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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission file number: 1-8681

 

 

KID BRANDS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

New Jersey   22-1815337

(State of or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

One Meadowlands Plaza, 8th Floor,

East Rutherford, New Jersey

  07073
(Address of principal executive offices)   (Zip Code)

(201) 405-2400

(Registrant’s Telephone Number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of each of the registrant’s classes of common stock, as of May 4, 2012 was as follows:

 

CLASS

   SHARES OUTSTANDING

Common Stock, $0.10 stated value

   21,826,649

 

 

 

 


Table of Contents

KID BRANDS, INC.

INDEX

 

PART I – FINANCIAL INFORMATION

  

Item 1. Financial Statements (unaudited)

  

a) Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011

     3   

b) Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011 (Restated)

     4   

c) Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2012 and 2011 (Restated)

     5   

d) Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 (Restated)

     6   

e) Notes to Unaudited Consolidated Financial Statements

     7   

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

     28   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     41   

Item 4. Controls and Procedures

     41   

PART II – OTHER INFORMATION

  

Item 1. Legal Proceedings

     42   

Item 1A. Risk Factors

     43   

Item 5 Other Information

     44   

Item 6. Exhibits

     44   

Signatures

     46   

Exhibit Index

     47   

 

2


Table of Contents

PART 1 – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

KID BRANDS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Data)

(UNAUDITED)

 

     March 31, 2012     December 31, 2011  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 878      $ 2,456   

Accounts receivable- trade, less allowances of $4,704 in 2012 and $6,784 in 2011

     36,836        39,313   

Inventories, net

     43,844        42,688   

Prepaid expenses and other current assets

     2,848        3,728   

Income tax receivable

     2,084        2,149   

Deferred income taxes, net

     5,027        5,458   
  

 

 

   

 

 

 

Total current assets

     91,517        95,792   

Property, plant and equipment, net

     4,974        5,008   

Intangible assets

     45,048        45,453   

Note receivable, net allowance of $14,955 in 2012 and 2011

     —          —     

Deferred income taxes, net

     44,651        43,670   

Other assets

     2,777        2,923   
  

 

 

   

 

 

 

Total assets

   $ 188,967      $ 192,846   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 18,482      $ 19,136   

Accrued expenses

     30,791        32,318   

Income taxes payable

     672        705   
  

 

 

   

 

 

 

Total current liabilities

     49,945        52,159   

Income taxes payable non-current

     75        74   

Deferred income taxes

     367        360   

Long-term debt

     48,330        49,490   

Other long-term liabilities

     827        949   
  

 

 

   

 

 

 

Total liabilities

     99,544        103,032   
  

 

 

   

 

 

 

Commitments and contingencies

    

Shareholders’ equity:

    

Common stock: $0.10 stated value; authorized 50,000,000 shares; issued 26,727,780 shares at March 31, 2012 and December 31, 2011

     2,674        2,674   

Additional paid-in capital

     88,113        89,027   

Retained earnings

     93,910        94,713   

Accumulated other comprehensive income

     530        550   

Treasury stock, at cost 4,902,131 and 4,971,025 shares at March 31, 2012 and December 31, 2011, respectively

     (95,804     (97,150
  

 

 

   

 

 

 

Total shareholders’ equity

     89,423        89,814   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 188,967      $ 192,846   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

3


Table of Contents

KID BRANDS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Share and Per Share Data)

(UNAUDITED)

 

     Three Months Ended March 31,  
     2012     2011 (Restated
See Note 12)
 

Net sales

   $ 55,228      $ 59,836   

Cost of sales

     41,442        43,742   
  

 

 

   

 

 

 

Gross profit

     13,786        16,094   

Selling, general and administrative expenses

     14,441        15,334   
  

 

 

   

 

 

 

(Loss) income from operations

     (655     760   

Other (expense) income:

    

Interest expense, including amortization and write-off of deferred financing costs

     (780     (1,156

Interest and investment income

     4        3   

Other, net

     157        42   
  

 

 

   

 

 

 
     (619     (1,111
  

 

 

   

 

 

 

(Loss) from operations before income tax (benefit)

     (1,274     (351

Income tax (benefit)

     (471     (26
  

 

 

   

 

 

 

Net (loss)

   $ (803   $ (325
  

 

 

   

 

 

 

Net (loss) per share:

    

Basic

   $ (0.04   $ (0.02
  

 

 

   

 

 

 

Diluted

   $ (0.04   $ (0.02
  

 

 

   

 

 

 

Weighted average shares:

    

Basic

     21,815,000        21,633,000   
  

 

 

   

 

 

 

Diluted

     21,815,000        21,633,000   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

4


Table of Contents

KID BRANDS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In Thousands)

(UNAUDITED)

 

     Three Months Ended March 31,  
     2012     2011 (Restated
See Note 12)
 

Net (loss)

   $ (803   $ (325

Other comprehensive loss:

    

Unrealized gain on derivative

     —          16   

Foreign currency translation adjustments

     (20     (37
  

 

 

   

 

 

 

Comprehensive loss

   $ (823   $ (346
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

5


Table of Contents

KID BRANDS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(UNAUDITED)

 

     Three Months Ended March 31,  
     2012     2011 (Restated-
See Note 12)
 

Cash flows from operating activities:

    

Net loss

   $ (803   $ (325

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     669        992   

Amortization of deferred financing costs

     107        229   

Provision for customer allowances

     5,710        8,150   

Provision for inventory reserve

     354        485   

Share-based compensation expense

     285        466   

Deferred income taxes

     (543     (301

Change in assets and liabilities:

    

Accounts receivable

     (3,197     (2,904

Income tax receivable

     65        102   

Inventories

     (1,398     (3,929

Prepaid expenses and other current assets

     890        595   

Other assets

     39        456   

Accounts payable

     (679     (5,748

Accrued expenses

     (1,661     1,464   

Income taxes payable

     (32     134   
  

 

 

   

 

 

 

Net cash used in operating activities

     (194     (134
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures

     (230     (364
  

 

 

   

 

 

 

Net cash used in investing activities

     (230     (364
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of common stock

     146        243   

Excess tax benefit from stock-based compensation

     —          (24

Repayment of long-term debt

     (1,160     (3,243

Net borrowing (payment) of old revolving credit facility

     —          4,065   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (1,014     1,041   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (140     (69
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (1,578     474   

Cash and cash equivalents at beginning of period

     2,456        1,075   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 878      $ 1,549   
  

 

 

   

 

 

 

Cash paid during the period for:

    

Interest

   $ 467      $ 877   

Income taxes

   $ 31      $ 35   

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

6


Table of Contents

KID BRANDS, INC AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Kid Brands, Inc. (“KID”), together with its subsidiaries (collectively with KID, the “Company”), is a leading designer, importer, marketer and distributor of infant and juvenile consumer products. The Company operates in one segment: the infant and juvenile business.

The Company’s current operating subsidiaries consist of Kids Line, LLC (“Kids Line”), Sassy, Inc. (“Sassy”), LaJobi, Inc. (“LaJobi”) and CoCaLo, Inc. (“CoCaLo”), which are each direct or indirect wholly-owned subsidiaries of KID, and design, manufacture through third parties and market products in a number of categories including, among others; infant bedding and related nursery accessories and décor, kitchen and nursery appliances and food preparation products, diaper bags, and bath/spa products (Kids Line® and CoCaLo®); nursery furniture and related products (LaJobi®); and developmental toys and feeding, bath and baby care items with features that address the various stages of an infant’s early years (Sassy®). In addition to branded products, the Company also markets certain categories under various licenses, including Carters®, Disney®, Graco® and Serta®. The Company’s products are sold primarily to retailers in North America, the United Kingdom and Australia, including large, national retail accounts and independent retailers (including toy, specialty, food, drug, apparel and other retailers).

The accompanying unaudited interim consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under generally accepted accounting principles have been condensed or omitted pursuant to such principles and regulations. The information furnished reflects all adjustments, which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of the Company’s consolidated financial position, results of operations and cash flows for the interim periods presented. Results for interim periods are not necessarily an indication of results to be expected for the year. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as amended (the “2011 10-K”).

Restatement

The Company has restated herein its unaudited interim consolidated financial statements for the year to date period ended March 31, 2011, as included in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2011. See Note 12.

Certain prior year amounts have been reclassified to conform to the 2012 presentation.

The Company evaluates all subsequent events prior to filing.

NOTE 2—SHAREHOLDERS’ EQUITY

Share-Based Compensation

As of March 31, 2012, the Company maintained (i) its Equity Incentive Plan (the “EI Plan”), which is a successor to the Company’s 2004 Stock Option, Restricted and Non-Restricted Stock Plan (the “2004 Option Plan”, and together with the EI Plan, the “Plans”) and (ii) the 2009 Employee Stock Purchase Plan (the “2009 ESPP”), which was a successor to the Company’s Amended and Restated 2004 Employee Stock Purchase Plan (the “2004 ESPP”). The EI Plan and the 2009 ESPP were each approved by the Company’s shareholders on July 10, 2008. In addition, the Company may issue equity awards outside of the Plans (however, no such awards were outstanding as of March 31, 2012). The exercise or measurement price for equity awards issued under the Plans or otherwise is generally equal to the closing price of KID’s common stock on the New York Stock Exchange as of the date the award is granted. Generally, equity awards under the Plans (or otherwise) vest over a period ranging from three to five years from the grant date as provided in the award agreement governing the specific grant. Options and stock appreciation rights generally expire ten years from the date of grant. Shares in respect of equity awards are issued from authorized shares reserved for such issuance or treasury shares.

The EI Plan, which became effective July 10, 2008 (at which time no further awards could be made under the 2004 Option Plan), provides for awards in any one or a combination of: (a) Stock Options, (b) Stock Appreciation Rights, (c) Restricted Stock, (d) Stock Units, (e) Non-restricted Stock, and/or (f) Dividend Equivalent Rights. Any award under the EI Plan may, as determined by the committee administering the EI Plan (the “Plan Committee”) in its sole discretion, constitute a “Performance-Based Award” (an award that qualifies for the performance-based compensation exemption of Section 162(m) of the Internal Revenue Code of 1986, as amended). All awards granted under the EI Plan are evidenced by a written agreement between the Company and each participant (which need not be identical with respect to each grant or participant) that provides the terms and conditions, not inconsistent with the requirements of the EI Plan, associated with such awards, as determined by the Plan Committee in its sole discretion. A total of 1,500,000 shares of Common Stock have been reserved for issuance under the EI Plan. In the event all or a portion of an award is forfeited, terminated or cancelled, expires, is settled for cash, or otherwise does not result in the issuance of all or a portion of the shares of Common Stock subject to the award in connection with the exercise or settlement of such award (“Unissued Shares”), such Unissued Shares will in each case again be available for awards under the EI Plan pursuant to a formula set forth in the EI Plan. The preceding sentence also applies to any awards outstanding on July 10, 2008, under the 2004 Option Plan, up to a maximum of an additional 1,750,000 shares of Common Stock. At March 31, 2012, 924,792 shares were available for issuance under the EI Plan.

 

7


Table of Contents

KID BRANDS, INC AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

The 2009 ESPP became effective on January 1, 2009. A total of 200,000 shares of Common Stock have been reserved for issuance under the 2009 ESPP. At March 31, 2012, 6,663 shares were available for issuance under the 2009 ESPP, after giving effect to the 54,284 shares issued thereunder with respect to the 2011 plan year. The 2009 ESPP has been suspended for the 2012 and 2013 plan years.

Impact on Net (Loss)

The components of share-based compensation expense follows (in thousands):

 

     Three Months Ended March 31,  
     2012      2011  

Stock option expense

   $ 66       $ 116   

Restricted stock expense

     9         79   

Restricted stock unit expense

     52         59   

SAR expense

     158         178   

ESPP expense

     —           34   
  

 

 

    

 

 

 

Total share-based payment expense

   $ 285       $ 466   
  

 

 

    

 

 

 

The Company records share-based compensation expense in the statements of operations within the same categories that payroll expense is recorded in selling general and administrative expense. No share-based compensation expense was capitalized in inventory or any other assets for the three months ended March 31, 2012 or 2011. The relevant Financial Accounting Standards Board (“FASB”) standard requires the cash flows related to tax benefits resulting from tax deductions in excess of compensation costs recognized for those equity compensation grants (excess tax benefits) to be classified as financing cash flows.

The fair value of stock options and stock appreciation rights (SARs) granted under the Plans or otherwise is estimated on the date of grant using a Black-Scholes-Merton option pricing model using assumptions with respect to dividend yield, risk-free interest rate, volatility and expected term, which are included below for SARs only, as there were no stock options issued during the three months ended March 31, 2012 or 2011. Expected volatilities are calculated based on the historical volatility of KID’s Common Stock. The expected term of options or SARs granted is derived from the vesting period of the award, as well as historical exercise behavior, and represents the period of time that the award is expected to be outstanding. Management monitors exercises and employee termination patterns to estimate forfeiture rates within the valuation model. Separate groups of employees, directors and officers that have similar historical exercise behavior are considered separately for valuation purposes. The risk-free interest rate is based on the Treasury note interest rate in effect on the date of grant for the expected term of the award.

Stock Options

Stock options are rights to purchase KID’s Common Stock in the future at a predetermined per share exercise price (generally the closing price for such stock on the New York Stock Exchange on the date of grant). Stock options may be either: “Incentive Stock Options” (stock options which comply with Section 422 of the Code), or Nonqualified Stock Options (stock options which are not Incentive Stock Options). There were no stock options issued during the three months ended March 31, 2012 or 2011.

As of March 31, 2012, the total remaining unrecognized compensation cost related to unvested stock options, net of forfeitures, was approximately $0.4 million, and is expected to be recognized over a weighted-average period of 1.6 years.

 

8


Table of Contents

KID BRANDS, INC AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

Activity regarding outstanding stock options for the three months ended March 31, 2012 is as follows:

 

     All Stock Options Outstanding  
           Weighted Average  
     Shares     Exercise Price  

Options Outstanding as of December 31, 2011

     446,975      $ 12.55   

Options Granted

     —          —     

Options Forfeited/Cancelled*

     (2,280   $ 16.77   
  

 

 

   

 

 

 

Options Outstanding as of March 31, 2012

     444,695      $ 12.53   
  

 

 

   

Option price range at March 31, 2012

   $ 6.63-$34.05     

 

* See disclosure below regarding forfeitures.

The aggregate intrinsic value of the unvested and vested outstanding stock options was $0 at March 31, 2012 and December 31, 2011. The aggregate intrinsic value is the total pretax value of in-the-money stock options, which is the difference between the fair value at the measurement date and the exercise price of each stock option. No stock options were exercised during the three months ended March 31, 2012 or 2011, respectively. No stock options vested during the three months ended March 31, 2012.

A summary of the Company’s unvested stock options at March 31, 2012 and changes during the three months ended March 31, 2012 is as follows:

 

Unvested stock options    Options     Weighted Average  Grant
Date Fair Value
 

Unvested at December 31, 2011

     107,200      $ 4.63   

Granted

     —        $ —     

Vested

     —        $ —     

Forfeited/cancelled*

     (2,280   $ 6.58   
  

 

 

   

 

 

 

Unvested stock options at March 31, 2012

     104,920      $ 4.59   
  

 

 

   

 

* See disclosure below regarding forfeitures.

Restricted Stock

Restricted Stock is Common Stock that is subject to restrictions, including risks of forfeiture, determined by the Plan Committee in its sole discretion, for so long as such Common Stock remains subject to any such restrictions. A holder of restricted stock has all rights of a shareholder with respect to such stock, including the right to vote and to receive dividends thereon, except as otherwise provided in the award agreement relating to such award. Restricted Stock Awards are equity classified within the consolidated balance sheets. The fair value of each restricted stock grant is estimated on the date of grant using the closing price of KID’s Common Stock on the New York Stock Exchange on the date of grant.

During the three months ended March 31, 2012 and 2011, respectively, there were no shares of restricted stock issued under the EI Plan or otherwise. At March 31, 2012 and December 31, 2011, there were 2,380 and 2,720 shares of unvested restricted stock outstanding, respectively. These restricted stock grants have vesting periods of five years, with fair values (per share) at date of grant ranging from $14.90 to $16.77. Compensation expense is determined for the issuance of restricted stock by amortizing over the requisite service period, or the vesting period, the aggregate fair value of the restricted stock awarded based on the closing price of KID’s Common Stock on the date of grant.

A summary of the Company’s unvested restricted stock at March 31, 2012 and changes during the three months ended March 31, 2012 is as follows:

 

Unvested Restricted Stock    Restricted Stock     Weighted Average  Grant
Date Fair Value
 

Unvested at December 31, 2011

     2,720      $ 16.43   

Granted

     —        $ —     

Vested

     —        $ —     

Forfeited/cancelled*

     (340   $ 16.77   
  

 

 

   

 

 

 

Unvested restricted stock at March, 31, 2012

     2,380      $ 16.38   
  

 

 

   

 

* See disclosure below regarding forfeitures.

 

9


Table of Contents

KID BRANDS, INC AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

As of March 31, 2012, the total remaining unrecognized compensation cost related to issuances of restricted stock was approximately $27,000, and is expected to be recognized over a weighted-average period of 0.7 years.

Restricted Stock Units

A Restricted Stock Unit (“RSU”) is a notional account representing a participant’s conditional right to receive at a future date one (1) share of Common Stock or its equivalent in value. Shares of Common Stock issued in settlement of an RSU may be issued with or without other consideration as determined by the Plan Committee in its sole discretion. RSUs may be settled in the sole discretion of the Plan Committee: (i) by the distribution of shares of Common Stock equal to the grantee’s RSUs, (ii) by a lump sum payment of an amount in cash equal to the fair value of the shares of Common Stock which would otherwise be distributed to the grantee, or (iii) by a combination of cash and Common Stock. The RSUs issued under the EI Plan vest (and will be settled) ratably over a 5-year period commencing from the date of grant and are equity classified in the consolidated balance sheets. There were 102,250 and 10,000 RSU’s issued to employees of the Company during the three months ended March 31, 2012 and 2011, respectively.

The fair value of each RSU grant is estimated on the grant date. The fair value is set using the closing price of KID’s Common Stock on the New York Stock Exchange on the date of grant. Compensation expense for RSUs is recognized ratably over the vesting period, based upon the market price of the shares underlying the awards on the date of grant.

A summary of the Company’s unvested RSUs at March 31, 2012 and changes during the three months ended March 31, 2012 is as follows:

 

           Weighted  
     Restricted     Average  
     Stock     Grant-Date  
     Units     Fair Value  

Unvested at December 31, 2011

     148,560      $ 5.47   

Granted

     102,250      $ 3.02   

Vested

     (14,950   $ 5.00   

Forfeited/cancelled*

     (5,520   $ 6.61   
  

 

 

   

 

 

 

Unvested at March 31, 2012

     230,340      $ 4.39   
  

 

 

   

 

* See disclosure below regarding forfeitures.

As of March 31, 2012, there was approximately $0.9 million of unrecognized compensation cost related to unvested RSUs. That cost is expected to be recognized over a weighted-average period of 3.8 years.

Stock Appreciation Rights

A Stock Appreciation Right (a “SAR”) is a right to receive a payment in cash, Common Stock or a combination thereof, as determined by the Plan Committee, in an amount or value equal to the excess of: (i) the fair value, or other specified valuation (which may not exceed fair value), of a specified number of shares of Common Stock on the date the right is exercised, over (ii) the fair value or other specified amount (which may not be less than fair value) of such shares of Common Stock on the date the right is granted; provided, however, that if a SAR is granted in tandem with or in substitution for a stock option, the designated fair value for purposes of the foregoing clause (ii) will be the fair value on the date such stock option was granted. No SARs will be exercisable later than ten (10) years after the date of grant. The SARs issued under the EI Plan vest ratably over a period ranging from zero to five years and unless terminated earlier, expire on the tenth anniversary of the date of grant. SARs are typically granted at an exercise price equal to the closing price of KID’s Common Stock on the New York Stock Exchange on the date of grant. There were 306,750 and 50,000 SARs granted during the three months ended March 31, 2012, and 2011, respectively. SARs are accounted for at fair value at the date of grant in the consolidated statement of operations, are amortized on a straight line basis over the vesting term, and are equity-classified in the consolidated balance sheets. There were no SARs exercised in the three months ended March 31, 2012. There were 1,100 SARs exercised during the three months ended March 31, 2011, all of which were settled in cash.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

The assumptions used to estimate the weighted average fair value of the SARs granted during the three months ended March 31, 2012 and 2011 were as follows:

 

     Three Months Ended March 31,  
     2012     2011  

Dividend yield

     0.0     0.0

Risk-free interest rate

     0.90     1.03

Volatility

     85.0     104.0

Expected term (years)

     5.0        3.0   

Weighted-average fair value of SARs granted

   $ 2.02      $ 5.42   

Activity regarding outstanding SARs for the three months ended March 31, 2012 is as follows:

 

     All SARs Outstanding  
           Weighted Average  
     Shares     Exercise Price  

SARs Outstanding as of December 31, 2011

     787,690      $ 5.63   

SARs Granted

     306,750      $ 3.02   

SARs Exercised

     —          —     

SARs Forfeited/Cancelled*

     (22,120   $ 6.53   
  

 

 

   

 

 

 

SARs Outstanding as of March 31, 2012

     1,072,320      $ 4.87   
  

 

 

   

SAR price range at March 31, 2012

   $ 1.53-$9.86     
  

 

 

   

 

* See disclosure below regarding forfeitures.

