NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010
Note 1 Description of Business
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 currently operates in one segment: the infant and juvenile business.
The Companys 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, nursery appliances, 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 infants early years, including the recently acquired
Kokopax
®
line of baby gear products as described in Note 4 (Sassy
®
). In addition to branded products, the Company also markets certain categories under various licenses, including
Carters
®
, Disney
®
, Graco
®
and Serta
®
. The Companys 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).
Note 2 Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, after elimination of all inter-company accounts and transactions.
Business Combinations
The Company accounts for business
combinations consummated after 2009 by applying the acquisition method of accounting. At acquisition, we recognize assets acquired and liabilities assumed based on their fair values at the date of acquisition. Accounting for business combinations
requires significant assumptions and estimates to measure fair value and may include the use of appraisals, market quotes for similar transactions, discounted cash flow techniques or other information we believe to be relevant. Any excess of the
cost of a business acquisition over the fair values of the assets acquired and liabilities assumed is recorded as goodwill. Should the acquisition result in a bargain purchase, where the fair value of assets and liabilities exceed the amount of
consideration transferred, the resulting gain will be recorded into earnings on the acquisition date. All acquisition-related costs, other than the costs to issue debt or equity securities, are accounted for as expense in the period in which they
are incurred. All assets and liabilities arising from contractual contingencies are recognized as of the acquisition date if the acquisition date fair value of that asset or liability can be determined during the measurement period. Subsequent
to the acquisition date, the Company measures contingent consideration arrangements at fair value for each period. Changes in fair value that are not measurement period adjustments are recognized in earnings.
If initial accounting for the business combination has not been completed by the end of the reporting period in which the business
combination occurs, provisional amounts will be reported for which the accounting is incomplete, with retrospective adjustment made to such provisional amounts during the measurement period to present new information about facts and circumstances
that existed as of the acquisition date. Once the measurement period ends, and in no case beyond one year from the acquisition date, subsequent revisions of the accounting for the business combination will only be accounted for as correction of an
error.
For all acquisitions consummated prior to 2009, the Company allocated at the time of acquisition, the cost of a
business acquisition to the specific tangible and intangible assets acquired and liabilities assumed based upon their relative fair values. Significant judgments and estimates were often made to determine these allocated values, and may have
included the use of appraisals, market quotes for similar transactions, discounted cash flow techniques or other information the Company believed to be relevant. The finalization of the purchase price allocation typically took a number of months to
complete, and if final values were materially different from initially recorded amounts, adjustments were recorded. Any excess of the cost of a business acquisition over the fair values of the net assets and liabilities acquired was recorded as
goodwill which is not amortized to expense. Any excess of the fair value of the net tangible and identifiable intangible assets acquired over the purchase price (negative goodwill) was allocated on a pro-rata basis to long-lived assets, including
identified intangible assets.
60
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
Revenue Recognition
The Company recognizes revenue when products are shipped and the customer takes ownership and assumes risk of loss, which is generally on
the date of shipment, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed and determinable. The Company records reductions to revenue for estimated returns and customer
allowances, price concessions or other incentive programs that are estimated using historical experience and current economic trends. Material differences may result in the amount and timing of net sales for any period if management makes different
judgments or uses different estimates.
Immaterial Corrections
In connection with a system conversion, management determined that certain shipping and handling fees had been incorrectly classified. The
Company corrected the classification of $5.4 million and $4.4 million in expenses originally classified as cost of sales in the years ended December 31, 2011 and 2010, respectively. In accordance with the Companys policy (see Cost of
Sales) these expenses should have been classified as selling general and administrative expenses.
As a result of the
revisions in the Consolidated Statement of Operations, cost of sales decreased $5.4 million and $4.4 million and, selling general and administrative expense increased by $5.4 million and $4.4 million, for the years ended December 31, 2011 and
2010, respectively. The misstatements had no impact on previously reported (Loss) Income from Continuing Operations, (Loss) Income before Provision (Benefit) for Income Taxes, Net (Loss) Income, or (Loss) Earnings Per Share for either period.
Cost of Sales
The most significant components of cost of sales are cost of the product, including inbound freight charges, duty, packaging and display costs, labor, depreciation, any inventory adjustments, purchasing
and receiving costs, product development costs and quality control costs.
The Companys 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. The Company accounts for the above expenses as operating expenses and
classifies them under selling, general and administrative expenses. For the years ended December 31, 2012, 2011, and 2010, the costs of warehousing, outbound handling costs and outbound shipping costs were $11.8 million, $12.9 million, and
$11.6 million, respectively. In addition, the majority of outbound shipping costs are paid by the Companys customers, as many of the Companys customers pick up their goods at the Companys distribution centers. See Immaterial
Corrections for a discussion of the correction of an immaterial misclassification of certain expenses which were originally classified as cost of sales, which should have been classified as selling, general and administrative expenses for
specified periods.
