September 30,2008 to $114,194,000 for the nine months ended September 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 were noted in most of the significantcustomers.  In addition, the year-to-date sales in 2009 includes ninemonths of activity for the products acquired from Kiddopotamus and BasicComfort (businesses which were acquired in March and April of 2008),while the prior year numbers only include approximately six months of activityfor these products, which accounts for approximately $5,900,000 of the year-to-dateincrease.

 

Grossprofit increased from $34,719,000 for the nine months ended September 30,2008 to $40,178,000 for the nine months ended September 30, 2009. The gross profit as a percentage of 

 

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revenuesdecreased to 35.2% from 35.4% in the prior year.  The decrease as apercentage of revenues is due to increased costs of finished goods from theCompany’s vendors in Asia and the US.  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 $24,648,000 for the ninemonths ended September 30, 2008 to $29,444,000 for the nine months ended September 30,2009. This increase was primarily attributable to increases in headcount,higher variable selling expenses due to the increase in revenues, and costsassociated with the opening of new distribution centers to support the increasein revenues.  Selling, general and administrative expenses increased to25.8% of net revenues in the nine months ended September 30, 2009 from25.1% of net revenues in the nine months ended September 30, 2008.

 

AdjustedEBITDA increased from approximately $10,071,000 for the nine months ended September 30,2008 to approximately $10,734,000 for the nine months ended September 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’srevenues have increased significantly over the past several years. For the yearended December 31, 2003, net revenues were $17,600,000. For the year endedDecember 31, 2008, net revenues exceeded $132,000,000. This growth has ledto a substantial increase in working capital requirements, specificallyaccounts receivable and inventory. The typical cash flow cycle is as follows:

 

·                     Inventory ispurchased to meet expected demand plus a safety stock. Because the majority ofSummer’s vendors are based in Asia, inventory takes from four to six weeks toarrive from Asia to the various distribution points Summer maintains in the USand the UK. Payment terms for these vendors average 60 days from the date theproduct ships from Asia, therefore Summer is generally paying for the product ashort time after it is physically received in the US. The increased salesSummer has experienced result in increased levels of inventory, and thereforean increase in the amount of cash required to fund its inventory level.

 

·                     Sales tocustomers generally have payment terms of 30 to 60 days. The increased saleshave resulted in an increase in the level of accounts receivable, and thereforehave increased the amount of cash required to fund working capital.

 

Summerhas 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 nine months ended September 30, 2009, net cash provided by operatingactivities was $6,680,000.  This was primarily due to the net incomegenerated year to date, in addition to the reduction in inventory due toimproved working capital management.

 

Netcash used in investing activities was $2,707,000, which primarily relates tocash paid for additions to property, plant and equipment.

 

Netcash used in financing activities was $2,253,000, which relates to the netreduction of bank debt in 2009 due to the positive cash flow generated byoperations.

 

Basedon the above factors, the net cash increase for the nine months ended September 30,2009 was $1,727,000, resulting in a cash balance of $2,715,000 at September 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.

 

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OnApril 10, 2008, Summer entered into two new three-year secured creditfacilities (the “Loan Agreement”) with Bank of America, N.A., as AdministrativeAgent, and each of the financial institutions a signatory to the LoanAgreement.  The Loan Agreement provides for a $36,000,000 working capitalrevolving credit facility and a $10,000,000 non-restoring acquisition creditfacility.  The new credit facilities mature on June 30, 2011.

 

Summerand its subsidiaries, Summer Infant (USA), Inc. Summer Infant EuropeLimited, Summer Infant Asia Limited and Summer Infant Canada, Limited are theborrowers under this Loan Agreement.  These new credit facilities aresecured by all assets of Summer and its subsidiaries.  These new creditfacilities replace Summer’s prior line of credit, and are being used principallyto fund growth opportunities and for working capital purposes.