The aggregate intrinsic value of the unvested and vested outstanding SARs at March 31, 2012 and December 31, 2011 was $58,500 and $81,500, respectively. The aggregate intrinsic value is the total pretax value of in-the-money SARs, which is the difference between the fair value at the measurement date and the exercise price of each SAR.

A summary of the Company’s unvested SARs at March 31, 2012 and changes during the three months ended March 31, 2012 is as follows:

 

           Weighted-Average Grant  
     Shares     Date Fair Value Per
Share
 

Unvested at December 31, 2011

     583,740      $ 3.64   

Granted

     306,750      $ 2.02   

Vested

     (53,050   $ 2.87   

Forfeited*

     (19,600   $ 3.96   
  

 

 

   

 

 

 

Unvested at March 31, 2012

     817,840      $ 3.08   
  

 

 

   

 

 

 

 

* See disclosure below regarding forfeitures.

As of March 31, 2012, there was approximately $2.2 million of unrecognized compensation cost related to unvested SARs, which is expected to be recognized over a weighted-average period of 3.5 years.

Option/SAR Forfeitures

All of the forfeited options/SARs described in the charts set forth above resulted from the termination of the employment of the respective grantees and the resulting forfeiture of unvested and/or vested but unexercised options/SARs. Pursuant to the Plans, upon the termination of employment of a grantee, such grantee’s outstanding unexercised options/SARs are typically cancelled and deemed terminated as of the date of termination; provided, that if the termination is not for cause, all vested options/SARs generally remain outstanding for a period ranging from 30 to 90 days, and then expire to the extent not exercised.

Restricted Stock/RSU Forfeitures

All of the forfeited Restricted Stock and RSUs described in the charts set forth above resulted from the termination of the employment of the respective grantees and the resulting forfeiture of unvested Restricted Stock and RSUs. Pursuant to the award agreements governing the outstanding Restricted Stock and RSUs, upon a grantee’s termination of employment, such grantee’s outstanding unvested Restricted Stock and RSUs are forfeited, except in the event of disability or death, in which case all restrictions lapse.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

Employee Stock Purchase Plan

Under the 2009 ESPP (until its suspension for the 2012 and 2013 plan years), eligible employees were provided the opportunity to purchase KID’s Common Stock at a discount. Pursuant to the 2009 ESPP, options were granted to participants as of the first trading day of each plan year, which is the calendar year, and were exercised as of the last trading day of each plan year, to purchase from KID the number of shares of Common Stock that could have been purchased at the relevant purchase price with the aggregate amount contributed by each participant. In each plan year (through 2011), an eligible employee could elect to participate in the 2009 ESPP by filing a payroll deduction authorization form for up to 10% (in whole percentages) of his or her compensation. No employee had the right to purchase Common Stock under the 2009 ESPP that had a fair value in excess of $25,000 in any plan year or the right to purchase more than 25,000 shares in any plan year. The purchase price was the lesser of 85% of the closing market price of KID’s Common Stock on either the first trading day or the last trading day of the plan year. If an employee did not elect to exercise his or her option, the total amount credited to his or her account during that plan year was returned to such employee without interest, and his or her option expired. At March 31, 2012, 6,663 shares were available for issuance under the 2009 ESPP. The Company has suspended the 2009 ESPP for fiscal years 2012 and 2013.

The fair value of each option granted under the 2009 ESPP was estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the following assumptions:

 

     Three Months Ended
March  31,
     2011

Dividend yield

   0%

Risk-free interest rate

   0.29%

Volatility

   73.5%

Expected term (years)

   1.0

Expected volatilities are calculated based on the historical volatility of KID’s Common Stock. The risk-free interest rate is based on the U.S. Treasury yield with a term that is consistent with the expected life of the options. The expected life of options granted under the 2009 ESPP was one year, or the equivalent of the annual plan year.

NOTE 3—WEIGHTED AVERAGE COMMON SHARES

Earnings per share (“EPS”) under the two-class method is computed by dividing earnings allocated to common stockholders by the weighted-average number of common shares outstanding for the period. In determining EPS, earnings are allocated to both common shares and participating securities based on the respective number of weighted-average shares outstanding for the period. Participating securities include unvested restricted stock awards where, like the Company’s restricted stock awards, such awards carry a right to receive non-forfeitable dividends, if declared. As a result of the foregoing, and in accordance with the applicable accounting standard, vested and unvested shares of restricted stock are also included in the calculation of basic earnings per share. With respect to RSUs, as the right to receive dividends or dividend equivalents is contingent upon vesting, in accordance with the applicable accounting standard, the Company does not include unvested RSUs in the calculation of basic earnings per share. To the extent such RSUs are settled in stock, upon settlement, such stock is included in the calculation of basic earnings per share. With respect to SARs and stock options, as the right to receive dividends or dividend equivalents is contingent upon vesting and exercise (with respect to SARs, to the extent they are settled in stock), in accordance with the applicable accounting standard, the Company does not include unexercised SARs or stock options in the calculation of basic earnings per share. To the extent such SARs and stock options have vested and are exercised (with respect to SARs, to the extent they are settled in stock), the stock received upon such exercise is included in the calculation of basic earnings per share.

 

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

The weighted average common shares outstanding included in the computation of basic and diluted net loss per share is set forth below (in thousands):

 

     Three Months Ended
March 31,
 
     2012      2011  

Weighted average common shares outstanding-Basic

     21,815         21,633   

Dilutive effect of common shares issuable upon exercise of stock options, RSUs and SARs

     —           —     
  

 

 

    

 

 

 

Weighted average common shares outstanding assuming dilution

     21,815         21,633   
  

 

 

    

 

 

 

The computation of diluted net loss per common share for the three months ended March 31, 2012 and March 31, 2011 did not include stock options and stock appreciation rights to purchase an aggregate of approximately 1.3 million and 1.8 million shares of common stock, respectively, because their inclusion would have been anti-dilutive due to the net loss incurred during such periods.

NOTE 4—DEBT

As of August 8, 2011, KID and specified domestic subsidiaries (such entities collectively with KID and such other future created or acquired domestic subsidiaries that are designated as borrowers from time to time, the “Borrowers”), and the subsidiaries of the Borrowers identified as guarantors therein (the “Guarantors”, and together with the Borrowers, the “Loan Parties”), executed a Second Amended and Restated Credit Agreement (the “New Credit Agreement”) with certain financial institutions (the “Lenders”), including Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and Merrill Lynch, Pierce, Fenner & Smith Incorporated as Sole Lead Arranger and Book Manager (“ML”). RB Trademark Holdco, LLC (“Licensor”), a limited liability company wholly-owned by KID which licensed specified intellectual property to the buyer of the Company’s former gift business prior to its bankruptcy, will become a Loan Party when permitted under its organizational documents (upon termination of the relevant license agreement). The obligations of the Borrowers under the New Credit Agreement are joint and several.

The New Credit Agreement provided for an aggregate $175.0 million revolving credit facility, which was reduced, effective as of May 11, 2012, to a maximum aggregate of $100.0 million by notice from the Borrowers to the Administrative Agent (the “New Revolver”), with a sub-facility for letters of credit in an amount not to exceed $25.0 million, and a sub-facility for swing-line loans in an amount not to exceed $5.0 million. As a result of the voluntary reduction in the aggregate revolving commitment, the Company expects to record a non-cash charge of approximately $0.8 million in the second quarter of 2012 to write off a portion of the remaining unamortized deferred financing costs incurred in August 2011 in connection with the New Credit Agreement. Subject to conditions to lending set forth in the New Credit Agreement, loans may be made up to the full amount of the New Revolver (without borrowing base limitations), swing-line loans may be made up to the full amount of the sublimit for swing-line loans, and letters of credit may be issued up to the sublimit for letters of credit. KID also has the right (without the consent of any Lender or the Administrative Agent) to increase the amount of the New Revolver by an additional aggregate amount not to exceed $35.0 million, provided, among other things, that (i) no event of default or unmatured event of default shall have occurred and be continuing, and (ii) the Borrowers receive commitments for such increase. KID may offer such increase to existing Lenders or certain third party financial institutions as described in the New Credit Agreement, however, no lender is obligated to increase its commitment.

The New Credit Agreement amended and restated the Borrowers’ previously existing Amended and Restated Credit Agreement with the Administrative Agent, as successor by merger to LaSalle Bank National Association, and the other lenders party thereto, dated April 2, 2008, as amended on each of August 13, 2008, March 20, 2009, and March 30, 2011 (collectively, the “Old Credit Agreement”), which provided for a $50.0 million revolving credit facility (the “Old Revolver”) based on eligible receivables and inventory, with a $5.0 million sub-facility for letters of credit, and an $80.0 million term loan facility (the “Old Term Loan”), which was scheduled to mature on April 1, 2013. The New Credit Agreement represents a refinancing of the Borrowers’ senior secured debt under the Old Credit Agreement.

Upon the execution of the New Credit Agreement, the Borrowers drew down $47.5 million under the New Revolver, and utilized the proceeds to repay the Old Term Loan in full. Outstanding amounts under the Old Revolver (in the approximate amount of an additional $29.4 million) were reallocated among the continuing Lenders in accordance with their respective commitments under the New Credit Agreement. Outstanding letters of credit were deemed to have been issued under the New Credit Agreement.

At March 31, 2012, an aggregate of $48.3 million was borrowed under the New Revolver and at December 31, 2011, an aggregate of $49.5 million was borrowed under the New Revolver. At March 31, 2012, revolving loan availability was $1.2 million. At December 31, 2011, revolving loan availability was $9.9 million.

The aggregate amounts outstanding under the New Credit Agreement (other than letters of credit, which may generally remain outstanding until August 1, 2017) are due and payable on August 8, 2016 (subject to customary early termination provisions).

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

The New Revolver bears interest, at the Borrowers’ option, at a specified base rate (the higher of (x) the Administrative Agent’s prime rate and (y) the Federal Funds rate plus 0.50%), or a specified Eurodollar rate based on specified British Bankers Association LIBOR, plus (in each case) applicable margins. Applicable margins range from 1.75% to 2.75% on Eurodollar rate loans and 0.75% to 1.75% on base rate loans, based on the Company’s Consolidated Leverage Ratio (as defined below) for the most recently ended fiscal quarter. Swing-line loans bear interest at the base rate plus the applicable margin for base rate loans. During the continuance of any default under the New Credit Agreement, the applicable margin shall increase by 2% (subject, in all cases other than a default in the payment of principal, to the written consent of Lenders holding a majority of the commitments (the “Required Lenders”) and prior written notice to KID).

As of March 31, 2012, the applicable interest rate margins were: 2.25% for Eurodollar Loans and 1.25% for Base Rate Loans. The weighted average interest rates for the outstanding loans as of March 31, 2012 were as follows:

 

     At March 31, 2012  
     Eurodollar Loans     Base Rate Loans  

New Revolver

     2.60     4.50

The Borrowers may prepay the New Revolver (and swing-line loans) at any time and from time to time without premium or penalty, and without a corresponding commitment reduction (subject to reimbursement of the Lenders’ breakage and redeployment costs in the case of Eurodollar rate loans). The unutilized portion of the New Revolver may be reduced or terminated by the Borrowers at any time and from time to time without premium or penalty. In accordance therewith, as described above, the Borrowers reduced the New Revolver to an aggregate maximum of $100 million by notice to the Administrative Agent effective as of May 11, 2012.

Under the terms of the New Credit Agreement, the Company is required to comply with the following financial covenants (the “Financial Covenants”): (a) a quarterly minimum Consolidated Fixed Charge Coverage Ratio (defined below) of 1.50:1.00; and (b) a quarterly maximum Consolidated Leverage Ratio (defined below) of 3.25:1.00 (stepping down to 3.00:1.00 for the quarter ending June 30, 2013, provided, that in the event a permitted acquisition is consummated prior to August 8, 2013, such maximum ratio shall remain 3.25:1.00 until the later of June 30, 2013 and the date that is 18 months after such consummation).

The Consolidated Fixed Charge Coverage Ratio under the New Credit Agreement is the ratio of: (a) Covenant EBITDA (as described below) for the most recently completed four quarters minus the sum of (i) all unfinanced capital expenditures incurred during such period; (ii) all cash taxes paid during such period; and (iii) all cash dividends paid by KID during such period, to (b) an amount generally equal to, with respect to the Company, the sum for such period of all scheduled interest and principal payments of debt, including the principal component of any capital lease, paid or payable in cash. The Consolidated Leverage Ratio under the New Credit Agreement is the ratio of the indebtedness of the Company to Covenant EBITDA for the most recently completed four quarters. Indebtedness, as used in the determination of the maximum Consolidated Leverage Ratio, generally means the outstanding principal amount of all debt (including obligations under capital leases plus the face amount of all letters of credit). The Borrowers were in compliance with all applicable Financial Covenants as of March 31, 2012.

Covenant EBITDA, as defined in the New Credit Agreement, is a non-GAAP financial measure used to determine relevant interest rate margins and the Borrowers’ compliance with the Financial Covenants, as well as the determination of whether certain repurchases of equity securities, acquisitions, payments of specified Duty Amounts (defined below) and other specified customs duty underpayments, and payment of LaJobi Earnout Consideration (defined below), if any, can be made if other specified prerequisites are met, and the determination of the amount of specified fees. Covenant EBITDA is defined generally as the net income of KID and its consolidated subsidiaries (excluding extraordinary after-tax or non-recurring gains or losses, non-cash gains or losses from dispositions other than the write-down of current assets, non-cash restructuring charges, tax refunds, and net operating losses or other net tax benefits and any after-tax gains and losses from discontinued operations), as adjusted for interest expense; income tax expense; depreciation; amortization; other non-cash charges (gains); if expensed, reasonable costs incurred in connection with the execution of the New Credit Agreement and related documentation; and non-cash transaction losses (gains) due solely to fluctuations in currency values. Covenant EBITDA is further adjusted (up to an aggregate maximum of $14.855 million for all periods, less any earnout consideration paid in respect of KID’s 2008 purchase of LaJobi (“LaJobi Earnout Consideration”), if any, other than in accordance with the New Credit Agreement and/or to the extent not deducted in determining consolidated net income) for: (i) all customs duties, interest, penalties and other related amounts (“Duty Amounts”) owed by LaJobi to U.S. Customs and Border Protection (“U.S. Customs”) to the extent they relate to the nonpayment or incorrect payment by LaJobi of import duties to U.S. Customs on certain wooden furniture imported by LaJobi from vendors in China resulting in a violation prior to March 30, 2011 of anti-dumping regulations, the related misconduct on the part of certain LaJobi employees, and LaJobi’s business and staffing practices in Asia prior to March 30, 2011 relating thereto (“Duty Events”); (ii) fees and expenses incurred in connection with the internal and U.S. Customs’ investigation of the Duty Amounts and Duty Events (the “Investigations”); and (iii) LaJobi Earnout Consideration, if any, paid in accordance with the terms of the New Credit Agreement.

 

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KID BRANDS, INC AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

On May 4, 2012, the Loan Parties, the Administrative Agent and the Required Lenders under the New Credit Agreement executed a letter agreement (the “Letter Agreement”) pursuant to which the Required Lenders and the Loan Parties agreed that up to an aggregate of $1.0 million in severance expense may be treated by the Company as excluded “non-recurring losses” in its determination of consolidated net income. If severance expense at any time exceeds this limitation (any such excess, “Excess Severance”): (i) to the extent deducted from the determination of consolidated net income, the accrual of such Excess Severance expense may be added back to consolidated net income for purposes of calculating Covenant EBITDA during the period when accrued; and (ii) the amount of any Excess Severance payments (regardless of when accrued) will be deducted from Covenant EBITDA during the period when paid.

Pursuant to the Letter Agreement, the Company also agreed to retain a financial consultant to review the issues pertaining to the Company’s customs duties and the LaJobi Earnout Consideration, to review and deliver an opinion regarding the Company’s financial forecasts, and any other mutually-agreed matters. Such consultant must provide periodic reports to the Administrative Agent and the Lenders, and a written report on or before July 31, 2012. Fees and expenses related to such consultant may be treated as excluded “non-recurring losses” for purposes of determining consolidated net income. In addition, the Loan Parties agreed that prior to January 1, 2013, Total Revolving Outstandings (as defined in the New Credit Agreement) shall not exceed $70.0 million without the prior written consent of the Required Lenders (such limitation does not constitute a reduction of the commitments under the New Credit Agreement).

The New Credit Agreement contains customary representations and warranties, as well as various affirmative and negative covenants in addition to the Financial Covenants, including, without limitation, financial reporting (including annual delivery of projections) requirements, notice requirements with respect to specified events and required compliance certificates. In addition, among other restrictions, the Loan Parties (and their subsidiaries other than the Licensor until such time as it becomes a Loan Party) are prohibited from consummating a merger or other fundamental change, paying dividends and making distributions, purchasing or redeeming stock, incurring additional debt, making acquisitions, disposing of assets and other transactions outside of the ordinary course of business, making specified payments and investments, engaging in transactions with affiliates, paying Duty Amounts and other specified customs duty underpayments (see Note 9 of the Notes to Unaudited Consolidated Financial Statements under paragraph (b)), or paying any LaJobi Earnout Consideration, subject in each case to specified exceptions, some of which are described below. The activities of the Licensor are also limited until it becomes subject to the restrictions set forth above as a Loan Party.

At the time of any accrual in excess of $1.0 million, or proposed payment, of any Duty Amounts or other specified customs duty underpayments (see Note 9 of the Notes to Unaudited Consolidated Financial Statements under paragraph (b)): (i) the Consolidated Fixed Charge Coverage Ratio, calculated on a pro forma basis as of the last day of the most recently ended quarter with respect to the four most recently ended quarters ending on such date, as if such accrual or payment occurred during such quarter, must be at least 1:50:1.0; or (ii) the Consolidated Leverage Ratio, calculated on a pro forma basis as of the last day of the most recently ended quarter with respect to the four most recently ended quarters ending on such date, as if such accrual or payment occurred during such quarter, must be equal to or less than 3.25:1:0.

With respect to the payment by KID of dividends, among other things, so long as no event of default or unmatured event of default then exists or would result therefrom, and no violation of the Financial Covenants then exists or would result therefrom, KID may pay a regular quarterly dividend, provided, however, that prior to such time that the “focused assessment” of U.S. Customs has been deemed concluded and all Duty Amounts required thereby have been remitted by LaJobi (the “Duty Conclusion Date”), such payments, when aggregated with permitted repurchases of KID’s equity securities as described below, shall be limited to an aggregate amount not to exceed $5.0 million.

With respect to the repurchase by KID of its equity securities, among other things, so long as no event of default or unmatured event of default then exists or would result therefrom, no violation of the Financial Covenants then exists or would, on a pro forma basis, result therefrom, and the Consolidated Leverage Ratio, on a pro forma basis, is at least 0.25x less than the maximum then permitted, KID may repurchase or redeem its equity securities, provided, however, that prior to the Duty Conclusion Date, such payments, when aggregated with permitted quarterly dividends as described above, shall be limited to an aggregate amount not to exceed $5.0 million.