Advertising Costs
Production costs for advertising are charged to operations in the period the related advertising campaign begins. All other advertising costs are charged to operations during the period in which they are
incurred. Advertising costs for the years ended December 31, 2012, 2011, and 2010, amounted to $0.5 million, $0.8 million, and $0.8 million respectively.
Cash and Cash Equivalents
Cash equivalents consist of investments
in interest bearing accounts and highly liquid securities having a maturity of three months or less, at the date of purchase, and their costs approximate fair value.
Restricted Cash
Restricted cash consists of lock box accounts that
are automatically swept as funds become available to pay down balances outstanding under the revolving credit facility. See Note 7.
61
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
Accounts Receivable
Accounts receivable are recorded at the invoiced amount. Commencing in late 2011, the Company occasionally elects to participate in an
auction program initiated by one of its largest customers, which permits the Company 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. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses
inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses, current receivable aging, and existing industry and national economic data. The Company reviews its allowance for doubtful
accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. Account balances are charged off against the allowance after commercially reasonable means of collection have been exhausted
and the potential for recovery is considered unlikely. The Company also analyzes its allowances policies to assess the adequacy of allowance levels and adjusts such allowances as necessary. The Company does not have any off-balance sheet credit
exposure related to its customers.
Inventories
Inventories, which consist of finished goods, are carried on the Companys 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, the Companys effectiveness in inventory management, as well as discontinuance of products or product lines. In addition, estimating sales prices, establishing mark down percentages and evaluating the
condition of the Companys inventories all require judgments and estimates, which may also impact the inventory valuation. However, the Company believes that, based on prior experience of managing and evaluating the recoverability of slow
moving, excess, damaged and obsolete inventory in response to market conditions, including decreased sales in specific product lines, the Companys established reserves are materially adequate. If actual market conditions and product sales
prove to be less favorable than projected, however, additional inventory reserves may be necessary in future periods. At December 31, 2012 and 2011, the balance of the inventory reserve was approximately $1,279,000 and $1,701,000, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost or fair market value at date of acquisition and are depreciated using the straight-line method over their estimated useful lives, which primarily range
from three to twenty-five years. Leasehold improvements are amortized using the straight-line method over the term of the respective lease or asset life, whichever is shorter. Major improvements are capitalized, while expenditures for maintenance
and repairs are charged to operations as incurred. Internal use software development costs that are capitalized are included in plant, property and equipment in the consolidated balance sheet. These assets are depreciated over the estimated useful
life of the asset using the straight-line method. Equipment under capital leases is amortized over the lives of the respective leases or the estimated useful lives of the assets, whichever is shorter. Assets to be disposed of are separately
presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. Gain or loss on retirement or disposal of individual assets is recorded as income or expense in the
period incurred and the related cost and accumulated depreciation are removed from the respective accounts.
Impairment of Long-Lived
Assets
Long-lived assets, such as property, plant, and equipment and purchased intangibles subject to amortization,
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset
to the estimated undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount for which the
carrying amount of the asset exceeds its fair value as determined by an estimate of discounted future cash flows. No impairments to long-lived assets were recorded in 2012. See Note 4 with respect to a discussion of the annual impairment testing of
all the Companys intangible assets in 2012.
62
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of costs over fair value of net assets of businesses acquired. Goodwill and intangible assets acquired in a
purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that the assets may be impaired.
The Company tests goodwill for impairment on an annual basis as of its year end. Goodwill of a reporting unit will be tested
for impairment between annual tests if events occur or circumstances change that would likely reduce the fair value of the reporting units below its carrying value. The Company uses a two-step process to test goodwill for impairment. First, the
reporting units fair value is compared to its carrying value. If a reporting units carrying amount exceeds its fair value, an indication exists that the reporting units goodwill may be impaired, and the second step of the
impairment test would be performed. The second step of the goodwill impairment test is used to measure the amount of the impairment loss. In the second step, the implied fair value of the reporting units goodwill is determined by allocating
the reporting units fair value to all of its assets and liabilities other than goodwill in a manner similar to a purchase price allocation. The resulting implied fair value of the goodwill that results from the application of this second step
is then compared to the carrying amount of the goodwill and an impairment charge would be recorded for the difference. In the fourth quarter of 2011, the Company recorded an impairment charge of $11.7 million related to goodwill (see Note 4 below
for detail with respect to such impairment charge). This impairment charge comprised all of the Companys goodwill.