 

Summer’sability to borrow under the Loan Agreement is subject to its ongoing compliancewith a number of financial and other covenants, including the following: (i) thatSummer and its subsidiaries maintain a net worth of $50,000,000 plus the sum of50% of net income earned in each fiscal year, (ii) that Summer and itssubsidiaries maintain a ratio of total funded debt to EBITDA of not greaterthan 3.50:1.00, and (iii) that Summer and its subsidiaries maintain aratio of operating cash flow to debt service of not less than 1.25:1,00. Furthermore, if Summer’s ratio of total funded debt to EBITDA is greater than3.25:1.00 for any fiscal year, the aggregate amount that may be borrowed underthe Loan Agreement will be determined by reference to a borrowing base. Thesecredit facilities have an unused line fee based on the unused amount of thecredit facilities equal to 25 basis points.

 

Aspart of the loan agreement Summer Infant was required to enter into two swapagreements.  Summer was also required topay down approx. $158,086 per month on the acquisition loan beginning in May 2009.

 

Swap#1 Effective Notional amount $10,000,000 has a fixed rate of 2.92% plus 150basis points (based on the effective spread with the bank); this swapterminates in November 2010.

 

Swap#2 Effective Notional amount $6,000,000 has a fixed rate of 3.5% plus 150 basispoints (based on the effective spread with the bank); this swap terminates in April 2011.

 

Inaddition, Summer Infant in June of 2007 entered into a $4,000,000construction loan for the corporate offices located in Woonsocket, RI that waspaid off as a part of the sale/leaseback transaction in March of2009.  Surviving this transaction was theswap agreement tied to the original construction loan. This swap agreement wasfolded into the Revolving Credit Facility, meaning that a portion of theoutstanding balance of the Revolving Credit Facility is fixed at 7.06%.  Summer will continue to pay the fixed rate of7.06% interest per month based upon the amortization schedule agreed to at theloan origination until the swap contract terminates in June 2012. Changesin fair value of the swaps are recorded through earnings as they did not qualifyfor hedge accounting.

 

TheLoan Agreement also contains customary events of default, including a crossdefault provision and a change of control provision.  In the event of adefault, all of the obligations of the Company and its subsidiaries under theloan Agreement may be declared immediately due and payable.   Forcertain events of default relating to insolvency and receivership, alloutstanding obligations become due and payable.

 

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

 

Webelieve that Summer’s cash flows from operations, cash on hand, and availableborrowings will be sufficient to meet Summer’s working capital and capitalexpenditure requirements and provide us with adequate liquidity to meetanticipated operating needs for at least the next 12 months. Summer’s cashrequirements for the period beyond that are expected to be met by the continueduse of bank facilities to meet working capital requirements.

 

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**Non-GAAP Discussion**

 

Inaddition to its GAAP results, Summer considers non-GAAP measures of itsperformance. Adjusted EBITDA, as defined below, is an important supplementalfinancial measure of Summer’s performance that is not required by, or presentedin accordance with, GAAP. As used herein, “Adjusted EBITDA” represents netincome (loss) before income taxes, interest expense, non-capitalized dealrelated costs, non-cash stock option expense, and depreciation andamortization. Summer’s management uses Adjusted EBITDA as a financial measureto assess the ability of its assets to generate cash sufficient to pay intereston its indebtedness, meet capital expenditure and working capital requirements,and otherwise meet its obligations as they become due. Summer’s managementbelieves that the presentation of Adjusted EBITDA provides useful informationregarding Summer’s results of operations because they assist in analyzing andbenchmarking the performance and value of Summer’s business. Summer believesthat Adjusted EBITDA is useful to stockholders as a measure of comparativeoperating performance, as it is less susceptible to variances in actualperformance resulting from depreciation and amortization and more reflective ofchanges in pricing decisions, cost controls and other factors that affectoperating performance.

 

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

 

·                     to calculateand support various coverage ratios with Summer’s lenders;

 

·                     to allowlenders to calculate total proceeds they are willing to loan to Summer based onits relative strength compared to other competitors; and

 

·                     to moreaccurately compare Summer’s operating performance from period-to-period andcompany-to-company by eliminating differences caused by variations in capitalstructures (which affect relative interest expense), tax positions andamortization of intangibles.