With respect to acquisitions, specified non-hostile acquisitions will be permitted (without a ceiling on the purchase price therefor), provided that, among other things, immediately before and after giving effect to such acquisition, no event of default or unmatured event of default exists, the Loan Parties are in pro forma compliance with the Financial Covenants, the pro forma Consolidated Leverage Ratio is at least 0.25x less than the maximum level then permitted, and minimum availability under the New Revolver is at least $15.0 million.

 

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KID BRANDS, INC AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

Generally with respect to the payment of LaJobi Earnout Consideration, if any, both before and immediately after giving effect to any such payment, (i) no event of default or unmatured event of default may then exist or result therefrom, (ii) no violation of the Financial Covenants or covenants with respect to Duty Amount accruals or payments may then exist or would, on a pro forma basis, result therefrom, and (iii) the Consolidated Leverage Ratio (calculated on a pro forma basis) is at least, if the Duty Conclusion Date has not yet occurred, 0.25 to 1.0 less than the maximum then permitted.

The New Credit Agreement contains customary events of default (including any failure to remain in compliance with the Financial Covenants), as well as specified defaults with respect to the LaJobi Earnout Consideration. If an event of default occurs and is continuing (in addition to default interest as described above, and other remedies available to the Lenders), with the consent of the Required Lenders, the Administrative Agent is entitled to, and at the request of such Lenders, the Administrative Agent is required to, declare commitments under the New Credit Agreement to be terminated, declare outstanding obligations thereunder to be due and payable, and/or demand cash collateralization of letters of credit (provided that upon events of bankruptcy, the commitments will be immediately due and payable, and the Borrowers will be required to cash collateralize letters of credit). In addition, an event of default under the New Credit Agreement could result in a cross-default under certain license agreements that KID maintains.

The New Credit Agreement also contains customary conditions to lending, including that no default shall exist, or would result from any proposed extension of credit.

In order to secure the obligations of the Loan Parties under the New Credit Agreement, each Loan Party has pledged 100% of the equity interests of its domestic subsidiaries, including a pledge of the capital stock of each Borrower (other than KID) and the Licensor, and 65% of the equity interests of specified foreign subsidiaries, to the Administrative Agent, and has granted security interests to the Administrative Agent in substantially all of its personal property (other than the assets of the Licensor until it becomes a Loan Party), all pursuant to the terms of a Second Amended and Restated Security and Pledge Agreement dated as of August 8, 2011 (the “New Security Agreement”), which amends and restates the Amended and Restated Guaranty and Collateral Agreement dated as of April 2, 2008, as amended, among the Borrowers in favor of the Administrative Agent (the “Old Security Agreement”). As additional security for Sassy, Inc.’s obligations under the New Credit Agreement, Sassy, Inc. has continued its grant of a mortgage for the benefit of the Administrative Agent and the continuing Lenders on the real property located at 2305 Breton Industrial Park Drive, S.E., Kentwood, Michigan.

The Borrowers paid an arrangement fee to ML in an aggregate amount of approximately $656,000 and an up-front fee to the Lenders in an aggregate amount of approximately $665,000 in connection with the execution of the New Credit Agreement and related documentation. The Company recorded these costs and related professional fees totaling in the aggregate approximately $1.7 million as deferred charges. These deferred charges will be amortized over the five-year contractual term of the New Revolver. The Borrowers are also required to pay a quarterly commitment fee ranging from 0.30% to 0.45% (based on the Consolidated Leverage Ratio) on the daily unused portions of the New Revolver (outstanding amounts under letters of credit are considered utilization for this purpose; outstanding swing-line loans are not so considered); letter of credit fees ranging from 1.75% to 2.75% (based on the Consolidated Leverage Ratio) on the maximum daily amount available to be drawn, plus fronting fees and other customary fees as are set forth in the New Credit Agreement.

Financing costs associated with Old Credit Agreement were deferred and amortized over their contractual term. The fees for an amendment to the Old Credit Agreement in March 2011 ($131,000), were recorded as expense in the consolidated statements of operations for the three months ended March 31, 2011.

NOTE 5—FINANCIAL INSTRUMENTS

The fair value of assets and liabilities is determined by reference to the estimated price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).

Financial assets and liabilities are measured using inputs from the three levels of the following fair value hierarchy:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities. The Company currently has no Level 1 assets or liabilities that are measured at a fair value on a recurring basis.

Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs). Most of the Company’s assets and liabilities fall within Level 2 and include foreign exchange contracts (when applicable) and an interest rate swap agreement (until its expiration on December 21, 2011). The fair value of foreign currency and interest rate swap agreements are based on third-party market maker valuation models that discount cash flows resulting from the differential between the contract rate and the market-based forward rate or curve capturing volatility and establishing intrinsic and carrying values.

 

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KID BRANDS, INC AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

Level 3—Unobservable inputs that reflect the Company’s assessment about the assumptions that market participants would use in pricing the asset or liability. The Company currently has no Level 3 assets or liabilities that are measured at a fair value on a recurring basis.

Categorization within the hierarchy is based upon the lowest level input that is available and significant to the fair value measurement. Observable inputs are preferred and are based on market data obtained from independent sources, while unobservable inputs are based on the Company’s market assumptions.

Cash and cash equivalents, trade accounts receivable, inventory, income tax receivable, trade accounts payable, and accrued expenses are reflected in the consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these instruments.

The carrying value of the Company’s long term borrowings approximates fair value, because interest rates applicable thereto are variable, based on prevailing market rates.

There were no material changes to the Company’s valuation techniques during the three months ended March 31, 2012 compared to those used in prior periods.

Derivative Instruments

The Company was required by its lenders (until the execution of the New Credit Agreement as of August 8, 2011) to maintain in effect interest rate swap agreements that protected against potential fluctuations in interest rates with respect to a minimum of 50% of the outstanding amount of the Old Term Loan (such swap agreement was not terminated at the time of the execution of the New Credit Agreement even though it was no longer required thereunder, but expired by its terms on December 21, 2011). The Company’s objective was to offset the variability of cash flows in the interest payments on a portion of the total outstanding variable rate debt. During the three months ended March 31, 2011, the Company applied hedge accounting treatment to such interest rate swap agreement based upon the criteria established by accounting guidance for derivative instruments and hedging activities, including designation of its derivatives as fair value hedges or cash flow hedges and assessment of hedge effectiveness. Following the execution of the New Credit Agreement, as the requirement to maintain hedge agreements was no longer in effect, the Company discontinued hedge accounting for the interest rate swap agreement and from such date until its expiration accounted for such agreement as a non-qualifying derivative instrument. The Company records its derivatives in its consolidated balance sheets at fair value. The Company does not use derivative instruments for trading purposes.

Cash Flow Hedges

To comply with a requirement in the Old Credit Agreement to offset variability in cash flows related to the interest rate payments on the Old Term Loan, the Company used an interest rate swap designated as a cash flow hedge. The interest rate swap converted the variable rate on a portion of the Old Term Loan to a specified fixed interest rate by requiring payment of a fixed rate of interest in exchange for the receipt of a variable rate of interest at the LIBOR U.S. dollar three month index rate. The duration of the contract was twelve months, and the contract expired in December 2011.

The Company measured hedge ineffectiveness by comparing the cumulative change in cash flows of the hedge contract with the cumulative change in cash flows of the hedged transaction. The Company recognized any ineffective portion of the hedge in its Consolidated Statement of Operations as a component of interest expense. The impact of hedge ineffectiveness on earnings was not significant during the three months ended March 31, 2011. During the three months ended March 31, 2011, the Company did not discontinue any cash flow hedges.

As of March 31, 2011, accumulated other comprehensive income reflected the difference between the overall change in fair value of the interest rate swap since inception of the hedge and the amount of ineffectiveness reclassified into earnings. For the three months ended March 31, 2011, an unrealized gain of $16,000 for the Company’s former interest rate swap agreement was recorded as a component of comprehensive loss. The Company had no derivatives as of March 31, 2012.

 

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NOTE 6—INTANGIBLE ASSETS

As of March 31, 2012 and December 31, 2011, the components of intangible assets consist of the following (in thousands):

 

     Weighted Average    March 31,      December 31,  
     Amortization Period    2012      2011  

Sassy trade name

   Indefinite life    $ 5,400       $ 5,400   

Kids Line customer relationships

   20 years      6,896         7,000   

Kids Line trade name

   Indefinite life      5,300         5,300   

LaJobi trade name

   Indefinite life      8,700         8,700   

LaJobi customer relationships

   20 years      10,161         10,319   

LaJobi royalty agreements

   5 years      730         840   

CoCaLo trade name

   Indefinite life      5,800         5,800   

CoCaLo customer relationships

   20 years      2,030         2,063   

CoCaLo foreign trade name

   Indefinite life      31         31   
     

 

 

    

 

 

 

Total intangible assets

      $ 45,048       $ 45,453   
     

 

 

    

 

 

 

Aggregate amortization expense was approximately $405,000 and $689,000 for the three months ended March 31, 2012 and 2011, respectively.

Indefinite-lived intangible assets are reviewed for impairment at least annually, and more frequently if a triggering event occurs indicating that an impairment may exist. The Company’s annual impairment testing is performed in the fourth quarter of each year (unless specified triggering events warrant more frequent testing). All intangible assets, both definite-lived and indefinite-lived, were tested for impairment in the fourth quarter of 2011. In connection therewith, as has been previously disclosed, the Company recorded an impairment in the fourth quarter of 2011 in the amount of $9.9 million with respect to the LaJobi trade name and $19.0 million with respect to the Kids Line customer relationships. In accordance with applicable accounting standards, there were no triggering events warranting interim testing of intangible assets in the first quarter of 2012, and no impairments of intangible assets (either definite-lived or indefinite-lived) were recorded during such period. Details with respect to the testing for impairment of the Company’s intangible assets, the conclusions of such testing, and impairments to intangible assets recorded in the quarter and year ended December 31, 2011 (including a complete impairment as of such date of the $11.7 million in goodwill required to be recorded for the year ended December 31, 2010) can be found in the 2011 10-K, in Note 4 to the Notes to Consolidated Financial Statements therein.

As many of the factors used in assessing fair value are outside the control of management, the assumptions and estimates used in such assessment may change in future periods, which could require that the Company record additional impairment charges to the Company’s assets. The Company will continue to monitor circumstances and events in future periods to determine whether additional asset impairment testing or recordation is warranted.

NOTE 7—GEOGRAPHIC INFORMATION AND CONCENTRATION OF RISK

The following tables present net sales and total assets of the Company by geographic area (in thousands):

 

     Three Months ended March 31,  
Net sales    2012      2011  

Net domestic sales

   $ 52,947       $ 56,988   

Net foreign sales (Australia and United Kingdom)*

     2,281         2,848   
  

 

 

    

 

 

 

Total net sales

   $ 55,228       $ 59,836   
  

 

 

    

 

 

 

 

     March 31,      December 31,  
Assets    2012      2011  

Domestic assets

   $ 182,637       $ 186,424   

Foreign assets (Australia and United Kingdom)

     6,330         6,422   
  

 

 

    

 

 

 

Total assets

   $ 188,967       $ 192,846   
  

 

 

    

 

 

 

 

* Excludes export sales from the United States.

 

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The Company currently categorizes its sales in five product categories: Soft Good Basics, Hard Good Basics, Toys and Entertainment, Accessories and Décor and Other. Soft Good Basics includes bedding, blankets and mattresses. Hard Good Basics includes cribs and other nursery furniture, feeding, food preparation and kitchen products, baby gear and organizers. Toys and Entertainment includes developmental toys, bath toys and mobiles. Accessories and Décor includes hampers, lamps, rugs and décor. Other includes all other products that do not fit in the above four categories. The Company’s consolidated net sales by product category, as a percentage of total consolidated net sales, for the three months ended March 31, 2012 and 2011 were as follows:

 

     Three months ended March 31,  
     2012     2011  

Soft Good Basics

     38.8     36.7

Hard Good Basics

     36.3     35.5

Toys and Entertainment

     14.6     15.6

Accessories and Décor

     9.0     10.7

Other

     1.3     1.5
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

Customers who account for a significant percentage of the Company’s gross sales are shown in the table below:

 

     Three months ended March 31,  
     2012     2011  

Toys “R” Us, Inc. and Babies “R” Us, Inc.

     32.3     38.5

Walmart

     16.8     13.9

Target

     7.7     9.6

The loss of these customers or any other significant customers, or a significant reduction in the volume of business conducted with such customers, could have a material adverse impact on the Company. The Company does not normally require collateral or other security to support credit sales.

As part of its ongoing risk assessment procedures, the Company monitors concentrations of credit risk associated with financial institutions with which it conducts business. The Company seeks to avoid concentration with any single financial institution. The Company also monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business.

During the three months ended March 31, 2012, approximately 74% of the Company’s dollar volume of purchases was attributable to manufacturing in the People’s Republic of China (“PRC”), compared to 78% for the three months ended March 31, 2011. The PRC currently enjoys “permanent normal trade relations” (“PNTR”) status under U.S. tariff laws, which provides a favorable category of U.S. import duties. The loss of such PNTR status would result in a substantial increase in the import duty for products manufactured for the Company in the PRC and imported into the United States and would result in increased costs for the Company.

The supplier accounting for the greatest dollar volume of the Company’s purchases accounted for approximately 21% of such purchases for the three months ended March 31, 2012 and approximately 18% for the three months ended March 31, 2011. The five largest suppliers accounted for approximately 49% of the Company’s purchases in the aggregate for the three months ended March 31, 2012 and 45% for the three months ended March 31, 2011.

NOTE 8—INCOME TAXES

The Company uses the asset and liability approach for financial accounting and reporting of income taxes. A valuation allowance is provided for deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizability of deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies. The Company’s ability to realize its deferred tax assets depends upon the generation of sufficient future taxable income to allow for the utilization of its deductible temporary differences and loss and credit carry forwards.

The Company operates in multiple tax jurisdictions, both within the United States and outside of the United States, and faces audits from various tax authorities regarding the inclusion of certain items in taxable income, the deductibility of certain expenses, transfer pricing, the utilization and carryforward of various tax credits, and the utilization of various carryforward items such as capital losses, and net operating loss carryforwards (“NOLs”). At March 31, 2012, the amount of liability for unrecognized tax benefits related to federal, state, and foreign taxes was approximately $739,000 including approximately $159,000 of interest and penalties.

 

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Activity regarding the liability for unrecognized tax benefits for the three months ended March 31, 2012 is as follows:

 

     (in thousands)  

Balance at December 31, 2011

   $ 729   

Increase related to prior year tax positions

     10   
  

 

 

 

Balance at March 31, 2012

   $ 739   
  

 

 

 

The Company is currently under examination by the Internal Revenue Service for its consolidated federal income tax returns for 2008 and 2009. Based upon the expiration of statutes of limitations and/or the conclusion of tax examinations in several jurisdictions, the Company believes it is reasonably possible that the total amount of previously unrecognized tax benefits discussed above may decrease by up to $665,000 within twelve months of March 31, 2012 and such amount is reflected on the Company’s consolidated balance sheet as current income taxes payable.

The Company’s policy is to classify interest and penalties related to unrecognized tax benefits as income tax expense.

The income tax benefit for the three months ended March 31, 2012 was $471,000 on loss before income tax benefit of $1,274,000. The difference between the effective tax rate of 37% for the three months ended March 31, 2012 and the U.S. federal tax rate of 35% primarily relates to: a benefit for state tax, net of federal tax benefit ($53,000); offset by: (i) an increase in the liability for unrecognized tax benefits ($7,000) as a result of additional interest being accrued; (ii) foreign adjustments related to foreign rate differences and withholding taxes ($5,000); and (iii) the effect of permanent adjustments ($11,000). The income tax benefit for the three months ended March 31, 2011 was approximately $26,000 on loss before income tax benefit of $351,000. The difference between the effective tax rate of 7.5% for the three months ended March 31, 2011 and the U.S. federal tax rate of 35% primarily relates to: (i) an increase in the liability for unrecognized tax benefits ($115,000) as a result of an increase in the liability for state taxes and additional interest being accrued; (ii) the effect of a graduated U.S. federal tax rate ($26,000); and (iii) foreign adjustments related to foreign rate differences and withholding taxes ($11,000); offset by: (i) a benefit for state tax, net of federal tax benefit ($55,000); and (ii) the effect of permanent adjustments ($2,000).

NOTE 9—LITIGATION; COMMITMENTS AND CONTINGENCIES

 

(a) LaJobi Customs, LaJobi Earnout Consideration and Asia Staffing Matters

In late December 2010, the Company’s LaJobi subsidiary was selected by U.S. Customs and Border Protection (“U.S. Customs”) for a “Focused Assessment” of its import practices and procedures (an evaluation by U.S. Customs of a company’s ability to comply with Customs requirements, and not an enforcement audit or a program intended to discover wrongdoing), which Focused Assessment commenced on January 19, 2011. In preparing for the Focused Assessment, the Company found certain potential issues with respect to LaJobi’s import practices. As a result, the Board initiated an investigation, supervised by a Special Committee of three non-management members of the Board. The Board’s investigation found instances at LaJobi in which incorrect anti-dumping duties were applied on certain wooden furniture imported from vendors in the PRC, resulting in a violation of anti-dumping laws. On the basis of the investigation, the Board concluded that there was misconduct involved on the part of certain LaJobi employees in connection with the incorrect payment of duties, including misidentifying the manufacturer, shipper and description of products. As a result, effective March 14, 2011, LaJobi’s President, Lawrence Bivona, and LaJobi’s Managing Director of operations were both terminated from employment. Promptly upon becoming aware of the issues and related misconduct described above, the Company voluntarily disclosed its findings to the SEC on an informal basis and is cooperating with the Staff of the SEC. See “SEC Informal Investigation” in paragraph (d) below.

The Company expects to complete a voluntary prior disclosure to U.S. Customs identifying certain underpayments of anti-dumping duty, and remit payment of duty not paid, with interest thereon. Accordingly, the aggregate amount accrued by the Company during the period commencing April 2, 2008 (the date of purchase of the LaJobi assets by the Company) through March 31, 2012 with respect to anti-dumping duties and related interest that it anticipates will be owed to U.S. Customs by LaJobi is approximately $7,829,000, which amount includes approximately $667,000 in interest. Of the foregoing amount, $60,000 was recorded for anticipated interest expense in the quarter ended March 31, 2012. All of the foregoing charges were recorded in cost of sales (other than the interest portions, which were recorded in interest expense). As a result of the restatement of the Prior Financial Statements (defined and described in Note 12), these amounts are recorded in the periods to which they relate. Previously, the Company had recorded the applicable anticipated customs duty payment requirements (and related interest) to such date in the quarter and year ended December 31, 2010, the period of discovery (the “Original Accrual”), and recorded additional interest expense on such aggregate amount in subsequent quarterly periods, all as described in Note 12.

 

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As the Focused Assessment is still pending, however, it is possible that the actual amount of duty owed for the period covered thereby will be higher upon completion thereof, and in any event, additional interest will continue to accrue on the amounts the Company currently anticipates the Company will owe until payment is made. In addition, it is possible that the Company may be assessed by U.S. Customs a penalty of up to 100% of such duty owed, as well as possibly being subject to additional fines, penalties or other measures from U.S. Customs or other governmental authorities. With respect to the actual amount of duty owed, and additional fines, penalties or other measures, the Company cannot currently estimate the amount of the loss (or range of loss), if any, in connection therewith. The Company has discontinued the practices that resulted in the charge for anticipated anti-dumping duty, and has established alternate vendor arrangements for the relevant products in countries that are not subject to such anti-dumping duties, and the Company believes that its ability to procure the affected categories of wooden bedroom furniture has not been materially adversely affected. The Company is committed to working closely with U.S. Customs to address issues relating to incorrect duties. The Company has also initiated certain enhancements to its processes and procedures in areas where underpayments were found, and continues to review these and possibly other remedial measures. In addition, there can be no assurance that the Company’s licensors, vendors and/or retail partners will not take adverse action under applicable agreements with the Company (or otherwise) as a result of the matters described above; however, to date, the Company is unaware of any such adverse actions.

As a result of the Original Accrual (which as a result of the restatement of the Prior Financial Statements has now been recorded in the periods to which they relate) and the facts and circumstances discovered in the Company’s preparation for the Focused Assessment and in its related investigation into LaJobi’s import practices described above (including misconduct on the part of certain employees at LaJobi), the Company concluded that no LaJobi Earnout Consideration (and therefore no related finder’s fee) was payable. Accordingly, prior to the restatement of the Prior Financial Statements, the Company had not recorded any amounts related thereto in the Company’s financial statements (the Company had previously disclosed a potential earnout payment of approximately $12.0 to $15.0 million in the aggregate relating to its acquisitions of LaJobi and CoCaLo, substantially all of which was estimated to relate to LaJobi).