Intangible assets with indefinite lives other than goodwill are tested annually for impairment and the appropriateness of the indefinite
life classification, or more often if changes in circumstances indicate that the carrying amount may not be recoverable or the asset life may be finite. The Companys intangible assets with indefinite lives consist of trademarks and trade names
for each of Kids Line, Sassy, LaJobi and CoCaLo. In testing for impairment, if the carrying amount of such intangible assets exceeds the fair value of such assets, an impairment loss is recorded in the amount of the excess. The Company uses various
models to estimate fair value. In the Companys analysis for 2012 and 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 2012 and 2011, the Company kept its long-term growth rate at 2.5% for all of its business units. For 2012, the Company used assumed royalty
rates of 3%, 3.5%, 2.0% and 5.5% for Kids Line, Sassy, LaJobi and CoCaLo, respectively. Assumed royalty rates increased with respect to Sassy and CoCaLo from the 2011 rates of 2.6% and 4%, respectively, as a result of increased profitability at
these business units in 2012. For 2011, the Company 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 LaJobi from the 2011 rates of 2.5%, as a
result of reduced profitability for such business unit in 2012. As fair value of all trade names tested exceeded their carrying value, no impairments were recorded for the year ended December 31, 2012. (See Note 4 for details with respect to
2011 impairment charges).
Foreign Currency Translation
Financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and the weighted average exchange rate for
each period for revenues, expenses, gains and losses. Translation adjustments are recorded as a separate component of accumulated other comprehensive income (loss) in the consolidated balance sheet and foreign currency transaction gains and losses
are recorded in other income (expense) in the consolidated statements of operations.
Derivative Instruments
The Company from time to time uses derivative financial instruments, primarily swaps, to hedge interest rate exposures. The Company
accounts for its derivative instruments as either assets or liabilities and measures them at fair value. Derivatives that are not designated as hedges are adjusted to fair value through earnings.
63
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
Accounting for Income Taxes
The Company accounts for income taxes under the asset and liability method. Such approach results in the recognition of deferred tax
assets and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax bases of assets and liabilities and for operating losses and tax credit carry forwards. Deferred tax assets and
liabilities are determined using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. Valuation allowances are established where expected future
taxable income, the reversal of deferred tax liabilities and development of tax strategies does not support the realization of the deferred tax asset.
The Company and its subsidiaries file separate foreign, state and local income tax returns and, accordingly, provide for such income taxes on a separate company basis.
The Company establishes accruals for tax contingencies when, notwithstanding the reasonable belief that its tax return positions are
fully supported, the Company believes that certain filing positions are likely to be challenged and, moreover, that such filing positions may not be fully sustained. Accordingly, a tax benefit from an uncertain tax position will only be recognized
if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The Company continually evaluates its uncertain tax positions and will adjust such amounts
in light of changing facts and circumstances including, but not limited to, emerging case law, tax legislation, rulings by relevant tax authorities, and the progress of ongoing tax audits. Settlement of a given tax contingency could impact the
income tax provision in the period of resolution. The Companys accruals for gross uncertain tax positions are presented in the consolidated balance sheet within income taxes payable for current items and income taxes payable, non-current for
items not expected to be settled within 12 months of the balance sheet date.
Accrued Liabilities and Deferred Tax Valuation Allowances
The preparation of the Companys Consolidated Financial Statements in conformity with generally accepted
accounting principles in the United States requires management to make certain estimates and assumptions that affect the reported amounts of liabilities and disclosure of contingent liabilities at the date of the financial statements. Such
liabilities include, but are not limited to, accruals for various legal matters, and tax exposures. The settlement of the actual liabilities could differ from the estimates included in the Companys consolidated financial statements.
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 assets will not be realized. In assessing the realizability of deferred tax assets, management evaluates all positive and negative evidence, including the Companys past operating results (the existence of cumulative losses), and
near-term forecasts of future taxable income consistent with the plans and estimates management is using to manage its underlying businesses, the amount of taxes paid in available carry back years, and tax planning strategies. The Companys
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.
As a result of the Companys reduced estimates of current and future taxable income during the carryforward period and the fact it
is in a three-year cumulative loss position, the Company recorded an additional $50.3 million of valuation allowance against its deferred tax assets in the period ending December 31, 2012. Management will continue to periodically evaluate the
need for a valuation allowance, and to the extent that conditions change, a portion of such valuation allowance could be reversed. See Note 9 of the Notes to the Consolidated Financial Statements for additional detail.
The Company currently has a valuation allowance of $73.8 million for its deferred tax assets, of which approximately $34.1 million
consists of valuation allowances against it intangible assets, approximately $17.2 million consists of valuation allowances against foreign tax credit carry forwards, approximately $8.7 million against capital loss carry forwards, approximately $4.8
million against federal NOL carry forwards, approximately $0.8 million against foreign NOL carry forwards, approximately $1.7 million against state NOL carry forwards, and approximately $6.5 million against the remaining tax reserves and accruals.