 

Inaddition, Adjusted EBITDA is an important valuation tool used by potentialinvestors when assessing the relative performance of a company in comparison toother companies in the same industry. Although Summer uses Adjusted EBITDA as afinancial measure to assess the performance of its business, there are materiallimitations to using a measure such as Adjusted EBITDA, including thedifficulty associated with using it as the sole measure to compare the resultsof one company to another and the inability to analyze significant items thatdirectly affect a company’s net income or operating income because it does notinclude certain material costs, such as interest, taxes, non-capitalized anddeal related costs necessary to operate its business. In addition, Summer’scalculation of Adjusted EBITDA may not be consistent with similarly titledmeasures of other companies and should be viewed in conjunction with measuresthat are computed in accordance with GAAP. Summer’s management compensates forthese limitations in considering Adjusted EBITDA in conjunction with itsanalysis of other GAAP financial measures, such as net income.

 

Thefollowing table presents a reconciliation of the Summer Adjusted EBITDA to netincome, its most directly comparable GAAP financial measure, on a historicalbasis, for the periods presented:

 

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

 
| ** **                           | ** ** | **Nine Months Ended******** September 30** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                           | ** ** | **2009**                                                       | ** ** | **2008** | ** ** |
|                                 |       |                                                           |       |   |   |
| Net income                           |       | $                                                              | 4,001      |   | $ | 3,936 |   |
|                                 |       |                                                           |       |   |   |
| Income taxes                         |       | 1,715                                                          |       | 2,312 |   |
|                                 |       |                                                           |       |   |   |
| Non-cash stock option expense        |       | 632                                                            |       | 270 |   |
|                                 |       |                                                           |       |   |   |
| Non-capitalizable deal-related costs |       | 215                                                            |       | 214 |   |
|                                 |       |                                                           |       |   |   |
| Interest expense                     |       | 1,128                                                          |       | 1,473 |   |
|                                 |       |                                                           |       |   |   |
| Depreciation and amortization        |       | 3,043                                                          |       | 1,866 |   |
|                                 |       |                                                           |       |   |   |
| Adjusted EBITDA, as defined          |       | $                                                              | 10,734     |   | $ | 10,071 |   |

 

**ITEM 4T.  Controls and Procedures**

 

*(a) Evaluation of Disclosure Controls and Procedures*

 

Asrequired by Rule 13a-15 under the Securities Exchange Act of 1934, as ofthe end of the period covered by this Quarterly Report, Summer carried out anevaluation, under the supervision and with the participation of its ChiefExecutive Officer and its Chief Financial Officer, of the effectiveness of our disclosurecontrols and procedures, as of September 30, 2009. Summer’s PrincipalExecutive Officer and Principal Financial Officer have concluded, based ontheir evaluation, that as of December 31, 2008 the Company’s controls andprocedures relating to interest rate swaps were not effective due to the factthat we had misapplied generally accepted accounting principles related to theaccounting for derivative liabilities. At the time of entering into interest rate swap agreements in 2007 and2008, the Company failed to fully account for and disclose the interest rateswaps.

 

Wehave restated our financial statements for the year ended December 31,2008 in order to correct the accounting and are in the process of revisingcertain historical filings.

 

*(b) Changes in Internal Control Over FinancialReporting*

 

Therewas no change in Summer’s internal control over financial reporting thatoccurred during the period covered by this Quarterly Report that has materiallyaffected, or is reasonably likely to materially affect, Summer’s internalcontrol over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**ITEM 1A. Risk Factors**

 

Therehave been no material changes pertaining to risk factors that were contained inthe Annual Report 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.

 

**ITEM 6. Exhibits**

 

31.1Chief Executive Officer Certification Pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

31.2Chief Financial Officer Certification Pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

32.1Certification of Jason Macari, Chief Executive Officer of Summer Infant, Inc.,pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002.

 

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

 

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**Signatures**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| **Summer Infant, Inc.** | ** **               |
|------------------------------|--------------------------|
| ** **                   | ** **               |
| ** **                   | ** **               |
| November 12,  2009      |                     |
|                         |                     |   |
|                         | /s/  Jason Macari        |   |
|                         | Jason  Macari            |   |
|                         | Chief  Executive Officer |   |
|                         |                     |
|                         |                     |
| November 12,  2009      |                     |
|                         |                     |   |
|                         | /s/  Joseph Driscoll     |   |
|                         | Joseph  Driscoll         |   |
|                         | Chief  Financial Officer |   |

 

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