As has been previously disclosed, the Company received a letter on July 25, 2011 from counsel to Lawrence Bivona demanding payment of the LaJobi Earnout Consideration to Mr. Bivona in the amount of $15.0 million, and a letter from counsel to Mr. Bivona alleging that Mr. Bivona’s termination by LaJobi “for cause”, violated his employment agreement and demanding payment to Mr. Bivona of amounts purportedly due under such employment agreement. In December 2011, Mr. Bivona initiated an arbitration proceeding with respect to these issues, as well as a claim for defamation, seeking damages in excess of $25.0 million. On February 22, 2012, the Company and LaJobi filed an answer thereto, in which they denied any liability, asserted defenses and counterclaims against Mr. Bivona, and asserted a third-party complaint against Mr. Bivona’s brother and the LaJobi seller.

Because the restatement of the Prior Financial Statements resulted in the technical satisfaction of the formulaic provisions for the payment of a portion of the LaJobi Earnout Consideration under the agreement governing the purchase of the LaJobi assets, applicable accounting standards required that the Company record a liability in the amount of the formulaic calculation, without taking into consideration the Company’s affirmative defenses, counterclaims and third party claims. Accordingly, in connection with the restatement of the Prior Financial Statements, the Company recorded a liability in the approximate amount of $11.7 million for the year ended December 31, 2010 ($10.6 million in respect of the LaJobi Earnout Consideration and $1.1 million in respect of the related finder’s fee), with an offset in equal amount to goodwill, all of which goodwill was impaired as of December 31, 2011. While we intend to vigorously defend against all of Mr. Bivona’s claims, and believe that we will prevail, based on, among other things, our affirmative defenses, counterclaims and third-party claims (in which case we will be able to reverse such liability), there can be no assurance that this will be the case. An adverse decision in the arbitration that requires any significant payment by us to Mr. Bivona or the LaJobi seller could result in a default under our credit agreement and have a material adverse effect on our financial condition and results of operations. See Note 4 for a description of the Company’s senior secured financing facility, including a discussion of conditions precedent to any LaJobi earnout payment requirements and the impact of any such payment on our required financial covenants.

In addition, as has been previously disclosed, the Asia payment and staffing practices utilized by our LaJobi subsidiary during 2010 were likely not in compliance with certain foreign laws in various jurisdictions. However, we currently do not believe that such matters (individually or in the aggregate) will have a material adverse effect on the Company (and we have not accrued any amounts to date in connection therewith), although there can be no assurance that this will be the case. LaJobi has since discontinued such practices, and the Company has taken corrective action. Specifically, we have established subsidiaries in the PRC, Hong Kong and Thailand to oversee our quality assurance activities in Asia, and have retained the full-time services of such individuals, either directly through such subsidiaries, or through third party outsource agencies, which we believe to be in compliance with applicable laws of the relevant Asian countries. There can be no assurance, however, that applicable governmental authorities will not impose taxes or penalties or other measures with respect to staffing and related payment practices previously utilized by LaJobi, or that our licensors, vendors and/or retail partners will not take adverse action under applicable agreements with us (or otherwise) as a result of such potential compliance issues (although we are unaware of any such actions to date).

 

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(b) Customs Compliance Investigation

Following the discovery of the matters described above with respect to LaJobi, our Board authorized a review, supervised by the Special Committee and conducted by outside counsel, of customs compliance practices at the Company’s non-LaJobi operating subsidiaries, consisting of Kids Line, CoCaLo and Sassy (the “Customs Review”). In connection therewith, instances were identified in which these subsidiaries filed incorrect entries and invoices with U.S. Customs as a result of, in the case of Kids Line, incorrect descriptions, classifications and valuations of certain products imported by Kids Line and, in the case of CoCaLo, incorrect classifications of certain products imported by CoCaLo. As a result of these findings to date, the Company currently estimates that it will incur aggregate costs of approximately $2,939,000, which includes approximately $316,000 in interest, relating to customs duty for the years ended 2006 through 2011 and the quarter ended March 31, 2012. Of the foregoing amount, $18,000 was recorded for anticipated interest expense in the quarter ended March 31, 2012. All of the foregoing charges were recorded in cost of sales (other than the interest portions, which were recorded in interest expense). As a result of the restatement of the Prior Financial Statements (defined and described in Note 12), these amounts are recorded in the periods to which they relate. Previously, the Company had recorded the applicable anticipated customs duty payment requirements (and related interest) to such date in the three and six months ended June 30, 2011 (the period of discovery), and recorded additional interest expense on such aggregate amount in the subsequent quarterly period, all as described in Note 12.

As the Customs Review is still pending, however, it is possible that the actual amount of duty owed will be higher upon its completion and, in any event, additional interest will continue to accrue until payment is made. In addition, it is possible that the Company may be assessed by U.S. Customs a penalty of up to 100% of any such duty owed, as well as possibly being subject to additional fines, penalties or other measures from U.S. Customs or other governmental authorities. With respect to the actual amount of duties owed, and additional fines, penalties or other measures, the Company cannot currently estimate the amount of loss (or range of loss), if any, in connection therewith. Promptly after becoming aware of the foregoing, the Company submitted voluntary prior disclosures to U.S. Customs identifying such issues. Following the completion of the Customs Review, the Company intends to remit to U.S. Customs the amount of duties owed and any interest and penalties thereon. Our Board has also authorized an investigation, supervised by the Special Committee and conducted by a second outside counsel, to more fully review the customs practices at these operating subsidiaries, including whether there was any misconduct by personnel (the “Customs Investigation”). The Company has also voluntarily disclosed to the SEC the existence of the Customs Review and the Customs Investigation. Because the Customs Investigation is ongoing, there can be no assurance as to how the resulting consequences, if any, may impact our internal controls, business, reputation, results of operations or financial condition.

 

(c) Putative Class Action and Derivative Litigations

Putative Class Action. On March 22, 2011, a complaint was filed in the United States District Court, District of New Jersey, encaptioned Shah Rahman v. Kid Brands, et al. (the “Putative Class Action”). The Putative Class Action was brought by one plaintiff on behalf of a putative class of all those who purchased or otherwise acquired KID’s common stock between March 26, 2010 and March 15, 2011. In addition to KID, Bruce G. Crain, KID’s then- President, Chief Executive Officer and a member of KID’s Board, Guy A. Paglinco, KID’s Vice President and Chief Financial Officer, Raphael Benaroya, Mario Ciampi, Frederick J. Horowitz, Salvatore Salibello and Michael Zimmerman, each members of KID’s Board, as well as Lauren Krueger and John Schaefer, each a former member of KID’s Board, were named as defendants.

The Putative Class Action alleged one claim for relief pursuant to Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder, and a second claim pursuant to the Exchange Act, claiming generally that the Company and/or the other defendants issued materially false and misleading statements during the relevant time period regarding compliance with customs laws, the Company’s financial reports and internal controls. The Putative Class Action did not state the size of the putative class. The Putative Class Action sought compensatory damages but did not quantify the amount of damages sought. The Putative Class Action also sought unspecified extraordinary and injunctive relief, the costs and disbursements of the lawsuit, including attorneys’ and experts’ fees and costs, and such equitable relief as the court deemed just and proper. By order dated July 26, 2011, Shah Rahman was appointed lead plaintiff pursuant to Section 21D (a) (3) (B) of the Exchange Act.

On September 26, 2011, an amended complaint was filed by the lead plaintiff which asserted additional allegations, extended the putative class to all those who purchased or otherwise acquired KID’s common stock between March 26, 2010 and August 16, 2011, and eliminated several of the named defendants other than KID, Bruce G. Crain, Guy A. Paglinco and Raphael Benaroya. The amended complaint was dismissed without prejudice against Raphael Benaroya by a Notice of Voluntary Dismissal filed by the lead plaintiff on October 21, 2011 and so ordered by the Court on October 25, 2011.

 

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On November 10, 2011, KID and individual defendants Bruce G. Crain and Guy A. Paglinco (collectively “Defendants”) moved to dismiss the amended complaint pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6) and the Private Securities Litigation Reform Act, 15 U.S.C. § 74u-4. Briefing on Defendants’ motions to dismiss was completed on January 15, 2012. On March 7, 2012, the Court issued an opinion and order granting Defendants’ motions to dismiss the amended complaint without prejudice. The Court ordered that plaintiff may file another amended complaint with sixty (60) days of the March 7th Order.

On May 7, 2012, the lead plaintiff filed a second amended complaint that named the Company, Bruce G. Crain, Guy A. Paglinco, and Raphael Benaroya as defendants. The second amended complaint repeats the same claims for relief and many of the allegations of the previous complaints in the action, but contains new allegations that, among other things, the Company and/or the other defendants issued materially false and misleading statements during the relevant time period regarding custom law violations and safety violations regarding certain of its products. The relief demanded and the class period are the same as in the first amended complaint.

The Company intends to continue to defend the Putative Class Action vigorously, and has notified its insurance carriers of the existence of the action; however, no amounts have been accrued in connection therewith, although legal costs are being expensed as incurred.

Putative Shareholder Derivative Action. On May 20, 2011, a putative stockholder derivative complaint was filed by the City of Roseville Employees’ Retirement System (“Roseville”) in the United States District Court of the District of New Jersey (the “Putative Derivative Action”), against Bruce Crain, KID’s then CEO, Guy Paglinco, KID’s CFO, Marc Goldfarb, KID’s Senior Vice President and General Counsel, each member of KID’s current Board, and John Schaefer, a former member of KID’s Board (collectively, the “Defendants”). In addition, KID was named as a nominal defendant.

The Putative Derivative Action alleged, among other things, that the Defendants breached their fiduciary duties to the Company by allegedly failing to oversee and disclose alleged misconduct at KID’s LaJobi subsidiary relating to LaJobi’s compliance with certain U.S. customs laws. In addition to asserting the breach of fiduciary duty claim, the complaint also asserted claims of gross mismanagement, abuse of control and commission of corporate waste and unjust enrichment. The Putative Derivative Action sought monetary damages against the individual Defendants in an unspecified amount together with interest, in addition to exemplary damages, the costs and disbursements of the lawsuit, including attorneys’ and experts’ fees and costs, and such equitable relief as the court deems just and proper.

On July 25, 2011, the individual Defendants and nominal defendant KID moved to dismiss the complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) and 23.1. On October 24, 2011, the Court granted Defendants’ motion to dismiss without prejudice with leave for plaintiff to amend the complaint. The Court ruled that plaintiff failed to satisfy applicable pleading standards required to bring a shareholder derivative claim.

On November 23, 2011, Roseville sent a letter to KID demanding to inspect certain books and records of the Company pursuant to New Jersey state law. The demand requested to inspect documents relating to LaJobi’s compliance with U.S. customs laws to determine whether the Roseville will amend its complaint in the Putative Derivative Action. On March 1, 2012, the Company indicated in a letter that it had provided all the documents to which Roseville is entitled under New Jersey law. On April 28, 2012, Roseville filed a motion to compel inspection of documents beyond those previously provided by the Company. The Company’s opposition to the motion is due on May 14, 2012. Roseville’s time to amend its complaint has been extended by the Court until the issues raised in the motion are resolved.

The Company notified its insurance carriers of the Putative Derivative Action. While the Company incurred costs in connection with the defense of this lawsuit, and may incur additional costs (which costs were or will be expensed as incurred), the lawsuit did not seek monetary damages against the Company, and no amounts have been accrued in connection therewith.

 

(d) SEC Informal Investigation

As noted above, the Company voluntarily disclosed to the SEC the findings of its internal investigation of LaJobi’s customs and Asia staffing practices. On June 20, 2011, the Company received a letter from the SEC indicating that the Staff was conducting an informal investigation and requesting that the Company provide certain documents on a voluntary basis. Subsequent thereto, the Company voluntarily disclosed to the SEC the existence of the Customs Review and the Customs Investigation. The Company believes that it has fully cooperated, and will continue to fully cooperate, with the SEC. The Company is currently unable to predict the duration, resources required or outcome of the investigation or the impact such investigation may have on the Company’s financial condition or results of operations.

 

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KID BRANDS, INC AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

(e) U.S. Attorney’s Office Investigation

On August 19, 2011, the United States Attorney’s Office for the District of New Jersey (“USAO”) contacted Company counsel, requesting information relating to LaJobi previously provided by the Company to U.S. Customs and the SEC, as well as additional documents. The Company is cooperating with the USAO on a voluntary basis. The Company is currently unable to predict the duration, the resources required or outcome of the USAO investigation or the impact such investigation may have.

 

(f) Wages and Hours Putative Class Action

On November 3, 2011, a complaint was filed in the Superior Court of the State of California for the County of Los Angeles, encaptioned Guadalupe Navarro v. Kids Line, LLC (the “Wages and Hours Action”). The Wages and Hours Action was brought by one plaintiff on behalf of a putative class for damages and equitable relief for: (i) failure to pay minimum, contractual and/or overtime wages (including for former employees with respect to their final wages), and failure to provide adequate meal breaks, in each case based on defendant’s time tracking system and automatic deduction and related policies; (ii) statutory penalties for failure to provide accurate wage statements; (iii) waiting time penalties in the form of continuation wages for failure to timely pay terminated employees; and (iv) penalties under the Private Attorneys General Act (PAGA). Plaintiff seeks wages for all hours worked, overtime wages for all overtime worked, statutory penalties under Labor Code Section 226(e), and Labor Code Section 203, restitution for unfair competition under Business and Professions Code Section 17203 of all monies owed, compensation for missed meal breaks, and injunctive relief. The complaint also seeks unspecified liquidated and other damages, statutory penalties, reasonable attorney’s fees, costs of suit, interest, and such other relief as the court deems just and proper. Although the total amount claimed is not set forth in the complaint, the complaint asserts that the plaintiff and the class members are not seeking more than $4.9 million in damages at this time (with a statement that plaintiff will amend his complaint in the event that the plaintiff and class members’ claims exceed $4.9 million).

The Company intends to vigorously defend the Wages and Hours Action. Based on currently available information, the Company cannot currently estimate the amount of the loss (or range of loss), if any, in connection therewith. As a result, no amounts have been accrued in connection therewith, although legal costs are being expensed as incurred.

 

(g) Other

In addition to the proceedings described above, in the ordinary course of its business, the Company is from time to time party to various copyright, patent and trademark infringement, unfair competition, breach of contract, customs, employment and other legal actions incidental to the Company’s business, as plaintiff or defendant. In the opinion of management, the amount of ultimate liability with respect to any such actions that are currently pending will not, individually or in the aggregate, materially adversely affect the Company’s consolidated results of operations, financial condition or cash flows. KID may also remain obligated with respect to certain contracts and other obligations of its former gift business that were not novated in connection with their transfer. No payments have been made by KID in connection with the contracts described in the preceding sentence to date (other than $1.4 million paid by the Company in the quarter ended March 31, 2012 to the landlord in complete settlement of a contingent obligation with respect to a lease assumed by the buyer of the Company’s former gift business), nor is KID aware of any remaining potential obligations, but there can be no assurance that payments will not be required of KID in the future with respect thereto.

 

(h) Share Repurchase Program

On November 8, 2011, the Board approved a share repurchase program. Under the share repurchase program, the Company is authorized to purchase up to $10.0 million of its outstanding shares of common stock (and in connection therewith, the Board terminated the repurchase program authorized in March of 1990). The purchases may be made from time to time on the open market or in negotiated transactions. The timing and extent to which the Company repurchases its shares will depend on market conditions and other corporate considerations as may be considered in the Company’s sole discretion, including limitations in the New Credit Agreement, which, in addition to limits on revolver availability and a stricter consolidated leverage ratio for this purpose (0.25x less than the maximum then-permitted), limits the aggregate amount that can be expended on share repurchases and dividends to $5.0 million until the LaJobi Focused Assessment has been concluded and all duty amounts required thereby have been paid (see Note 4 above). The share repurchase program may be suspended or discontinued at any time without prior notice. The Company intends to finance the share repurchase program from available cash and/or proceeds under the New Credit Agreement (to the extent available therefor).

 

(i) Purchase Commitments

The Company has approximately $41.5 million in outstanding purchase commitments at March 31, 2012, consisting primarily of purchase orders for inventory.

 

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KID BRANDS, INC AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

(j) License and Distribution Agreements

The Company enters into various license and distribution agreements relating to trademarks, copyrights, designs, and products which enable the Company to market items compatible with its product line. Most of these agreements are for two- to five-year terms with extensions if agreed to by both parties. Although the Company does not believe its business is dependent on any single license, the Graco® license (which expires on December 31, 2013, subject to renewals) and the Carter’s® license (which expires on December 31, 2012, subject to renewals) are each material to and accounted for a material portion of the net revenues of LaJobi and Kids Line, respectively, as well as a significant percentage of the net revenues of the Company, in each case for each of the last three years. In addition, the Serta® license (which expires on December 31, 2013, subject to renewals) is material to and accounted for a significant percentage of the net revenues of LaJobi; the Disney® license (which expires on December 31, 2012, subject to renewals) is material to and accounted for a significant percentage of the net revenues of Kids Line; and the Garanimals® license (which expires on December 31, 2012) is material to and accounted for a significant percentage of the net revenues of Sassy, in each case (other than the Garanimals® license which commenced in 2010) for the last three years ended December 31, 2011. While historically the Company has been able to renew the license agreements that it wishes to continue on terms acceptable to it, the loss of any of the foregoing and/or other significant license agreements could have a material adverse effect on the Company’s results of operations. Several of these agreements require pre-payments of certain minimum guaranteed royalty amounts. The amount of minimum guaranteed royalty payments with respect to all license agreements pursuant to their original terms aggregates approximately $18.5 million, of which approximately $9.2 million remained unpaid at March 31, 2012. Royalty expense was $2.1 million and $1.8 million for the three months ended March 31, 2012 and 2011, respectively.

 

(k) Letters of Credit

As of March 31, 2012, the Company had obligations under certain letters of credit that require the Company to make payments to parties aggregating $0.1 million upon the occurrence of specified events.

NOTE 10—RECENTLY ISSUED ACCOUNTING STANDARDS

The Company has implemented all new accounting pronouncements that are in effect and that may materially impact its financial statements, and does not believe that there are any other new accounting pronouncements or changes in accounting pronouncements issued during the three months ended March 31, 2012, that might have a material impact on the Company’s financial position, results of operations or cash flows.

NOTE 11—SALE OF GIFT BUSINESS AND TRC BANKRUPTCY SETTLEMENT

On December 23, 2008, KID completed the sale of its former gift business (the “Gift Sale”) to the Russ Companies, Inc. (‘TRC”). The aggregate purchase price payable by TRC for such gift business was (i) 199 shares of the Common Stock, par value $0.001 per share, of TRC, representing a 19.9% interest in TRC after consummation of the transaction that was accounted for at cost; and (ii) a subordinated, secured promissory note issued by TRC to KID in the original principal amount of $19.0 million (the “Seller Note”). In the second quarter of 2009, the Company fully impaired or reserved against all such consideration. In addition, in connection with the Gift Sale, a limited liability company wholly-owned by KID (the “Licensor”) executed a license agreement (the “License Agreement”) with TRC permitting TRC to use specified intellectual property, consisting generally of the “Russ” and “Applause” trademarks and trade names (the “Retained IP”). Pursuant to the License Agreement, TRC was required to pay the Licensor a fixed, annual royalty (the “Royalty”) equal to $1,150,000. KID received $287,500 in respect of the Royalty payment due March 23, 2010, which was recorded as other income in the first quarter of 2010, but did not receive any other payments in respect of the Royalty, and therefore recorded no further income related to such Royalties.

As has been previously disclosed, on April 21, 2011, TRC and TRC’s domestic subsidiaries (collectively, the “Debtors”), filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code (the “Code”) in the United States Bankruptcy Court for the District of New Jersey (the “Bankruptcy Court”). On June 16, 2011, the Bankruptcy Court entered an order which, among other things, approved a settlement with the secured creditors of the Debtors, including KID (the “Settlement”).