The Company has no significant deferred tax liabilities, and, as a result, there are no significant reversals accounted for in its analysis. In addition, the Company considered and concluded there was no tax planning strategies relevant in its
analysis of deferred tax assets.
64
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
Fair Value of Financial Instruments
The Company has estimated that the carrying amount of cash and cash equivalents, accounts receivable, inventory, prepaid and other current
assets, accounts payable and accrued expenses reflected in the consolidated financial statements equals or approximates their fair values because of the short-term maturity of those instruments. The carrying value of the Companys short-term
and long-term debt approximates fair value as the debt bears interest at a variable market rate.
Earnings (Loss) Per Share
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 Companys 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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires
management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Significant items subject to such estimates and assumptions include the recoverability of property, plant and equipment and other intangible assets; valuation allowances for receivables, inventories and
deferred income tax assets; and accruals for income taxes, customs duty and litigation. Actual results could differ from these estimates.
Share-Based Compensation
The Company recognizes in the financial statements all costs resulting from share-based payment transactions at their fair values.
The relevant 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. There was no excess tax benefit or tax deficiency recognized from share-based compensation for the year ended December 31, 2012. There was a tax deficiency of $0.3 million and $0.1 million
recognized from share-based compensation costs for the years ended December 31, 2011 and 2010, respectively.
Accumulated Other
Comprehensive (Loss) Income
Comprehensive (loss) income consists of net (loss) income and other gains and losses that
are not included in net (loss) income, but are recorded directly in the consolidated statements of shareholders equity, such as the unrealized gains and losses on the translation of the assets and liabilities of the Companys foreign
operations and gains or losses on derivatives.
Subsequent Events
The Company has evaluated subsequent events prior to filing.
65
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
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 year ended December 31, 2012, that might have a material impact on the Companys financial position,
results of operations or cash flows.
Note 3 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 with TRC permitting TRC to use specified
intellectual property, consisting generally of the Russ and Applause trademarks and trade names (the Retained IP).
As has been previously disclosed, on April 21, 2011, TRC and TRCs 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 KIDs sale of the gift business to TRC; (ii) confirms that the Seller Note and KIDs security interests therein are valid, and are junior only to TRCs 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 TRCs 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 TRCs assets under which KID is generally entitled to receive, to the extent proceeds are available therefor after the payment of amounts owed to TRCs 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 TRCs 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.
As a
result of such set-off described above, the Company reduced the valuation reserve previously recorded against the Seller Note receivable by $2.0 million (representing liabilities to TRC extinguished by the settlement agreement) during the year ended
December 31, 2011.
Note 4 Goodwill and Intangible Assets
Goodwill
As previously disclosed, the restatement of certain prior financial statements resulted 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. As a result, applicable accounting standards required the Company to record a liability for such portion 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 finders fee), which also required an offset in equal amount to goodwill, all of which goodwill was impaired as of December 31, 2011 (as described
below).
66
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
The Company record a liability for the LaJobi earnout 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 finders fee), which also required an offset in equal amount to goodwill, all of which goodwill was
impaired as of December 31, 2011 (as described below).
With respect to such goodwill, the Company performed its 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 using discounted cash flow analysis is estimated. 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 units 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 units goodwill. The implied fair value of the reporting units 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 Companys stock price during 2011).
Managements determination of the fair value of the goodwill for the second step in 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 Companys operating forecasts; (ii) revenue growth rates; (iii) risk-commensurate discount rates and costs of capital; and (iv) price or market multiples. The Companys
estimates of revenues and costs are based on historical data, various internal estimates and a variety of external sources, and are developed by the Companys routine long-range planning process.
During the year ended December 31, 2011 the Companys stock price declined substantially. Such decline in the Companys
stock price in 2011 indicated the potential for impairment of the Companys goodwill. In addition, 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 its 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 Companys 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.
Changes in the carrying amount of goodwill during the year ended December 31, 2011 were as follows:
|
|
|
|
|
|
|
(in thousands)
|
|
Goodwill at December 31, 2010
|
|
$
|
11,719
|
|
Impairment
|
|
|
(11,719
|
)
|
|
|
|
|
|
Goodwill at December 31, 2011
|
|
|
0
|
|
|
|
|
|
|
67
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
Intangible Assets
As of December 31, 2012, and 2011, the components of intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Amortization Period
|
|
2012
|
|
|
2011
|
|
Sassy trade name
|
|
Indefinite life
|
|
$
|
5,400
|
|
|
$
|
5,400
|
|
Kokopax trade name *
|
|
6 years
|
|
|
403
|
|
|
|
|
|
Kokopax customer relationships *
|
|
5 years
|
|
|
49
|
|
|
|
|
|
Kids Line customer relationships
|
|
20 years
|
|
|
6,583
|
|
|
|
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
|
|
|
9,684
|
|
|
|
10,319
|
|
LaJobi royalty agreements
|
|
5 years
|
|
|
403
|
|
|
|
840
|
|
CoCaLo trade name
|
|
Indefinite life
|
|
|
5,800
|
|
|
|
5,800
|
|
CoCaLo customer relationships
|
|
20 years
|
|
|
1,934
|
|
|
|
2,063
|
|
CoCaLo foreign trade name
|
|
Indefinite life
|
|
|
31
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
$
|
44,287
|
|
|
$
|
45,453
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
In late September of 2012, Sassy acquired substantially all of the operating assets of Kokopax, LLC, a developer and marketer of framed infant back carriers and related
accessories, including sun hats and totes. Under the purchase method of accounting, the total purchase price for Kokopax has been assigned to the net tangible and intangible assets acquired based on their estimated fair values. Approximately
$478,000 was assigned to certain intangible assets based on preliminary valuations performed by the Company. Accordingly, the final determination of value could result in an increase or decrease to these values in future periods. See Note 17 for
information on potential earnout consideration in connection with the purchase of the Kokopax assets.
|
Aggregate
amortization expense, was $1.6 million, $2.8 million and $2.8 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Estimated annual amortization expense is as follows (in thousands) for each of the fiscal years ending December 31:
|
|
|
|
|
2013
|
|
$
|
1,659
|
|
2014
|
|
|
1,263
|
|
2015
|
|
|
1,263
|
|
2016
|
|
|
1,263
|
|
2017
|
|
|
1,261
|
|
In accordance with Accounting Standard Codification (ASC) Topic 350, indefinite-lived intangible assets
are no longer amortized but are reviewed for impairment at least annually, and more frequently if a triggering event occurs indicating that an impairment may exist. The Companys annual impairment testing is performed in the fourth quarter of
each year (unless specified triggering events warrant more frequent testing). In accordance with applicable accounting standards, there were no triggering events warranting interim testing of intangible assets in the first or second quarter of 2012,
and no impairments of intangible assets (either definite-lived or indefinite-lived) were recorded during either such period. Due to continued softness in the business during the third quarter of 2012, however, the Company determined that indicators
of impairment of its indefinite-lived intangible assets (consisting of trade names) existed, and conducted testing of the Companys trade names as of September 30, 2012 in connection therewith. Testing of 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
Companys September 30, 2012 analysis, it used a five-year projection period, which has been its prior practice. For the interim testing the Company concluded that it was appropriate to retain the long-term growth rates and assumed royalty
rates used for its 2011 annual testing. Such interim testing demonstrated that no trade names were impaired as of September 30, 2012.
68
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
All intangible assets, both definite-lived and indefinite-lived, were tested for
impairment in the fourth quarter of 2012. As discussed below, there were no impairments recorded for the year ended December 31, 2012 with respect to intangible assets (whether definite or indefinite-lived).
The Companys non-amortizing intangibles (trade names) are tested for impairment as part of the Companys
annual impairment testing of goodwill and other indefinite-lived assets. The Company tested the non-amortizing intangible trade names recorded on its consolidated balance sheet as of December 31, 2012, which consisted of Kids Line
®
, Sassy
®
, LaJobi
®
, and CoCaLo
®
. 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 Companys analysis for 2012,
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 2012, the Company kept its long-term growth rate at 2.5% for all of its business units. However, the Company used assumed royalty rates of 3%, 3.5%, 2.0% and 5.5% for Kids Line, Sassy, LaJobi and CoCaLo, respectively.
Assumed royalty rates increased with respect to Sassy and CoCaLo from the 2011 rates of 2.6% and 4%, respectively, as a result of increased profitability at these business units in 2012. Assumed royalty rates decreased with respect to LaJobi from
the 2011 rates of 2.5%, as a result of reduced profitability for such business unit in 2012. As the fair value of all trade names tested exceeded their carrying value, no impairments with respect thereto were recorded for the year ended
December 31, 2012.
The Company tested the non-amortizing intangible trade names recorded on its
consolidated balance sheet as of December 31, 2011, which consisted of Kids Line
®
, Sassy
®
, LaJobi
®
, and CoCaLo
®
. 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 Companys 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. However, the Company 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 Companys other intangible assets with definite lives (consisting of customer lists and royalty agreements) continue to be 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 assets fair value and its carrying value. No
such impairment charges were recorded for 2012. 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. No other impairments were recorded with respect to the Companys other intangible assets with definitive lives during 2011.