The Settlement, among other things: (i) includes a release of KID by and on behalf of the Debtors’ estates (without the requirement of any cash payment) from all claims, including fraudulent conveyance and preference claims under the Code, and claims pertaining to KID’s sale of the gift business to TRC; (ii) confirms that the Seller Note and KID’s security interests therein are valid, and are junior only to TRC’s senior lender; (iii) allows KID to retain ownership of the Retained IP, provided, that the trustee in the bankruptcy may include such intellectual property as part of a global sale of TRC’s business, if any, as long as KID receives at least $6.0 million therefor; (iv) includes a set-off against the Seller Note of all amounts owed by KID and its subsidiaries to TRC and its subsidiaries, for which KID had accrued an aggregate of approximately $2.0 million, without the requirement of any cash payment; (v) establishes distribution priorities for any proceeds obtained from the sale of TRC’s assets under which KID is generally entitled to receive, to the extent proceeds are available therefor after the payment of amounts owed to TRC’s senior lender and approximately $1.4 million in specified expenses have been funded, approximately $1.0 million, and to the extent further proceeds are available subsequent to the payment of approximately $1.0 million to the Debtors’ estates for additional specified expenses, 60% of any remaining proceeds (40% of any such remaining proceeds will go to the Debtors’ estates for the benefit of general unsecured creditors, and KID may participate therein as an unsecured creditor to the extent of 50% of any deficiency claims, including for unpaid royalties). As it is not possible to determine the amount, if any, that the trustee in the bankruptcy will obtain through the sale of TRC’s assets, KID may obtain only limited recovery on its remaining claims, or may obtain no recovery at all. The Debtors’ estates’ rights with respect to the Retained IP terminated in December 2011.

 

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KID BRANDS, INC AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

NOTE 12—RESTATEMENT

The Company previously recorded charges of approximately: (i) $6.86 million (which included approximately $340,000 of interest) for the quarter and year ended December 31, 2010; (ii) $382,000 (which included approximately $55,000 of interest) for the quarter ended March 31, 2011; (iii) $55,000 in related interest expense for the quarter ended June 30, 2011; and (iv) $56,000 in related interest expense for the quarter ended September 30, 2011, in each case for duties (or related interest) relating to aggregate anti-dumping duties and interest the Company anticipates will be owed to U.S. Customs by LaJobi for the period commencing in April 2008 (when the Company acquired LaJobi’s assets) through December 31, 2010 (the period of discovery). The anticipated duties were recorded in cost of sales, and the related interest was recorded in interest expense. See Note 9.

In addition, the Company also previously recorded charges of approximately $2.4 million (which included approximately $200,000 of interest) for the three and six months ended June 30, 2011, and an additional $30,000 in interest expense for the quarter ended September 30, 2011, relating to aggregate customs duties and related interest the Company anticipates will be owed to U.S. Customs by Kids Line and CoCaLo for the years ended 2006 through 2010 and the six months ended June 30, 2011 (the period of discovery). The anticipated duties were recorded in costs of sales, and the related interest was recorded in interest expense. See Note 9.

Although it was the initial determination of the Company’s management that the impact of the aggregate charges described above was immaterial to prior periods, after various submissions to and discussions with the Staff of the SEC (the “Staff”) on this matter, and in recognition of the Staff’s position with respect thereto (and not as a result of the discovery of new facts or information), management and the Audit Committee (the “Audit Committee”) of the Board of Directors of the Company (the “Board”) met and determined on February 14, 2012 (which determination was subsequently ratified by the Board), that it was necessary to restate the Company’s audited consolidated financial statements as of December 31, 2010 and for the three years ended December 31, 2010 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, as well as its unaudited interim consolidated financial statements as of and for the quarter and year to date periods ended March 31, 2011, June 30, 2011 and September 30, 2011, and related 2010 comparative prior quarter and year to date periods, as included in its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2011, June 30, 2011, and September 30, 2011 (collectively, the “Prior Financial Statements”). As a result, on February 14, 2012, management and the Audit Committee determined that the Prior Financial Statements should no longer be relied upon.

The restatement of the Prior Financial Statements has been implemented as follows. The Company’s 2011 10-K restated all periods presented therein, as applicable, to reflect the recording of the anticipated anti-dumping duty (and related interest) payment requirements of the Company’s LaJobi subsidiary and anticipated customs duty (and related interest) payment requirements of the Company’s Kids Line and CoCaLo subsidiaries described above in the respective periods to which such liabilities relate. The restatement also included: (x) the Company’s revised calculations of the total amount of anti-dumping duty that it anticipates will be owed to U.S. Customs by LaJobi (additional custom duties charges in the aggregate amount of $314,000), and additional related accrued interest expense of $101,000 for the quarter ended December 31, 2011; and (y) the Company’s revised calculations of the total amount of customs duty that it anticipates will be owed to U.S. Customs with respect to Kids Line and CoCaLo (additional custom duties charges in the aggregate amount of $461,000), and additional related accrued interest expense of $76,000 for the quarter ended December 31, 2011, all of which have been recorded in the periods to which they relate as part of such restatement.

The restatement of the Prior Financial Statements also included the impact of a liability required to be recorded at December 31, 2010 by applicable accounting standards for potential LaJobi Earnout Consideration, a required corresponding offset in equal amount to goodwill related to its 2008 acquisition of LaJobi, all of which goodwill was subsequently determined to be impaired at December 31, 2011.

This Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (the “Q1 10-Q”) also includes the impact of such restatement on the applicable unaudited quarterly financial information for the quarter ended March 31, 2011 presented in the Statement of Operations in this Q1 10-Q, as well as a reclassification to conform prior year amounts to the 2012 presentation. In addition, the Company’s future Quarterly Reports on Form 10-Q for subsequent periods during 2012 will restate applicable 2011 comparable prior quarter and year to date periods.

 

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KID BRANDS, INC AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

Previously filed Annual Reports on Form 10-K and quarterly reports on Form 10-Q for quarterly and annual periods ended prior to December 31, 2011 have not been and will not be amended.

The combined impact of the adjustments to specified line items in the Statement of Operations for the quarter ended March 31, 2011 included in this Q1 10-Q resulting from the restatement is set forth below. The restatement had no effect on net cash used in operating, investing or financing cash flows.

CHANGES TO MARCH 31, 2011 CONSOLIDATED STATEMENT OF OPERATIONS

 

     As Reported
March 31, 2011
    Adjustments     As Restated
March 31, 2011
 

Net sales

   $ 59,836      $ —        $ 59,836   

Cost of sales

     43,570        172        43,742   
  

 

 

   

 

 

   

 

 

 

Gross profit

     16,266        (172     16,094   

Selling, general and administrative expenses

     15,370        (36     15,334   
  

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     896        (136     760   
  

 

 

   

 

 

   

 

 

 

Other (expense) income:

      

Interest expense, including amortization and write-off of deferred financing costs

     (1,102     (54     (1,156

Interest and investment income

     3        —          3   

Other, net

     42        —          42   
  

 

 

   

 

 

   

 

 

 
     (1,057     (54     (1,111
  

 

 

   

 

 

   

 

 

 

(Loss) from operations before income tax provision (benefit)

     (161     (190     (351

Income tax provision (benefit)

     52        (78     (26
  

 

 

   

 

 

   

 

 

 

Net (loss)

   $ (213   $ (112   $ (325
  

 

 

   

 

 

   

 

 

 

Basic (loss) earnings per share:

   $ (0.01   $ (0.01   $ (0.02
  

 

 

   

 

 

   

 

 

 

Diluted (loss) earnings per share:

   $ (0.01   $ (0.01   $ (0.02
  

 

 

   

 

 

   

 

 

 

Weighted Average Shares:

      

Basic

     21,633,000        21,633,000        21,633,000   
  

 

 

   

 

 

   

 

 

 

Diluted

     21,633,000        21,633,000        21,633,000   
  

 

 

   

 

 

   

 

 

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The financial and business analysis below provides information which we believe is relevant to an assessment and understanding of our consolidated financial condition, changes in financial condition and results of operations. This financial and business analysis should be read in conjunction with our Unaudited Consolidated Financial Statements and accompanying Notes to Unaudited Consolidated Financial Statements set forth in Part I, Financial Information, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q, and our Annual Report on Form 10-K for the year ended December 31, 2011, as amended (the “2011 10-K”), including the consolidated financial statements and notes thereto.

OVERVIEW

We are a leading designer, importer, marketer and distributor of branded infant and juvenile consumer products. Through our four wholly-owned operating subsidiaries – Kids Line, LLC (“Kids Line”); LaJobi, Inc. (“LaJobi”); Sassy, Inc. (“Sassy”); and CoCaLo, Inc. (“CoCaLo”) – we design, manufacture through third parties, and market branded infant and juvenile products in a number of complementary categories including, among others: infant bedding and related nursery accessories and décor, kitchen and nursery appliances and food preparation products, bath/spa products and diaper bags (Kids Line® and CoCaLo®); nursery furniture and related products (LaJobi®); and developmental toys and feeding, bath and baby care items with features that address the various stages of an infant’s early years (Sassy®). In addition to our branded products, we also market certain categories of products under various licenses, including Carter’s®, Disney®, Graco® and Serta®. Our products are sold primarily to retailers in North America, the United Kingdom (“U.K.”) and Australia, including large, national retail accounts and independent retailers (including toy, specialty, food, drug, apparel and other retailers). We maintain a direct sales force and distribution network to serve our customers in the United States, the U. K. and Australia. We also maintain relationships with several independent representatives to service select domestic and foreign retail customers, as well as international distributors to service certain retail customers in several foreign countries.

We generated net sales of approximately $55.2 million in the three months ended March 31, 2012. International sales, defined as sales outside of the United States, including export sales, constituted 11.9% and 9.8% of our net sales for the three months ended March 31, 2012 and 2011, respectively.

We operate in one segment: the infant and juvenile business. Our senior corporate management, together with senior management of our subsidiaries, coordinates the operations of all of our businesses and seeks to identify cross-marketing, procurement and other complementary business opportunities, while maintaining the separate brand identities of each subsidiary.

Aside from funds provided by our senior credit facility, revenues from the sale of products have historically been the major source of cash for the Company, and cost of goods sold and payroll expenses have been the largest uses of cash. As a result, operating cash flows primarily depend on the amount of revenue generated and the timing of collections, as well as the quality of customer accounts receivable. The timing and level of the payments to suppliers and other vendors also significantly affect operating cash flows. Management views operating cash flows as a good indicator of financial strength. Strong operating cash flows provide opportunities for growth both internally and through acquisitions, and also enable us to pay down debt.

We do not ordinarily sell our products on consignment (although we may do so in limited circumstances), and we ordinarily accept returns only for defective merchandise, although we may in certain cases accept returns as an accommodation to retailers. In the normal course of business, we grant certain accommodations and allowances to certain customers in order to assist these customers with inventory clearance or promotions. Such amounts, together with discounts, are deducted from gross sales in determining net sales.

Our products are manufactured by third parties, principally located in the PRC and other Eastern Asian countries. Our purchases of finished products from these manufacturers are primarily denominated in U.S. dollars. Expenses for these manufacturers are primarily denominated in Chinese Yuan. As a result, any material increase in the value of the Yuan relative to the U.S. dollar, as occurred in past periods, or higher rates of inflation in the country of origin, would increase our expenses, and therefore, adversely affects our profitability. Conversely, a small portion of our revenues are generated by our subsidiaries in Australia and the U.K. and are denominated primarily in their local currencies. Any material increase in the value of the U.S. dollar relative to the value of the Australian dollar or British pound would result in a decrease in the amount of these revenues upon their translation into U.S. dollars for reporting purposes. See Item 1A, Risk Factors — “Currency exchange rate fluctuations could increase our expenses”, of the 2011 10-K.

Our gross profit may not be comparable to those of other entities, since some entities include the costs of warehousing, outbound handling costs and outbound shipping costs in their costs of sales. We account for the above expenses as operating expenses and classify them under selling, general and administrative expenses. The costs of warehousing, outbound handling costs and outbound shipping costs were $1.7 million and $2.1 million, for the three months ended March 31, 2012 and 2011, respectively. In addition, the majority of outbound shipping costs are paid by our customers, as many of our customers pick up their goods at our distribution centers.

 

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If our suppliers experience increased raw materials, labor or other costs, and pass along such cost increases to us through higher prices for finished goods, our cost of sales would increase. Many of our suppliers are currently experiencing significant cost pressures related to labor rates, raw material costs and currency inflation, which has and, we believe, will continue to put pressure on our gross margins, at least for the foreseeable future. To the extent we are unable to pass such price increases along to our customers or otherwise reduce our cost of goods, our gross profit margins would decrease. Our gross profit margins have also been impacted in recent periods by: (i) an increasing shift in product mix toward lower margin products, including increased sales of licensed products, which typically generate lower margins as a result of required royalty payments (which are recorded in cost of goods sold); (ii) increased pressure from major retailers, largely as a result of prevailing economic conditions, to offer additional mark downs and other pricing accommodations to clear existing inventory, secure new product placements and/or to improve the gross margins of such retailers; and (iii) other increased costs of goods. We believe that our future gross margins will continue to be under pressure as a result of the items listed above, and such pressures may be more acute over the next several quarters as a result of anticipated product cost increases. In addition, charges pertaining to anti-dumping duties that we anticipate will be owed by our LaJobi subsidiary to U.S. Customs, and charges pertaining to customs duties we anticipate will be owed by our Kids Line and CoCaLo subsidiaries to U.S. Customs have adversely affected gross margins and net income for specified periods (See Notes 9 and 12 to the Notes to Unaudited Consolidated Financial Statements). The restatement of the Prior Financial Statements, as described in Note 12 to Notes to Unaudited Consolidated Financial Statements, had a negative impact on previously-reported results of operations for the period ended March 31, 2011. As the customs matters have not been concluded, however, it is possible that the actual amount of duty owed for the relevant periods will be higher than currently accrued amounts, and in any event, additional interest will continue to accrue until payment is made. In addition, we may be assessed by U.S. Customs a penalty of up to 100% of any customs duty owed, as well as possibly being subject to fines, penalties or other measures from U.S. Customs or other governmental authorities. Any amounts owed in excess of the accruals recorded will adversely affect our gross margin and net income for the period(s) in which such amounts are recorded and could have a material adverse affect on our results of operations. See Note 9 of Notes to the Unaudited Consolidated Financial Statements for a discussion of the LaJobi anti-dumping duty matters and the Kids Line/CoCaLo customs duty matters. We have discontinued the practices that resulted in the charge for anticipated anti-dumping duties, and have established alternate vendor arrangements for the relevant products in countries that are not subject to such anti-dumping duties. We believe that our ability to procure the affected categories of furniture has not been materially adversely affected.

We continue to seek to mitigate margin pressure through the development of new products that can command higher pricing, the identification of alternative, lower-cost sources of supply, re-engineering of certain existing products to reduce manufacturing cost, where possible, price increases, and more aggressive inventory management. Particularly in the mass market, our ability to increase prices or resist requests for mark-downs and/or other allowances is limited by market and competitive factors, and, while we have implemented selective price increases and will likely continue to seek to do so, we have not been able to increase prices commensurate with our cost increases and have generally focused on maintaining (or increasing) shelf space at retailers and, as a result, our market share.

Recent Developments

Restatement of Financial Statements

See Note 12 of the Notes to Unaudited Consolidated Financial Statements for a description of: (i) a restatement in the 2011 10-K of the Company’s financial statements previously included in its Annual Report on Form 10-K for the year ended December 31, 2010 to reflect the recording of specified anticipated anti-dumping and customs duty (and related interest) payment requirements of LaJobi, Kids Line and CoCaLo in the respective periods to which such liabilities relate; and (ii) the impact of such restatement on the applicable unaudited quarterly financial information for the quarter ended March 31, 2011 presented in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (the “Q1 10-Q”). The Company’s Quarterly Reports on Form 10-Q for subsequent periods during 2012 will restate applicable 2011 comparable prior quarter and year to date periods.

Goodwill and Intangible Assets

Because the restatement of the Prior Financial Statements results in the technical satisfaction of the formulaic provisions for the payment of a portion of the LaJobi earnout under the agreement governing the purchase of the LaJobi assets, applicable accounting standards required that the Company record a liability in the approximate amount of $11.7 million for the year ended December 31, 2010 ($10.6 million in respect of the LaJobi earnout and $1.1 million in respect of the related finder’s fee), which also required an offset in equal amount to goodwill, all of which goodwill was impaired as of December 31, 2011.

 

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With respect to such goodwill, we performed our annual goodwill assessment as of December 31, 2011. The goodwill impairment test is accomplished using a two-step process. The first step compares the fair value of a reporting unit that has goodwill to its carrying value. The fair value of a reporting unit is estimated using a discounted cash flow analysis. If the fair value of the reporting unit is determined to be less than its carrying value, a second step is performed to compute the amount of goodwill impairment, if any. Step two allocates the fair value of the reporting unit to the reporting unit’s net assets other than goodwill. The excess of the fair value of the reporting unit (using fair-value based tests) over the amounts assigned to its net assets other than goodwill is considered the implied fair value of the reporting unit’s goodwill. The implied fair value of the reporting unit’s goodwill is then compared to the carrying value of its goodwill. Any shortfall represents the amount of goodwill impairment.

As of December 31, 2011, after completing the first step of the impairment test, there was indication of impairment because our carrying value exceeded our market capitalization (as a result of the substantial decline of the Company’s stock price during 2011).

Management’s determination of the fair value of the goodwill for the second step in the analysis was performed with the assistance of a public accounting firm, other than the Company’s auditors. The analysis used a variety of testing methods that are judgmental in nature and involve the use of significant estimates and assumptions, including: (i) the Company’s operating forecasts; (ii) revenue growth rates; (iii) risk-commensurate discount rates and costs of capital; and (iv) price or market multiples. The Company’s estimates of revenues and costs are based on historical data, various internal estimates and a variety of external sources, and are developed by the Company’s routine long-range planning process.

In addition to the stock price decline, during the year ended December 31, 2011, net sales and gross margins for LaJobi declined substantially from the previous year, and the margins for Kids Line and CoCaLo declined from the previous year. These adverse conditions led the Company to revise its estimates with respect to net sales and gross margins, which in turn negatively impacted our cash flow forecasts for LaJobi, Kids Line and CoCaLo. These revised cash flows forecasts resulted in the conclusion in the second step of the analysis that the Company’s goodwill was fully impaired (it was determined to have no implied value), and as a result, the Company recorded a goodwill impairment charge in the amount of $11.7 million for the year ended December 31, 2011, representing the shortfall between the fair value of its operations for which goodwill had been allocated and its carrying value.

In addition, in connection with our annual assessment of indefinite-lived and definite-lived intangible assets (discussed in Note 4 to the Notes to Consolidated Financial Statements of the 2011 10-K), we recorded, in our consolidated financial statements for the fourth quarter and fiscal year ended December 31, 2011, non-cash impairment charges: (i) to our LaJobi trade name in the amount of $9.9 million; and (ii) to our Kids Line customer relationships in the amount of $19.0 million.

Testing for impairment of indefinite-lived trade names is based on whether the fair value of such trade names exceeds their carrying value. The Company determines fair value by performing a projected discounted cash flow analysis based on the Relief-From-Royalty Method for all indefinite-lived trade names. In the Company’s analysis for 2011, it used a five-year projection period, which has been its prior practice, and projected for each business unit the long-term growth rate of each business, as well as the assumed royalty rate that could be obtained by each such business by licensing out each intangible. For 2011, the Company kept its long-term growth rate at 2.5% for all of its business units, but used assumed royalty rates of 3%, 2.6%, 2.5% and 4% for Kids Line, Sassy, LaJobi and CoCaLo, respectively. Assumed royalty rates decreased with respect to Kids Line and LaJobi from the 2010 rates of 5% and 4%, respectively, as a result of reduced profitability for each such business unit in 2011. With respect to LaJobi, the difference between fair value and the carrying value of the relevant trade names resulted in an impairment charge in the amount of $9.9 million. No other trade names were impaired during 2011.

The Company’s other intangible assets with definite lives (consisting primarily of customer lists) are amortized over their estimated useful lives and are tested if events or changes in circumstances indicate that an asset may be impaired. In testing for impairment, the Company compares the carrying value of such assets to the estimated undiscounted future cash flows anticipated from the use of the assets and their eventual disposition. When the estimated undiscounted future cash flows are less than their carrying amount, an impairment charge is recognized in an amount equal to the difference between the asset’s fair value and its carrying value. The fair value of the Kids Line customer relationships was lower than the carrying value due to revised undiscounted future cash flow projections resulting from meaningfully lower sales to one of its major customers and reduced profitability in 2011. This resulted in a $19.0 million impairment which was recorded in cost of sales. While LaJobi sales also decreased during 2011, the fair value of its customer lists continued to exceed its carrying value as of December 31, 2011.