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 we
record additional impairment charges to our 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 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). The relevant FASB standard outlines a valuation framework and creates a fair value hierarchy in order
to increase the consistency and comparability of fair value measurements and related disclosures.
69
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
Financial assets and liabilities are measured using inputs from the three levels of the
fair value hierarchy. The three levels are as follows:
Level 1Inputs 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 2Inputs 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 Companys 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.
Level 3Unobservable inputs that reflect the Companys 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.
This hierarchy requires the Company to minimize the use of unobservable inputs and to use observable market data, if available, when
determining fair value. Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Companys market assumptions. Unobservable inputs require significant management judgment or
estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those instances, the fair value measurement is required to be classified using the lowest level of input that
is significant to the fair value measurement. In accordance with the applicable standard, the Company is not permitted to adjust quoted market prices in an active market.
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 Companys
borrowings under both the Tranche A Revolver and the Tranche A-1 Revolver (defined and described in Note 7) approximates fair value because interest rates applicable thereto are variable, based on prevailing market rates.
There were no material changes to the Companys valuation techniques during the year ended December 31, 2012, compared to those
used in prior periods.
Derivative Instruments
Until the execution of the 2011 Credit Agreement (defined in Note 7) as of August 8, 2011, the Company was required by its lenders 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 a prior term loan (such swap agreement was not terminated at the time of the execution of the 2011 Credit Agreement even though it was no
longer required thereunder, but expired by its terms on December 21, 2011). The Companys objective was to offset the variability of cash flows in the interest payments on a portion of the total outstanding variable rate debt. Until
execution of the 2011 Credit Agreement, 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 2011 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.
70
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
Cash Flow Hedges
As described above, to comply with a requirement in a prior credit agreement to offset variability in cash flows related to the interest rate payments on a prior 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 such 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 $54,000 during the year ended December 31, 2011, primarily as a result of
repayment in full of a prior term loan. During the year ended December 31, 2011, the Company did not discontinue any cash flow hedges.
Cash flow hedge accounting is discontinued when: (i) the hedging relationship is no longer highly effective; (ii) the forecasted transaction is no longer probable of occurring on the originally
forecasted date or within an additional two months thereafter, (iii) the hedge relationship is no longer eligible for designation as a hedged transaction; or (iv) the derivative hedging instrument is sold, terminated, or exercised.
Although the interest rate swap agreement was not terminated upon execution of the 2011 Credit Agreement (and remained in effect until its expiration on December 21, 2011), the Company had determined that the hedging relationship would no
longer be highly effective and discontinued hedge accounting thereon as of August 8, 2011. Subsequent to such date, all changes in fair value of the interest rate swap agreement were recorded directly in earnings.
Accumulated other comprehensive income reflects 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. During the year ended December 31, 2011, an expense of $54,000 for the Companys interest rate swap agreement (prior to its expiration) was reclassified
from Accumulated Other Comprehensive Income to earnings as a component of interest expense.
Concentrations of Credit Risk
Customers who account for a significant percentage of the Companys gross sales are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Toys R Us, Inc. and Babies R Us, Inc.
|
|
|
31.3
|
%
|
|
|
39.8
|
%
|
|
|
48.6
|
%
|
Walmart
|
|
|
17.8
|
%
|
|
|
12.7
|
%
|
|
|
9.4
|
%
|
Target
|
|
|
9.6
|
%
|
|
|
8.8
|
%
|
|
|
9.9
|
%
|
The loss of any 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 avoids 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.
71
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
Note 6 Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Land
|
|
$
|
690
|
|
|
$
|
690
|
|
Buildings
|
|
|
2,160
|
|
|
|
2,160
|
|
Machinery and equipment
|
|
|
7,783
|
|
|
|
6,289
|
|
Furniture and fixtures
|
|
|
1,846
|
|
|
|
1,772
|
|
Leasehold improvements
|
|
|
1,121
|
|
|
|
1,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,600
|
|
|
|
12,011
|
|
Less: Accumulated depreciation and amortization
|
|
|
(8,119
|
)
|
|
|
(7,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,481
|
|
|
$
|
5,008
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was approximately $1.1 million, $1.2 million, and $1.0 million for the years ended
December 31, 2012, 2011, and 2010, respectively.
Note 7 Debt
Background
KID and specified domestic subsidiaries executed a Second Amended and Restated Credit Agreement (the 2011 Credit Agreement) as of August 8, 2011, with certain financial institutions
including Bank of America, N.A., as Administrative Agent. The 2011 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, with a $25.0 million sub-facility for letters of credit, and a $5.0 million sub-facility for swing-line loans. A detailed description of the terms of the 2011 Credit Agreement can be found in
Note 7 of the Notes to Consolidated Financial Statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2011.
As of June 30, 2012, the Company was not in compliance with the consolidated leverage ratio covenant under the 2011 Credit Agreement. As a result, the 2011 Credit Agreement was amended, as of
August 13, 2012, via a Waiver and First Amendment to Credit Agreement and First Amendment to Security Agreement (the 2012 Credit Agreement), to among other things, waive such covenant default, amend the financial covenants
applicable to the Company for future periods, and in consideration therefor, amend the terms of the facility. Due primarily to the combined impact of: (i) overall softness of the business; (ii) accruals recorded in the quarter ended September 30,
2012 pertaining to costs associated with the voluntary recall of certain products; and (iii) the interruptions to the Companys operations as a result of Hurricane Sandy, the Company determined that it would not likely be in compliance with one
or both of the financial covenants contained in the 2012 Credit agreement for certain future monthly test periods. As a result, on November 15, 2012, the 2012 Credit Agreement was amended, among other things, to amend the financial covenant
requirements contained therein for future periods (the November Amendment). A detailed description of the terms of the 2012 Credit Agreement and the November Amendment (which are summarized below) can be found in Note 4 of the Notes to
Unaudited Consolidated Financial Statements in the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 (the Q3 2012 10-Q).
On December 21, 2012, the 2012 Credit Agreement, as amended, and all loan documents related thereto, were terminated and the obligations thereunder were refinanced as described below (the
Refinancing). In connection with the Refinancing, all outstanding obligations under the amended 2012 Credit Agreement (approximately $55.5 million) were repaid using proceeds from a new credit agreement executed with Salus Capital
Partners, LLC (the Credit Agreement). As a result of the Refinancing, the Company wrote-off, in the fourth quarter of 2012, approximately $1.4 million in unamortized deferred financing costs originally incurred in connection with the
amended 2012 Credit Agreement.
Under the 2011 Credit Agreement, and as permitted by applicable accounting standards, all of
the Companys indebtedness for borrowed money was classified as long-term debt. Under the new Credit Agreement, the Tranche A Revolver and the Tranche A-1 Revolver (as defined below) are each classified as short term debt. Consolidated
long-term debt at December 31, 2011 was $49.5 million, consisting of all amounts outstanding under the 2011 Credit Agreement (revolver only) at December 31, 2011.
At December 31, 2012, an aggregate of $57.5 million was borrowed under the Credit Agreement ($38.8 million under the Tranche A Revolver and $18.7 million under the Tranche A-1 Revolver). At
December 31, 2011, an aggregate of $49.5 million was borrowed under the 2011 Credit Agreement. At December 31, 2012 and 2011, revolving loan availability was $11.4 million and $10.3 million, respectively.
72
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
Credit Agreement
On December 21, 2012 (amended as of April 16, 2013 as described below), the Company, specified domestic subsidiaries consisting of Kids Line, LLC, Sassy, Inc., LaJobi, Inc., CoCaLo, Inc., I&J
Holdco, Inc., and RB Trademark Holdco, LLC (such entities collectively with the Company, the Borrowers), executed a Credit Agreement (the Credit Agreement) with Salus Capital Partners, LLC, as Lender, Administrative Agent and
Collateral Agent (the Agent), and the other lenders from time to time party thereto (the Lenders). The obligations of the Borrowers under the Credit Agreement are joint and several.
The Credit Agreement provides for an aggregate maximum $80.0 million revolving credit facility, composed of: (i) a revolving $60.0
million tranche (the Tranche A Revolver), with a $5.0 million sublimit for letters of credit; and (ii) a $20.0 million first-in last-out tranche (the Tranche A-1 Revolver). The Borrowers may not request extensions of
credit under the Tranche A Revolver unless they have borrowed the full amount available under the Tranche A-1 Revolver. Borrowers must cash collateralize all outstanding letters of credit.
Loans under the Credit Agreement bear interest at a specified 30-day LIBOR rate (subject to a minimum LIBOR floor of 0.50%), plus a
margin of 4.0% per annum with respect to the Tranche A Revolver and a margin of 11.25% per annum with respect to the Tranche A-1 Revolver. Interest is payable monthly in arrears and on the maturity date of the facility. During the
continuance of any event of default, existing interest rates would increase by 3.50% per annum. The weighted average interest rates for the outstanding loans under the Credit Agreement as of December 31, 2012 were 4.5% with respect to the
Tranche A Revolver and 11.75% with respect to the Tranche A-1 Revolver.