There was no impairment of the Company’s other intangible assets (either definite-lived or indefinite-lived) during 2011. There was no impairment of any of the Company’s intangible assets (either definite-lived or indefinite-lived) during the quarter ended March 31, 2012.

 

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Interim Executive Chairman

Effective September 12, 2011, Bruce G. Crain resigned as President and Chief Executive Officer of the Company. In connection therewith, Mr. Crain also resigned his position as a member of the Board and all other positions with the Company and its subsidiaries. In addition, as of September 12, 2011, Raphael Benaroya was appointed by the Board to the position of interim Executive Chairman, to serve as the chief executive of the Company during the pendency of the Board’s search for a new chief executive officer until the earlier of: (i) December 31, 2011; and (ii) the appointment of a new chief executive officer or written notice from the Company. On February 14, 2012, this agreement was modified and extended on a month-to-month basis, effective as of January 1, 2012, subject to termination by either the Company or RB, Inc. at any time upon ten days written notice to the other party.

The Board’s Search Committee is continuing to oversee the process for the selection of a new chief executive officer with the assistance of the executive search firm retained by the Board for such purpose.

Details with respect to these events are set forth in the Company’s Current Report on Form 8-K filed on February 17, 2012.

TRC Matters

See Note 11 of the Unaudited Notes to Consolidated Financial Statements for a discussion of the bankruptcy filing of TRC and its domestic subsidiaries, and a settlement agreement approved by the Bankruptcy Court with the secured creditors of the debtors, including KID.

See Part II, Item 1 “Legal Proceedings” for a discussion of a General Release and Settlement Agreement entered into as of January 20, 2012 between the Company and the TRC Landlord (as defined therein) with respect to which the Company had previously accrued $1.1 million for potential contingent liabilities.

LaJobi Matters

See Notes 9 and 12 of the Notes to Unaudited Consolidated Financial Statements for a description of: (i) a demand for arbitration initiated by Mr. Bivona with respect to the LaJobi earnout and matters under his employment agreement, as well as the related required recording of a liability in the approximate amount of $11.7 million for the year ended December 31, 2010 ($10.6 million in respect of the LaJobi earnout and $1.1 million in respect of the related finder’s fee), with a required offset in equal amount to goodwill, all of which goodwill was impaired as of December 31, 2011; (ii) the “Focused Assessment” of our LaJobi subsidiary’s import practices and procedures by U.S. Customs, charges recorded in connection therewith based on current assumptions and information, and actions taken by the Company as a result of such matters, including the restatement of the Prior Financial Statements; (iii) a discussion of certain corrective payment practices established with respect to individuals providing quality control, compliance and certain other services in the PRC, Hong Kong, Vietnam and Thailand; and (iv) a description of an informal investigation by the SEC and a document request by the United States Attorney’s Office for the District of New Jersey into these matters. Also see “Goodwill and Intangible Assets” above and Item 3, “Legal Proceedings.”

Putative Class Action and Derivative Litigations

See Part II, Item 1 “Legal Proceedings”, for a discussion of recent developments with respect to the putative class action proceeding and shareholder derivative proceeding instituted against the Company and various of its officers and directors, including the dismissal without prejudice of each such proceeding with leave for the plaintiffs to amend the respective complaints, a second amended complaint filed by the plaintiff on May 7, 2012 in the putative class action proceeding, and a motion to compel the inspection of documents filed by the plaintiff in the putative derivative proceeding on April 28, 2012 (with a related extension of time to amend the complaint).

Customs Compliance Investigation

See Notes 9 and 12 of the Notes to Unaudited Consolidated Financial Statements for a description of a review authorized by the Board of Directors of the customs compliance practices at the Company’s non-LaJobi subsidiaries, charges recorded in connection therewith based on current assumptions and information, a related investigation initiated by the Board with respect to such review and other actions taken by the Company as a result thereof.

 

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Inventory

Inventory, which consists of finished goods, is carried on our balance sheet at the lower of cost or market. Cost is determined using the weighted average cost method and includes all costs necessary to bring inventory to its existing condition and location. Market represents the lower of replacement cost or estimated net realizable value of such inventory. Inventory reserves are recorded for damaged, obsolete, excess and slow-moving inventory if management determines that the ultimate expected proceeds from the disposal of such inventory will be less than its carrying cost as described above. Management uses estimates to determine the necessity of recording these reserves based on periodic reviews of each product category based primarily on the following factors: length of time on hand, historical sales, sales projections (including expected sales prices), order bookings, anticipated demand, market trends, product obsolescence, the effect new products may have on the sale of existing products and other factors. Risks and exposures in making these estimates include changes in public and consumer preferences and demand for products, changes in customer buying patterns, competitor activities, our effectiveness in inventory management, as well as discontinuance of products or product lines. In addition, estimating sales prices, establishing markdown percentages and evaluating the condition of our inventories all require judgments and estimates, which may also impact the inventory valuation. However, we believe that, based on our prior experience of managing and evaluating the recoverability of our slow moving, excess, damaged and obsolete inventory in response to market conditions, including decreased sales in specific product lines, our established reserves are materially adequate. If actual market conditions and product sales were less favorable than we have projected, however, additional inventory reserves may be necessary in future periods.

Company Outlook

The principal elements of our current global business strategy include:

 

  focusing on design-led and branded product development at each of our subsidiaries to enable us to continue to introduce compelling new products;

 

  pursuing organic growth opportunities to capture additional market share, including:

 

  (i) expanding our product offerings into related categories;

 

  (ii) increasing our existing product penetration (selling more products to existing customer locations);

 

  (iii) increasing our existing store or online penetration (selling to more store locations within each large, national retail customer or their associated websites); and

 

  (iv) expanding and diversifying our distribution channels, with particular emphasis on sales into international markets and non-traditional infant and juvenile retailers;

 

  growing through licensing, distribution or other strategic alliances, including pursuing acquisition opportunities in businesses complementary to ours;

 

  implementing strategies to further capture synergies within and between our confederation of businesses, through cross-marketing opportunities, consolidation of certain operational activities and other collaborative activities; and

 

  continuing efforts to manage costs within and across each of our businesses.

General Economic Conditions as they Impact Our Business

Our business, financial condition and results of operations have and may continue to be affected by various economic factors. Periods of economic uncertainty, such as the recession experienced in 2008 and much of 2009, can lead to reduced consumer and business spending, including by our customers, and the purchasers of their products, as well as reduced consumer confidence, which we believe has resulted in lower birth rates, although recent third party forecasts have suggested declining birth trends are likely to reverse with modest improvements in the economy. Reduced access to credit has and may continue to adversely affect the ability of consumers to purchase our products from retailers, as well as the ability of our customers to pay us. If such conditions are experienced in future periods, our industry, business and results of operations may be negatively impacted. Continuing adverse global economic conditions in our markets may result in, among other things: (i) reduced demand for our products; (ii) increased price competition for our products; (iii) increased risk in the collectibility of cash from our customers and/or (iv) increased pressure from major retailers to offer additional mark downs and other pricing accommodations. See Item 1A, “Risk Factors—The state of the economy may impact our business” of the 2011 10-K.

In addition, if internal funds are not available from our operations, we may be required to rely on the banking and credit markets to meet our financial commitments and short-term liquidity needs. Continued disruptions in the capital and credit markets, could adversely affect our ability to draw on our bank revolving credit facility (to the extent we have sufficient availability thereunder). Our access to funds under our credit facility is dependent on the ability of the banks that are parties to such facility to meet their funding commitments. Those banks may not be able to meet their funding commitments to us if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests from us and other borrowers within a short period of time. Such disruptions could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. See Item 1A, “Risk Factors—Further potential disruptions in the credit markets may adversely affect the availability and cost of short-term funds for liquidity requirements and our ability to meet long-term commitments, which could adversely affect our results of operations, cash flows, and financial condition” of the 2011 10-K.

 

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SEGMENTS

The Company operates in one segment: the infant and juvenile business.

RESULTS OF OPERATIONS—THREE MONTHS ENDED MARCH 31, 2012 AND 2011

The Results of Operations set forth below reflects the impact of the restatement of the Prior Financial Statements described in Note 12 of the Notes to Unaudited Consolidated Financial Statements.

Net sales for the three months ended March 31, 2012 decreased 7.7% to $55.2 million, compared to $59.8 million for the three months ended March 31, 2011. This decrease was primarily the result of lower sales at: Sassy (19.2%), primarily due to lower sales volume at two large customers due to inventory management at such customers and certain initial product placements in 2011, which did not recur in 2012; Kids Line (6.4%) primarily due to lower sales volume at two customers; and LaJobi (5.1%) due to decreased furniture sales, partially offset by increased sales by LaJobi of Graco branded product. CoCaLo sales were relatively flat for the three months ended March 31, 2012 as compared to the prior year period.

Gross profit was $13.8 million, or 25.0% of net sales, for the three months ended March 31, 2012, as compared to $16.1 million, or 26.9% of net sales, for the three months ended March 31, 2011. In absolute terms, gross profit decreased as a result of lower sales and lower gross profit margins. Gross profit margins decreased primarily as a result: (i) product mix changes; (ii) increased product costs; and (iii) increased royalty expense (approximately $0.2 million) resulting from increased sales of licensed products. This decline was partially offset by: (i) a reduction in markdown allowances; (ii) reduced amortization of intangibles ($0.3 million) as a result of the impairment in the fourth quarter of 2011 of the Kids Line Customer Relationship intangible asset; and (iii) an aggregate accrual of $0.5 million for anticipated LaJobi anti-dumping duties and Kids Line/CoCaLo customs duties recorded in the three months ended March 31, 2011 that did not recur in the current year quarter.

Selling, general and administrative (“SG&A”) expense was $14.4 million, or 26.1% of net sales, for the three months ended March 31, 2012 compared to $15.3 million, or 25.6% of net sales, for the three months ended March 31, 2011. SG&A expense increased as a percentage of sales primarily as a result of a lower sales base in the first quarter of 2012. In absolute terms, the decrease in SG&A costs was primarily a function of: (i) decreased professional fees incurred in connection with Company’s internal investigation of LaJobi’s import, business and staffing practices in Asia and Customs investigations at Kids Line and CoCaLo, as well as related litigation and other costs ($1.2 million); (ii) decreases in variable costs as a result of lower sales ($0.4 million); and (iii) lower share-based compensation ($0.2 million); all of which was offset by severance expense ($0.6 million) and increases in other professional costs ($0.3 million).

Other expense was $0.6 million for the three months ended March 31, 2012 as compared to $1.1 million for the three months ended March 31, 2011. This decrease of approximately $0.5 million was primarily due to a reduction in interest expense ($0.3 million) due to lower borrowings and lower borrowing costs in such period compared to the same period in 2011, fees for an amendment to the Company’s previous credit agreement ($0.1 million) recorded in the first quarter of 2011 that was not a factor in 2012, and an increase in other income of $0.1 million in the first quarter of 2012 related to foreign currency exchange gains.

Loss before income tax benefit was $1.3 million for the three months ended March 31, 2012 as compared to loss before income tax benefit of $0.35 million for the three months ended March 31, 2011, primarily as a result of the items described above.

The income tax benefit for the three months ended March 31, 2012 was $471,000 on loss before income tax benefit of $1.3 million. The difference between the effective tax rate of 37% for the three months ended March 31, 2012 and the U.S. federal tax rate of 35% primarily relates to a benefit for state tax, net of federal tax benefit ($53,000), offset by: (i) an increase in the liability for unrecognized tax benefits ($7,000) as a result of additional interest being accrued; (ii) foreign adjustments related to foreign rate differences and withholding taxes ($5,000); and (iii) the effect of permanent adjustments ($11,000). The income tax benefit for the three months ended March 31, 2011 was approximately $26,000 on loss before income tax benefit of $351,000. The difference between the effective tax rate of 7.5% for the three months ended March 31, 2011 and the U.S. federal tax rate of 35% primarily relates to: (i) an increase in the liability for unrecognized tax benefits ($115,000) as a result of an increase in the liability for state taxes and additional interest being accrued; (ii) the effect of a graduated U.S. federal tax rate ($26,000); and (iii) foreign adjustments related to foreign rate differences and withholding taxes ($11,000), all of which was offset by: (i) a benefit for state tax, net of federal tax benefit ($55,000); and (ii) the effect of permanent adjustments ($2,000).

 

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As a result of the foregoing, net loss for the three months ended March 31, 2012 was $0.8 million, or ($0.04) per diluted share, compared to net loss of $0.3 million, or ($0.02) per diluted share, for the three months ended March 31, 2011.

Liquidity and Capital Resources

Our principal sources of liquidity are cash flows from operations, cash and cash equivalents and availability under our bank facility. Our operating activities generally provide sufficient cash to fund our working capital requirements and, together with borrowings under our bank facility, are expected to be sufficient to fund our operating needs and capital requirements for at least the next twelve months (including expected customs duty assessments and related interest), based on current assumptions regarding the timing of such expenditures and anticipated cash flows.

Although we currently expect to remain in compliance with our bank covenants for at least the next twelve months, remaining availability under our bank facility, which is based on, among other things, a quarterly maximum Consolidated Leverage Ratio, which is the ratio of the Company’s indebtedness to Covenant EBITDA for the four most recently completed four quarters (see “Debt Financing – New Credit Agreement” below), was $1.2 million as of March 31, 2012, which is substantially lower than it has been historically. Based on our current expectations, we anticipate that our revolving loan availability will remain limited through the second quarter of 2012, and should increase during the third quarter of 2012 and beyond.

Accordingly, any significant deviation in actual results from our expected results of operations, any significant deviation in the timing of material expenditures from current estimates, or any significant earnout payments (see discussion immediately below), significant business or product acquisitions, or other significant unanticipated expenses (including customs duty assessments and related interest in excess of current accruals, and/or any related penalties) could result in a default under our credit agreement, have a material adverse effect on our financial condition and/or may result in the need for additional debt or equity financing. See Note 9 to the Notes to Unaudited Consolidated Financial Statements, for a discussion, among other things, of an arbitration proceeding commenced by Lawrence Bivona demanding, among other amounts, payment of the LaJobi earnout consideration to Mr. Bivona in the amount of $15.0 million, and the effect of the restatement of the Prior Financial Statements on such claim, including the requirement, pursuant to applicable accounting standards, that we record a liability in the approximate amount of $11.7 million for the year ended December 31, 2010 ($10.6 million in respect of the LaJobi earnout and $1.1 million in respect of a related finder’s fee), with an offset in equal amount to goodwill, all of which goodwill was impaired as of December 31, 2011. While we intend to continue to vigorously defend against all of Mr. Bivona’s claims, and believe that we will prevail (in which case we will be able to reverse such liability), there can be no assurance that this will be the case. An adverse decision in the arbitration that requires any significant payment by us to Mr. Bivona or the LaJobi Seller could result in a default under our credit agreement and have a material adverse effect on our financial condition and results of operations. See Item 1A – Risk Factors –“Inability to maintain compliance with the bank covenants” and “We are currently party to litigation that could be costly to defend and distracting to management, and if decided against us, could have a material adverse effect on our business” of the 2011 10-KSee also “Debt Financing – New Credit Agreement” below for conditions precedent contained in our credit agreement with respect to the payment of any earnout consideration, as well as the impact of any such payment on our required financial covenants.

Historically, the proceeds of our bank facility have been used to fund acquisitions, and cash flows from operations have been utilized to pay down our revolving credit facility and required amortization of our term loan. Accordingly, with the exception of funding short-term working capital requirements (which were necessitated by our strategy of paying down debt), we typically did not actively utilize our revolving credit facility to fund operations. As a result of the New Credit Agreement, our term loan was paid in full, and outstanding amounts under our revolver were reallocated among the refinancing lenders. To the extent available (and subject in all cases to the discussion above) the Company anticipates that cash flows from operations will continue to be used to pay down our new revolving credit facility, as well as to potentially purchase shares under our share repurchase program (in each case to the extent available for such purposes), and to pay associated interest on amounts outstanding under our revolver. Availability under the refinanced revolver is intended to continue to be used to fund short-term working capital requirements, including anticipated anti –dumping duty and other Customs duty assessments and related interest, and share repurchases, future acquisitions and/or unanticipated expenses, if any.

Commencing in late 2011, we occasionally elect to participate in an “auction” program initiated by one of our largest customers, which permits us to offer an additional discount on all or a portion of the outstanding accounts receivable from such customer in return for prompt, accelerated payment of all or the relevant portion of such receivable. The amount of the additional discount is subject to acceptance, is determined in part by the aging of the receivable and is within the range of customary discounts for early payment.

 

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As of March 31, 2012, the Company had cash and cash equivalents of $0.9 million compared to $2.5 million at December 31, 2011. This decrease of $1.6 million primarily reflects the timing of the repayment of outstanding debt. As of March 31, 2012 and December 31, 2011, working capital was $41.6 million and $43.6 million, respectively. The decrease in working capital for the period ended March 31, 2012 primarily reflects a $1.2 million repayment of long term debt.

Net cash used in operating activities was $0.2 million during the three months ended March 31, 2012 compared to net cash used in operating activities of $0.1 million during the three months ended March 31, 2011. Operating activities reflected the net loss of $0.8 million in the first three months of 2012, as compared to net loss of $0.3 million in the first three months of 2011. Cash used in operations for the three months ended March 31, 2012 also includes a decrease from the prior year period of $2.4 million in accounts payable and accrued expenses as a result of the timing of payments, a net increase in inventory of $1.0 million and a net decrease of $2.5 million in accounts receivable, both primarily resulting from lower sales for the first quarter of 2012 and a decrease in prepaid expenses and other current assets of $0.9 million.

Net cash used in investing activities was $0.2 million for the three months ended March 31 2012, as compared to $0.4 million for the three months ended March 31, 2011. The decrease of $0.2 million was primarily due to decreased capital expenditures in the three months ended March 31, 2012.

Net cash used in financing activities was $1.0 million for the three months ended March 31, 2012 as compared to net cash provided by financing activities of $1.0 million for the three months ended March 31, 2011. The cash used during the three months ended March 31, 2012 primarily reflects repayment of debt under the New Credit Agreement and the cash provided for the three months ended March 31, 2011 primarily reflects borrowings under the Old Credit Agreement.

Debt Financings

New Credit Agreement

As of August 8, 2011, KID and specified domestic subsidiaries (such entities collectively with KID and such other future created or acquired domestic subsidiaries that are designated as borrowers from time to time, the “Borrowers”), and the subsidiaries of the Borrowers identified as guarantors therein (the “Guarantors”, and together with the Borrowers, the “Loan Parties”), executed a Second Amended and Restated Credit Agreement (the “New Credit Agreement”) with certain financial institutions (the “Lenders”), including Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and Merrill Lynch, Pierce, Fenner & Smith Incorporated as Sole Lead Arranger and Book Manager (“ML”). RB Trademark Holdco, LLC (“Licensor”), a limited liability company wholly-owned by KID which licensed specified intellectual property to the buyer of the Company’s former gift business prior to its bankruptcy, will become a Loan Party when permitted under its organizational documents (upon termination of the relevant license agreement). The obligations of the Borrowers under the New Credit Agreement are joint and several.

The New Credit Agreement provided for an aggregate $175.0 million revolving credit facility, which was reduced, effective as of May 11, 2012, to a maximum aggregate of $100.0 million by notice from the Borrowers to the Administrative Agent (the “New Revolver”), with a sub-facility for letters of credit in an amount not to exceed $25.0 million, and a sub-facility for swing-line loans in an amount not to exceed $5.0 million. As a result of the voluntary reduction in the aggregate revolving commitment, the Company expects to record a non-cash charge of approximately $0.8 million in the second quarter of 2012 to write off a portion of the remaining unamortized deferred financing costs incurred in August 2011 in connection with the New Credit Agreement. Subject to conditions to lending set forth in the New Credit Agreement, loans may be made up to the full amount of the New Revolver (without borrowing base limitations), swing-line loans may be made up to the full amount of the sublimit for swing-line loans, and letters of credit may be issued up to the sublimit for letters of credit. KID also has the right (without the consent of any Lender or the Administrative Agent) to increase the amount of the New Revolver by an additional aggregate amount not to exceed $35.0 million, provided, among other things, that (i) no event of default or unmatured event of default shall have occurred and be continuing, and (ii) the Borrowers receive commitments for such increase. KID may offer such increase to existing Lenders or certain third party financial institutions as described in the New Credit Agreement, however, no lender is obligated to increase its commitment.

The New Credit Agreement amended and restated the Borrowers’ previously existing Amended and Restated Credit Agreement with the Administrative Agent, as successor by merger to LaSalle Bank National Association, and the other lenders party thereto, dated April 2, 2008, as amended on each of August 13, 2008, March 20, 2009, and March 30, 2011 (collectively, the “Old Credit Agreement”), which provided for a $50.0 million revolving credit facility (the “Old Revolver”) based on eligible receivables and inventory, with a $5.0 million sub-facility for letters of credit, and an $80.0 million term loan facility (the “Old Term Loan”), which was scheduled to mature on April 1, 2013. The New Credit Agreement represents a refinancing of the Borrowers’ senior secured debt under the Old Credit Agreement. Anticipated benefits of the New Credit Agreement include the elimination of borrowing base limitations, reduced debt service requirements (as the Old Term Loan was paid in full), lower minimum and maximum interest rate margins, an extended maturity date, and a generally less restrictive payment and cash utilization structure.

 

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Upon the execution of the New Credit Agreement, the Borrowers drew down $47.5 million under the New Revolver, and utilized the proceeds to repay the Old Term Loan in full. Outstanding amounts under the Old Revolver (in the approximate amount of an additional $29.4 million) were reallocated among the continuing Lenders in accordance with their respective commitments under the New Credit Agreement. Outstanding letters of credit were deemed to have been issued under the New Credit Agreement.

At March 31, 2012, an aggregate of $48.3 was borrowed under the New Revolver and at December 31, 2011, an aggregate of $49.5 million was borrowed under the New Revolver. All amounts outstanding under the New Credit Agreement are classified as long-term debt as permitted by applicable accounting standards. At March 31, 2012, revolving loan availability was $1.2 million. See “Liquidity and Capital Resources” above. At December 31, 2011, revolving loan availability was $9.9 million.

The aggregate amounts outstanding under the New Credit Agreement (other than letters of credit, which may generally remain outstanding until August 1, 2017) are due and payable on August 8, 2016 (subject to customary early termination provisions).

The New Revolver bears interest, at the Borrowers’ option, at a specified base rate (the higher of (x) the Administrative Agent’s prime rate and (y) the Federal Funds rate plus 0.50%), or a specified Eurodollar rate based on specified British Bankers Association LIBOR, plus (in each case) applicable margins. Applicable margins range from 1.75% to 2.75% on Eurodollar rate loans and 0.75% to 1.75% on base rate loans, based on the Company’s Consolidated Leverage Ratio (as defined below) for the most recently ended fiscal quarter. Swing-line loans bear interest at the base rate plus the applicable margin for base rate loans. Interest on base rate loans is payable quarterly, and at maturity. Interest on Eurodollar loans is payable at the end of the selected interest period (provided, that if the selected interest period is in excess of three months, interest is payable on the three-month anniversary of the first day of such interest period), and at maturity. During the continuance of any default under the New Credit Agreement, the applicable margin shall increase by 2% (subject, in all cases other than a default in the payment of principal, to the written consent of Lenders holding a majority of the commitments (the “Required Lenders”) and prior written notice to KID).

As of March 31, 2012, the applicable interest rate margins were: 2.25% for Eurodollar Loans and 1.25% for Base Rate Loans. The weighted average interest rates for the outstanding loans as of March 31, 2012 were as follows:

 

     At March 31, 2012  
     Eurodollar Loans     Base Rate Loans  

New Revolver

     2.60     4.50

The Borrowers may prepay the New Revolver (and swing-line loans) at any time and from time to time without premium or penalty, and without a corresponding commitment reduction (subject to reimbursement of the Lenders’ breakage and redeployment costs in the case of Eurodollar rate loans). The unutilized portion of the New Revolver may be reduced or terminated by the Borrowers at any time and from time to time without premium or penalty. In accordance therewith, as described above, the Borrowers reduced the New Revolver to an aggregate maximum of $100 million by notice to the Administrative Agent effective as of May 11, 2012.

Under the terms of the New Credit Agreement, the Company is required to comply with the following financial covenants (the “Financial Covenants”): (a) a quarterly minimum Consolidated Fixed Charge Coverage Ratio (defined below) of 1.50:1.00; and (b) a quarterly maximum Consolidated Leverage Ratio (defined below) of 3.25:1.00 (stepping down to 3.00:1.00 for the quarter ending June 30, 2013, provided, that in the event a permitted acquisition is consummated prior to August 8, 2013, such maximum ratio shall remain 3.25:1.00 until the later of June 30, 2013 and the date that is 18 months after such consummation).

The Consolidated Fixed Charge Coverage Ratio under the New Credit Agreement is the ratio of: (a) Covenant EBITDA (as described below) for the most recently completed four quarters minus the sum of (i) all unfinanced capital expenditures incurred during such period; (ii) all cash taxes paid during such period; and (iii) all cash dividends paid by KID during such period, to (b) an amount generally equal to, with respect to the Company, the sum for such period of all scheduled interest and principal payments of debt, including the principal component of any capital lease, paid or payable in cash. The Consolidated Leverage Ratio under the New Credit Agreement is the ratio of the indebtedness of the Company to Covenant EBITDA for the most recently completed four quarters. Indebtedness, as used in the determination of the maximum Consolidated Leverage Ratio, generally means the outstanding principal amount of all debt (including obligations under capital leases plus the face amount of all letters of credit). The Borrowers were in compliance with all applicable Financial Covenants as of March 31, 2012.

 

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Covenant EBITDA, as defined in the New Credit Agreement, is a non-GAAP financial measure used to determine relevant interest rate margins and the Borrowers’ compliance with the Financial Covenants, as well as the determination of whether certain repurchases of equity securities, acquisitions, payments of specified Duty Amounts (defined below) and other specified customs duty underpayments, and payment of earnout consideration in respect of KID’s 2008 purchase of LaJobi (“LaJobi Earnout Consideration”), if any, can be made if other specified prerequisites are met, and the determination of the amount of specified fees. Covenant EBITDA is defined generally as the net income of KID and its consolidated subsidiaries (excluding extraordinary after-tax or non-recurring gains or losses, non-cash gains or losses from dispositions other than the write-down of current assets, non-cash restructuring charges, tax refunds, and net operating losses or other net tax benefits and any after-tax gains and losses from discontinued operations), as adjusted for interest expense; income tax expense; depreciation; amortization; other non-cash charges (gains); if expensed, reasonable costs incurred in connection with the execution of the New Credit Agreement and related documentation; and non-cash transaction losses (gains) due solely to fluctuations in currency values. Covenant EBITDA is further adjusted (up to an aggregate maximum of $14.855 million for all periods, less any LaJobi Earnout Consideration paid, if any, other than in accordance with the New Credit Agreement and/or to the extent not deducted in determining consolidated net income) for: (i) all customs duties, interest, penalties and other related amounts (“Duty Amounts”) owed by LaJobi to U.S. Customs to the extent they relate to the nonpayment or incorrect payment by LaJobi of import duties to U.S. Customs on certain wooden furniture imported by LaJobi from vendors in China resulting in a violation prior to March 30, 2011 of anti-dumping regulations, the related misconduct on the part of certain LaJobi employees, and LaJobi’s business and staffing practices in Asia prior to March 30, 2011 relating thereto (“Duty Events”); (ii) fees and expenses incurred in connection with the internal and U.S. Customs’ investigation of the Duty Amounts and Duty Events (the “Investigations”); and (iii) LaJobi Earnout Consideration, if any, paid in accordance with the terms of the New Credit Agreement.

On May 4, 2012, the Loan Parties, the Administrative Agent and the Required Lenders under the New Credit Agreement executed a letter agreement (the “Letter Agreement”) pursuant to which the Required Lenders and the Loan Parties agreed that up to an aggregate of $1.0 million in severance expense may be treated by the Company as excluded “non-recurring losses” in its determination of consolidated net income. If severance expense at any time exceeds this limitation (any such excess, “Excess Severance”): (i) to the extent deducted from the determination of consolidated net income, the accrual of such Excess Severance expense may be added back to consolidated net income for purposes of calculating Covenant EBITDA during the period when accrued; and (ii) the amount of any Excess Severance payments (regardless of when accrued) will be deducted from Covenant EBITDA during the period when paid.

Pursuant to the Letter Agreement, the Company also agreed to retain a financial consultant to review the issues pertaining to the Company’s customs duties and the LaJobi Earnout Consideration, to review and deliver an opinion regarding the Company’s financial forecasts, and any other mutually-agreed matters. Such consultant must provide periodic reports to the Administrative Agent and the Lenders, and a written report on or before July 31, 2012. Fees and expenses related to such consultant may be treated as excluded “non-recurring losses” for purposes of determining consolidated net income. In addition, the Loan Parties agreed that prior to January 1, 2013, Total Revolving Outstanding (as defined in the New Credit Agreement) shall not exceed $70.0 million without the prior written consent of the Required Lenders (such limitation does not constitute a reduction of the commitments under the New Credit Agreement).

The New Credit Agreement contains customary representations and warranties, as well as various affirmative and negative covenants in addition to the Financial Covenants, including, without limitation, financial reporting (including annual delivery of projections) requirements, notice requirements with respect to specified events and required compliance certificates. In addition, among other restrictions, the Loan Parties (and their subsidiaries other than the Licensor until such time as it becomes a Loan Party) are prohibited from consummating a merger or other fundamental change, paying dividends and making distributions, purchasing or redeeming stock, incurring additional debt, making acquisitions, disposing of assets and other transactions outside of the ordinary course of business, making specified payments and investments, engaging in transactions with affiliates, paying Duty Amounts and other specified customs duty underpayments (see Note 9 of the Notes to Unaudited Consolidated Financial Statements under paragraph (b)), or paying any LaJobi Earnout Consideration, subject in each case to specified exceptions, some of which are described below. The activities of the Licensor are also limited until it becomes subject to the restrictions set forth above as a Loan Party.

At the time of any accrual in excess of $1.0 million, or proposed payment, of any Duty Amounts or other specified customs duty underpayments (see Note 9 of the Notes to Unaudited Consolidated Financial Statements under paragraph (b)): (i) the Consolidated Fixed Charge Coverage Ratio, calculated on a pro forma basis as of the last day of the most recently ended quarter with respect to the four most recently ended quarters ending on such date, as if such accrual or payment occurred during such quarter, must be at least 1:50:1.0; or (ii) the Consolidated Leverage Ratio, calculated on a pro forma basis as of the last day of the most recently ended quarter with respect to the four most recently ended quarters ending on such date, as if such accrual or payment occurred during such quarter, must be equal to or less than 3.25:1:0.

With respect to the payment by KID of dividends, among other things, so long as no event of default or unmatured event of default then exists or would result therefrom, and no violation of the Financial Covenants then exists or would result therefrom, KID may pay a regular quarterly dividend, provided, however, that prior to such time that the “focused assessment” of U.S. Customs has been deemed concluded and all Duty Amounts required thereby have been remitted by LaJobi (the “Duty Conclusion Date”), such payments, when aggregated with permitted repurchases of KID’s equity securities as described below, shall be limited to an aggregate amount not to exceed $5.0 million.

 

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With respect to the repurchase by KID of its equity securities, among other things, so long as no event of default or unmatured event of default then exists or would result therefrom, no violation of the Financial Covenants then exists or would, on a pro forma basis, result therefrom, and the Consolidated Leverage Ratio, on a pro forma basis, is at least 0.25x less than the maximum then permitted, KID may repurchase or redeem its equity securities, provided, however, that prior to the Duty Conclusion Date, such payments, when aggregated with permitted quarterly dividends as described above, shall be limited to an aggregate amount not to exceed $5.0 million.

With respect to acquisitions, specified non-hostile acquisitions will be permitted (without a ceiling on the purchase price therefor), provided that, among other things, immediately before and after giving effect to such acquisition, no event of default or unmatured event of default exists, the Loan Parties are in pro forma compliance with the Financial Covenants, the pro forma Consolidated Leverage Ratio is at least 0.25x less than the maximum level then permitted, and minimum availability under the New Revolver is at least $15.0 million.

Generally with respect to the payment of LaJobi Earnout Consideration, if any, both before and immediately after giving effect to any such payment, (i) no event of default or unmatured event of default may then exist or result therefrom, (ii) no violation of the Financial Covenants or covenants with respect to Duty Amount accruals or payments may then exist or would, on a pro forma basis, result therefrom, and (iii) the Consolidated Leverage Ratio (calculated on a pro forma basis) is at least, if the Duty Conclusion Date has not yet occurred, 0.25 to 1.0 less than the maximum then permitted.

Under the New Credit Agreement, KID may sell the membership interests or the assets of the Licensor or the real estate owned by Sassy for fair market value without the consent of the Administrative Agent or the Lenders, so long as all net cash proceeds from any such disposition are applied to the prepayment of outstanding indebtedness under the New Credit Agreement (without a corresponding commitment reduction).

The New Credit Agreement contains customary events of default (including any failure to remain in compliance with the Financial Covenants), as well as specified defaults with respect to the LaJobi Earnout Consideration. If an event of default occurs and is continuing (in addition to default interest as described above, and other remedies available to the Lenders), with the consent of the Required Lenders, the Administrative Agent is entitled to, and at the request of such Lenders, the Administrative Agent is required to, declare commitments under the New Credit Agreement to be terminated, declare outstanding obligations thereunder to be due and payable, and/or demand cash collateralization of letters of credit (provided that upon events of bankruptcy, the commitments will be immediately due and payable, and the Borrowers will be required to cash collateralize letters of credit). In addition, an event of default under the New Credit Agreement could result in a cross-default under certain license agreements that we maintain.

The New Credit Agreement also contains customary conditions to lending, including that no default shall exist, or would result from any proposed extension of credit.

Although there were no Guarantors as of the date of execution of the New Credit Agreement, Guarantors in the future will include domestic subsidiaries that do not become Borrowers in accordance with the terms of the New Credit Agreement, and the Borrowers with respect to specified swap contracts and treasury management agreements. Guarantors will jointly and severally guarantee the payment of all obligations of the Borrowers under the New Credit Agreement.

In order to secure the obligations of the Loan Parties under the New Credit Agreement, each Loan Party has pledged 100% of the equity interests of its domestic subsidiaries, including a pledge of the capital stock of each Borrower (other than KID) and the Licensor, and 65% of the equity interests of specified foreign subsidiaries, to the Administrative Agent, and has granted security interests to the Administrative Agent in substantially all of its personal property (other than the assets of the Licensor until it becomes a Loan Party), all pursuant to the terms of a Second Amended and Restated Security and Pledge Agreement dated as of August 8, 2011 (the “New Security Agreement”), which amends and restates the Amended and Restated Guaranty and Collateral Agreement dated as of April 2, 2008, as amended, among the Borrowers in favor of the Administrative Agent (the “Old Security Agreement”). As additional security for Sassy, Inc.’s obligations under the New Credit Agreement, Sassy, Inc. has continued its grant of a mortgage for the benefit of the Administrative Agent and the continuing Lenders on the real property located at 2305 Breton Industrial Park Drive, S.E., Kentwood, Michigan.

The Borrowers paid an arrangement fee to ML in an aggregate amount of approximately $656,000 and an up-front fee to the Lenders in an aggregate amount of approximately $665,000 in connection with the execution of the New Credit Agreement and related documentation. The Company recorded these costs and related professional fees totaling in the aggregate approximately $1.7 million as deferred charges. These deferred charges will be amortized over the five-year contractual term of the New Revolver. The Borrowers are also required to pay a quarterly commitment fee ranging from 0.30% to 0.45% (based on the Consolidated Leverage Ratio) on the daily unused portions of the New Revolver (outstanding amounts under letters of credit are considered utilization for this purpose; outstanding swing-line loans are not so considered); letter of credit fees ranging from 1.75% to 2.75% (based on the Consolidated Leverage Ratio) on the maximum daily amount available to be drawn, plus fronting fees and other customary fees as are set forth in the New Credit Agreement. See Part II, Item 5, “Other Information” below.

 

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As described above, effective immediately upon the execution of the New Credit Agreement and the New Security Agreement by the respective parties thereto, the terms and conditions of the Old Credit Agreement and the Old Security Agreement were amended as set forth in, and restated in their entirety and superseded by, the New Credit Agreement and the New Security Agreement, respectively. In addition, as the obligations of the Guarantors are set forth in the New Credit Agreement and the New Security Agreement, and equity pledges are included in the New Security Agreement, the Amended and Restated Pledge Agreement dated as of April 2, 2008, as amended, by the Borrowers for the benefit of the Lenders was terminated and superseded by the New Credit Agreement and the New Security Agreement.

Financing costs, including the arrangement fee and up-front fee, associated with the New Credit Agreement will be deferred and amortized over the contractual term of the New Credit Agreement.

Other Events and Circumstances Pertaining to Liquidity

A discussion of, among other things: (i) the restatement of specified previously-issued financial statements, including the required recordation of an approximate $11.7 million liability (with a corresponding offset to goodwill) as of December 31, 2010, and the impairment of all such goodwill as of December 31, 2011; (ii) an arbitration demand initiated by Mr. Bivona with respect to the LaJobi Earnout Consideration and matters pertaining to his employment agreement with the Company, the impact of such restatement on such matters, and the position of the Company with respect thereto; (iii) the “Focused Assessment” of KID’s LaJobi subsidiary, charges recorded in connection therewith, and an informal SEC investigation and a document request from the United States Attorney’s Office for the District of New Jersey with respect to such matters; (iv) the Customs Review, charges recorded in connection therewith, and the Customs Investigation (each as defined and described in detail in Note 9 to the Notes to Unaudited Consolidated Financial Statements); (v) a putative class action filed against KID and certain of its officers and directors in March of 2011, the subsequent dismissal of such proceeding without prejudice, and the filing of a second amended complaint with respect thereto on May 7, 2012; (vi) a putative derivative shareholder litigation instituted in May of 2011, the dismissal of such proceeding without prejudice, and a subsequent motion to compel the inspection of documents filed by the plaintiff in such action in April of 2012; (vii) the complete settlement of contingent liabilities associated with a lease assigned to the purchaser of the Company’s former gift business; and (viii) a complaint filed against Kids Line with respect to specified wages and hours allegations, can be found in the section captioned “Recent Developments” above, Item 3 “Legal Proceedings”, or Notes 9, 11 and 12 of the Notes to Unaudited Consolidated Financial Statements.

In addition to the matters referred to above, we are from time to time party to various copyright, patent and trademark infringement, unfair competition, breach of contract, customs, employment and other legal actions incidental to the Company’s business, as plaintiff or defendant. In the opinion of management, the amount of ultimate liability with respect to any such actions that are currently pending will not, individually or in the aggregate, materially adversely affect the Company’s consolidated results of operations, financial condition or cash flows. In addition, KID may remain obligated with respect to certain contracts and other obligations of its former gift business that were not novated in connection with their transfer. To date, no payments have been made by KID in connection with such contracts (other than $1.4 million paid by the Company in the quarter ended March 31, 2012 to the landlord in complete settlement of a contingent obligation with respect to a lease assumed by the buyer of the Company’s former gift business), nor is KID aware of any remaining potential obligations, but there can be no assurance that payments will not be required of KID in the future with respect thereto.

We commenced the implementation in 2010 of a new consolidated information technology system for our operations, which we believe will provide greater efficiencies, and greater reporting capabilities than those provided by the current systems in place across our individual infant and juvenile companies. In connection with such implementation, we anticipate incurring aggregate costs of approximately $4.3 million, of which $1.9 million has been incurred as of March 31, 2012. We anticipate the balance of the costs to be incurred as follows: $1.4 million in 2012 and $1.0 million in 2013. Such costs have been financed to date with borrowings under our credit facility, and are intended to be so financed in the future. Our business may be subject to transitional difficulties as we replace the current systems. These difficulties may include disruption of our operations, loss of data, and the diversion of our management and key employees’ attention away from other business matters. The difficulties associated with any such implementation, and our failure to realize the anticipated benefits from the implementation, could harm our business, results of operations and cash flows.

 

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On November 8, 2011, the Board approved a share repurchase program. Under the share repurchase program, the Company is authorized to purchase up to $10.0 million of its outstanding shares of common stock (and in connection therewith, the Board terminated the repurchase program authorized in March of 1990). The purchases may be made from time to time on the open market or in negotiated transactions. The timing and extent to which the Company repurchases its shares will depend on market conditions and other corporate considerations as may be considered in the Company’s sole discretion, including limitations in the New Credit Agreement, which, in addition to limits on revolver availability and a stricter Consolidated Leverage Ratio for this purpose (0.25x less than the maximum then permitted), limits the aggregate amount that can be expended on share repurchases and dividends to $5.0 million until the LaJobi focused assessment has been concluded and all duty amounts required thereby have been paid. (See “New Credit Agreement” above). The share repurchase program may be suspended or discontinued at any time without prior notice. The Company intends to finance the share repurchase program from available cash and/or proceeds under the New Credit Agreement (to the extent available therefor).

Consistent with our past practices and in the normal course of our business, we regularly review acquisition opportunities of varying sizes. We may consider the use of debt or equity financing to fund potential acquisitions. The New Credit Agreement includes provisions that place limitations on our ability to enter into acquisitions, mergers or similar transactions, as well as a number of other activities, including our ability to incur additional debt, create liens on our assets or make guarantees, make certain investments or loans, pay dividends, repurchase our common stock, or dispose of or sell assets (subject to exceptions specified therein). These covenants could restrict our ability to pursue opportunities to expand our business operations. We are required to make pre-payments of our debt upon a sale of the assets or membership interests in the Licensor and any sale of the real estate owned by Sassy.

Contractual Obligations

The following table summarizes the Company’s significant known contractual obligations as of March 31, 2012 and the future periods in which such obligations are expected to be settled in cash (in thousands):

 

     Total      2012      2013      2014      2015      2016      Thereafter  

Operating Lease Obligations

   $ 8,606       $ 2,355       $ 2,409       $ 979       $ 1,013       $ 938       $ 912   

Purchase Obligations (1)

     41,546         41,546         —           —           —           —           —     

Long Term Debt Obligation – New Revolver (3)

     48,330         —           —           —           —           48,330         —     

Royalty Obligations

     9,238         5,039         2,824         1,354         21         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Contractual Obligations (2)(3)(4)

   $ 107,720       $ 48,940       $ 5,233       $ 2,333       $ 1,034       $ 49,268       $ 912   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(1) The Company’s purchase obligations consist primarily of purchase orders for inventory.
(2) Does not include contingent obligations under off-balance sheet arrangements, if any, or otherwise, as the amount, if any, or timing of their potential settlement is not reasonably estimable. See “Off-Balance Sheet Arrangements” below, “Other Events and Circumstances Pertaining to Liquidity” above and Note 9 to the Notes to Unaudited Consolidated Financial Statements for a discussion of the Company’s Off Balance Sheet Arrangements and contingent liabilities. The liability recorded as of December 31, 2010 of $11.7 million in connection with the potential LaJobi earnout is included in accrued expense (and is not included in the table above), as the amount, if any, or the timing of any potential settlement is not reasonably estimable.
(3) The amount in the table represents amounts outstanding under the New Revolver as of March 31, 2012. Amounts outstanding under the New Revolver are due and payable on August 8, 2016. Excludes obligations under certain letters of credit that require the Company to make payments to parties aggregating $0.1 million upon the occurrence of specified events. Required interest under the New Revolver is based on the outstanding debt and the applicable interest spread and cannot be calculated. The 2012 interest payments for the New Revolver using an assumed 3.0% interest rate and the outstanding balance at March 31, 2012 would be $1.1 million. Such amounts are estimates only and actual interest payments could differ materially. See “Debt Financings” for a description of the New Credit Agreement, executed as of August 8, 2011, including amount and dates of repayment and interest obligations and provisions that create, increase and/or accelerate obligations thereunder.
(4) Of the total income tax payable for uncertain tax positions of $739,000, we have classified $665,000 as a current liability as of March 31, 2012, as such amount is expected to be resolved within one year. The remaining amount has been classified as a long-term liability and is not included in the above table as the timing of its potential settlement is not reasonably estimable.

Off Balance Sheet Arrangements

As of March 31, 2012, there have been no material changes in the information provided under the caption “Off Balance Sheet Arrangements” of Item 7 of the 2011 10-K.

 

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CRITICAL ACCOUNTING POLICIES

The SEC has issued disclosure advice regarding “critical accounting policies”, defined as accounting policies that management believes are both most important to the portrayal of the Company’s financial condition and results and require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.

Management is required to make certain estimates and assumptions during the preparation of its consolidated financial statements that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Estimates and assumptions are reviewed periodically, and revisions made as determined to be necessary by management. There have been no material changes to the Company’s significant accounting estimates and assumptions or the judgments affecting the application of such estimates and assumptions during the period covered by this report from those described in the Company’s 2011 10-K.

See Note 2 of Notes to Consolidated Financial Statements of the 2011 10-K for a summary of the significant accounting policies used in the preparation of the Company’s consolidated financial statements. Also see Note 2 of Notes to Unaudited Consolidated Financial Statements herein.

Recently Issued Accounting Standards

See Note 10 of the Notes to Unaudited Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements. Additional written and oral forward-looking statements may be made by us from time to time in Securities and Exchange Commission (SEC) filings and otherwise. The Private Securities Litigation Reform Act of 1995 provides a safe-harbor for forward-looking statements. These statements may be identified by the use of forward-looking words or phrases including, but not limited to, “anticipate”, “project”, “believe”, “expect”, “intend”, “may”, “planned”, “potential”, “should”, “will” or “would”. We caution readers that results predicted by forward-looking statements, including, without limitation, those relating to our future business prospects, revenues, working capital, liquidity, capital needs, interest costs and income are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Specific risks and uncertainties include, but are not limited to, those set forth under Part I, Item 1A, Risk Factors, of the 2011 10-K. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of March 31, 2012, there have been no material changes in the Company’s market risks as described in Item 7A of our 2011 10-K.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer (together, the “Certifying Officers”), to allow for timely decisions regarding required disclosure.

In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute assurance of achieving the desired objectives.

Under the supervision and with the participation of management, including the Certifying Officers, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to paragraph (b) of Exchange Act Rules 13a-15 or 15d-15 as of March 31, 2012. Based upon that evaluation, the Certifying Officers have concluded that our disclosure controls and procedures are effective as of March 31, 2012.

 

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Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 or 15d-15 that occurred during the fiscal quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

Putative Class Action

On March 22, 2011, a complaint was filed in the United States District Court, District of New Jersey, encaptioned Shah Rahman v. Kid Brands, et al. (the “Putative Class Action”). The Putative Class Action was brought by one plaintiff on behalf of a putative class of all those who purchased or otherwise acquired KID’s common stock between March 26, 2010 and March 15, 2011. In addition to KID, Bruce G. Crain, KID’s then President, Chief Executive Officer and a member of KID’s Board, Guy A. Paglinco, KID’s Vice President and Chief Financial Officer, Raphael Benaroya, Mario Ciampi, Frederick J. Horowitz, Salvatore Salibello and Michael Zimmerman, each members of KID’s Board, as well as Lauren Krueger and John Schaefer, each a former member of KID’s Board, were named as defendants.

The Putative Class Action alleged one claim for relief pursuant to Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder, and a second claim pursuant to the Exchange Act, claiming generally that the Company and/or the other defendants issued materially false and misleading statements during the relevant time period regarding compliance with customs laws, the Company’s financial reports and internal controls. The Putative Class Action did not state the size of the putative class. The Putative Class Action sought compensatory damages but did not quantify the amount of damages sought. The Putative Class Action also sought unspecified extraordinary and injunctive relief, the costs and disbursements of the lawsuit, including attorneys’ and experts’ fees and costs, and such equitable relief as the court deemed just and proper. By order dated July 26, 2011, Shah Rahman was appointed lead plaintiff pursuant to Section 21D (a) (3) (B) of the Exchange Act.

On September 26, 2011, an amended complaint was filed by the lead plaintiff which asserted additional allegations, extended the putative class to all those who purchased or otherwise acquired KID’s common stock between March 26, 2010 and August 16, 2011, and eliminated several of the named defendants other than KID, Bruce G. Crain, Guy A. Paglinco and Raphael Benaroya. The amended complaint was dismissed without prejudice against Raphael Benaroya by a Notice of Voluntary Dismissal filed by the lead plaintiff on October 21, 2011 and so ordered by the Court on October 25, 2011.

On November 10, 2011, KID and individual defendants Bruce G. Crain and Guy A. Paglinco (collectively “Defendants”) moved to dismiss the amended complaint pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6) and the Private Securities Litigation Reform Act, 15 U.S.C. § 74u-4. Briefing on Defendants’ motions to dismiss was completed on January 15, 2012. On March 7, 2012, the Court issued an opinion and order granting Defendants’ motions to dismiss the amended complaint without prejudice. The Court ordered that plaintiff may file another amended complaint with sixty (60) days of the March 7th Order.

On May 7, 2012, the lead plaintiff filed a second amended complaint that named the Company, Bruce G. Crain, Guy A. Paglinco, and Raphael Benaroya as defendants. The second amended complaint repeats the same claims for relief and many of the allegations of the previous complaints in the action, but contains new allegations that, among other things, the Company and/or the other defendants issued materially false and misleading statements during the relevant time period regarding custom law violations and safety violations regarding certain of its products. The relief demanded and the class period are the same as in the first amended complaint.

The Company intends to continue to defend the Putative Class Action vigorously, and has notified its insurance carriers of the existence of the action; however, no amounts have been accrued in connection therewith, although legal costs are being expensed as incurred.

Putative Shareholder Derivative Action

On May 20, 2011, a putative stockholder derivative complaint was filed by the City of Roseville Employees’ Retirement System (“Roseville”) in the United States District Court of the District of New Jersey (the “Putative Derivative Action”), against Bruce Crain, KID’s then CEO, Guy Paglinco, KID’s CFO, Marc Goldfarb, KID’s Senior Vice President and General Counsel, each member of KID’s current Board, and John Schaefer, a former member of KID’s Board (collectively, the “Defendants”). In addition, KID was named as a nominal defendant.

 

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The Putative Derivative Action alleged, among other things, that the Defendants breached their fiduciary duties to the Company by allegedly failing to oversee and disclose alleged misconduct at KID’s LaJobi subsidiary relating to LaJobi’s compliance with certain U.S. customs laws. In addition to asserting the breach of fiduciary duty claim, the complaint also asserted claims of gross mismanagement, abuse of control and commission of corporate waste and for unjust enrichment. The Putative Derivative Action sought monetary damages against the individual Defendants in an unspecified amount together with interest, in addition to exemplary damages, the costs and disbursements of the lawsuit, including attorneys’ and experts’ fees and costs, and such equitable relief as the court deems just and proper.

On July 25, 2011, the individual Defendants and nominal defendant KID moved to dismiss the complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) and 23.1. On October 24, 2011, the Court granted Defendants’ motion to dismiss without prejudice with leave for plaintiff to amend the complaint. The Court ruled that plaintiff failed to satisfy applicable pleading standards required to bring a shareholder derivative claim.

On November 23, 2011, Roseville sent a letter to KID demanding to inspect certain books and records of the Company pursuant to New Jersey state law. The demand requested to inspect documents relating to LaJobi’s compliance with U.S. customs laws to determine whether Roseville will amend its complaint in the Putative Derivative Action. On March 1, 2012, the Company indicated in a letter that it had provided all the documents to which Roseville is entitled under New Jersey law. On April 28, 2012, Roseville filed a motion to compel inspection of documents beyond those previously provided by the Company. The Company’s opposition to the motion is due on May 14, 2012. Roseville’s time to amend its complaint has been extended by the Court until the issues raised in the motion are resolved.

The Company notified its insurance carriers of the Putative Derivative Action. While the Company incurred costs in connection with the defense of this lawsuit, and may incur additional costs (which costs were or will be expensed as incurred), the lawsuit did not seek monetary damages against the Company, and no amounts have been accrued in connection therewith.

TRC Landlord Litigation

In connection with the sale by KID of its former gift business in December 2008 to TRC, KID and Russ Berrie U.S. Gift, Inc. (“U.S. Gift”), KIDS’s subsidiary at the time (and currently a subsidiary of TRC), sent a notice of termination with respect to the lease (the “TRC Lease”), originally entered into by KID (and subsequently assigned to U.S. Gift) of a facility in South Brunswick, New Jersey. Although the TRC Lease became the obligation of TRC (through is ownership of U.S. Gift), KID remained potentially obligated for rental and other specified payments due thereunder (to the extent they were owed but not paid by U.S. Gift). On July 18, 2011, the landlord under the TRC Lease (the “TRC Landlord”) filed a complaint in the Superior Court of New Jersey Law Division: Middlesex County, alleging that KID had breached the TRC Lease and a related assignment by failing to pay rent and other charges due and owing to the TRC Landlord by U.S. Gift pursuant to the TRC Lease, in an aggregate amount of approximately $12 million as of June 11, 2011 (the “Complaint”). KID had previously accrued $1.1 million for potential liabilities for rental and related charges owed by U.S. Gift under the TRC Lease, and stated that it could not assess it potential liability for other amounts allegedly owed thereunder.

As of January 20, 2012, KID and the TRC Landlord entered into a General Release and Settlement Agreement, pursuant to which: (i) KID (without admission of liability) agreed to pay the TRC Landlord $1.4 million in full and final satisfaction and settlement of all claims asserted against KID in the Complaint; and (ii) the TRC Landlord and related releasing parties released KID and other specified releases from all claims against them, including any claims arising out of matters asserted in the Complaint. KID paid the settlement amount on February 21, 2012 and the TRC Landlord dismissed the Complaint with prejudice on March 15, 2012.

Also see Note 9 of the Notes to Unaudited Consolidated Financial Statements for a discussion of the Company’s litigation, commitments and contingencies.

 

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors”, of the Company’s 2011 10-K.

 

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ITEM 5. OTHER INFORMATION

On May 4, 2012, the Loan Parties, the Administrative Agent and the Required Lenders under the New Credit Agreement executed a letter agreement (the “Letter Agreement”) pursuant to which the Required Lenders and the Loan Parties agreed that up to an aggregate of $1.0 million in severance expense may be treated by the Company as excluded “non-recurring losses” in its determination of consolidated net income. If severance expense at any time exceeds this limitation (any such excess, “Excess Severance”): (i) to the extent deducted from the determination of consolidated net income, the accrual of such Excess Severance expense may be added back to consolidated net income for purposes of calculating Covenant EBITDA during the period when accrued; and (ii) the amount of any Excess Severance payments (regardless of when accrued) will be deducted from Covenant EBITDA during the period when paid.

Pursuant to the Letter Agreement, the Company also agreed to retain a financial consultant to review the issues pertaining to the Company’s customs duties and the LaJobi Earnout Consideration, to review and deliver an opinion regarding the Company’s financial forecasts, and any other mutually-agreed matters. Such consultant must provide periodic reports to the Administrative Agent and the Lenders, and a written report on or before July 31, 2012. Fees and expenses related to such consultant may be treated as excluded “non-recurring losses” for purposes of determining consolidated net income. In addition, the Loan Parties agreed that prior to January 1, 2013, Total Revolving Outstanding (as defined in the New Credit Agreement) shall not exceed $70.0 million without the prior written consent of the Required Lenders (such limitation does not constitute a reduction of the commitments under the New Credit Agreement).

In addition, pursuant to the terms of the New Credit Agreement, the unutilized portion of the New Revolver may be permanently reduced or terminated by the Borrowers at any time and from time to time without premium or penalty. In accordance therewith, in order to reduce the required quarterly commitment fee under the New Credit Agreement on the daily unused portions of the New Revolver, which ranges from 0.30% to 0.45% (based on the Company’s Consolidated Leverage Ratio), the Borrowers reduced the New Revolver to a maximum of $100 million by notice to the Administrative Agent effective as of May 11, 2012.

The terms of the New Credit Agreement are discussed in detail under the caption “Debt Financings” of Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and in Note 4 of the Notes to Unaudited Consolidated Financial Statements.

 

ITEM 6. EXHIBITS

Exhibits to this Quarterly Report on Form 10-Q:

 

10.41    Letter Agreement between the Company and Guy Paglinco, dated as of April 26, 2012*
10.42    Letter Agreement between the Company and Marc Goldfarb, dated as of April 26, 2012*
10.43    Letter Agreement, dated May 4, 2012, among Kid Brands, Inc., Kids Line LLC, Sassy, Inc., I & J HoldCo, Inc., LaJobi, Inc. and CoCaLo, Inc., as Borrowers; Bank of America, N.A., as Administrative Agent and as a Lender, Swing Line Lender and L/C Issuer; and the other Lenders party thereto
31.1    Certification of principal executive officer required by Section 302 of the Sarbanes Oxley Act of 2002.
31.2    Certification of principal financial officer required by Section 302 of the Sarbanes Oxley Act of 2002.
32.1    Certification of principal executive office required by Section 906 of the Sarbanes Oxley Act of 2002.
32.2    Certification of principal financial officer required by Section 906 of the Sarbanes Oxley Act of 2002.
101.INS    XBRL Instance Document 1,2
101.SCH    XBRL Taxonomy Extension Schema Document 1,2
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document1,2
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document 1,2
101.LAB    XBRL Taxonomy Extension Label Linkbase Document 1,2
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document 1,2

 

* Represent management contracts or compensatory plans or arrangements

 

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1 Pursuant to Rule 405 of Regulation S-T, includes the following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in eXentsible Business Reporting Language (“XBRL”) interactive data files: (i) Consolidated Statements of Operations for the three-month periods ended March 31, 2012 and 2011, (ii) Consolidated Statements of Comprehensive Loss for the three-month periods ended March 31, 2012 and 2011, (iii) Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011, (iv) Consolidated Statements of Cash Flows for the three-month period ended March 31, 2012 and 2011, and (v) the Notes to Unaudited Consolidated Financial Statements.
2 As provided in Rule 406T of Regulation S-T, this information shall be not deemed “filed” for purposes of Section 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

Items 2, 3 and 4 are not applicable and have been omitted.

 

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SIGNATURES

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

 

    KID BRANDS, INC.
    (Registrant)
Date: May 10, 2012     By   /s/ Guy A. Paglinco
      Guy A. Paglinco
     

Vice President and Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

 

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EXHIBIT INDEX

 

10.41    Letter Agreement between the Company and Guy Paglinco, dated as of April 26, 2012*
10.42    Letter Agreement between the Company and Marc Goldfarb, dated as of April 26, 2012*
10.43    Letter Agreement, dated May 4, 2012, among Kid Brands, Inc., Kids Line LLC, Sassy, Inc., I & J HoldCo, Inc., LaJobi, Inc. and CoCaLo, Inc., as Borrowers; Bank of America, N.A., as Administrative Agent and as a Lender, Swing Line Lender and L/C Issuer; and the other Lenders party thereto
31.1    Certification of principal executive officer required by Section 302 of the Sarbanes Oxley Act of 2002.
31.2    Certification of principal financial officer required by Section 302 of the Sarbanes Oxley Act of 2002.
32.1    Certification of principal executive officer required by Section 906 of the Sarbanes Oxley Act of 2002.
32.2    Certification of principal financial officer required by Section 906 of the Sarbanes Oxley Act of 2002.
101.INS    XBRL Instance Document1,2
101.SCH    XBRL Taxonomy Extension Schema Document 1,2
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document 1,2
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document 1,2
101.LAB    XBRL Taxonomy Extension Label Linkbase Document 1,2
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document 1,2

 

* Represent management contracts or compensatory plans or arrangements
1 

Pursuant to Rule 405 of Regulation S-T, includes the following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in eXentsible Business Reporting Language (“XBRL”) interactive data files: (i) Consolidated Statements of Operations for the three-month periods ended March 31, 2012 and 2011, (ii) Consolidated Statements of Comprehensive Loss for the three-month periods ended March 31, 2012 and 2011, (iii) Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011, (iv) Consolidated Statements of Cash Flows for the three-month period ended March 31, 2012 and 2011, and (v) the Notes to Unaudited Consolidated Financial Statements.

2

As provided in Rule 406T of Regulation S-T, this information shall be not deemed “filed” for purposes of Section 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

 

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