Subject to the borrowing base described below, the
Borrowers may borrow, repay (without premium or penalty) and re-borrow advances under each of the Tranche A Revolver and the Tranche A-1 Revolver until December 21, 2016 (the Maturity Date), at which time all outstanding obligations
under the Credit Agreement are due and payable (subject to early termination provisions). Other than in connection with a permanent reduction of the Tranche A-1 Revolver as described below, repayments shall be first applied to the Tranche A
Revolver, and upon repayment of the Tranche A Revolver in full, to the Tranche A-1 Revolver.
The Borrowers may in their
discretion terminate or permanently reduce the commitments under the Tranche A Revolver or the Tranche A-1 Revolver,
provided
that the Borrowers may not reduce the commitments under the Tranche A-1 Revolver to less than $15.0 million while
commitments under the Tranche A Revolver remain outstanding, and if the commitments under the Tranche A Revolver are terminated or reduced to zero, the commitments under the Tranche A-1 Revolver will be automatically terminated. In the event of such
permanent reduction (or termination of the commitments prior to the Maturity Date), the Borrowers shall pay to the Agent for the benefit of the Lenders or as otherwise determined by the Agent, a termination fee in the amount of: (i) 2.0% of the
amount of the commitments so reduced or outstanding at the time of termination, if reduced or terminated prior to the first anniversary of the closing date of the Credit Agreement (the First Anniversary); (ii) 1.5% of the amount of
the commitments so reduced or outstanding at the time of termination, if reduced or terminated on or after the First Anniversary but prior to the second anniversary of such closing date (the Second Anniversary); and (iii) 0.50% of
the amount of the commitments so reduced or outstanding at the time of termination, if reduced or terminated on or after the Second Anniversary,
provided
that the Borrowers may permanently reduce the commitments under the Tranche A-1 Revolver
from time to time to no less than $15.0 million without the incurrence of any premium, penalty or fee, so long as no event of default has occurred and is continuing.
The Tranche A Revolver is subject to borrowing base limitations based on 95% of the face amount of specified eligible accounts receivable, net of reserves established in the reasonable discretion of the
Agent, including dilution reserves;
plus
the lesser of: (x) 68% of eligible inventory stated at the lower of cost or market value (in accordance with the Borrowers accounting practices), net of reserves established in the
reasonable discretion of the Agent; and (y) 100% of the appraised orderly liquidation value, net of costs and expenses, of eligible inventory stated at the lower of cost or market value, net of inventory reserves;
minus
an availability
block of $4.0 million (or if an event of default exists, such other amount established by the Agent);
minus
customary availability reserves (without duplication).
73
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
The Tranche A-1 Revolver is subject to borrowing base limitations based on the lesser
of: (i) 50% of the fair market value (as determined by an independent appraiser engaged by the Agent from time to time) of specified registered eligible intellectual property, net of reserves established in the reasonable discretion of the
Agent, and (ii) the aggregate commitments for the Tranche A-1 Revolver at such time ($20.0 million at the time of closing); provided that availability under the Tranche A-1 Revolver is capped at 40% of the combined borrowing bases of the
Tranche A Revolver and Tranche A-1 Revolver.
Under the Credit Agreement, the Company is subject to the following financial
covenants (the Financial Covenants):
(a) minimum monthly Adjusted EBITDA (defined below) for the trailing twelve-month period
ending on the last day of each month:
|
|
|
|
|
Trailing Twelve-Month Period Ending
|
|
Minimum
Adjusted
EBITDA
|
|
December 31, 2012
|
|
$
|
8,538,000
|
|
January 31, 2013
|
|
$
|
9,461,000
|
|
February 28, 2013
|
|
$
|
9,853,000
|
|
March 31, 2013
|
|
$
|
9,516,000
|
|
April 30, 2013
|
|
$
|
9,925,000
|
|
May 31, 2013
|
|
$
|
9,782,000
|
|
June 30, 2013
|
|
$
|
10,534,000
|
|
July 31, 2013
|
|
$
|
11,811,000
|
|
August 31, 2013
|
|
$
|
12,007,000
|
|
September 30, 2013
|
|
$
|
12,363,000
|
|
October 31, 2013
|
|
$
|
13,717,000
|
|
November 30, 2013
|
|
$
|
14,411,000
|
|
December 31, 2013
|
|
$
|
14,338,000
|
|
provided
, that, for trailing twelve month periods ending after December 31, 2013, the Agent shall establish
minimum monthly Adjusted EBITDA covenant levels based on those included in the relevant annual business plan required to be provided to the Agent, using a comparable methodology to that used to establish Adjusted EBITDA requirements for 2013,
including a set-back at least equal to the minimum set-back used to establish Adjusted EBITDA requirements for 2013; and
(b) commencing
March 31, 2013, a minimum Consolidated Fixed Charge Coverage Ratio (defined below) of 1.1: 1.0.
As has been previously
disclosed, in March 2013, a large customer of ours deducted approximately $900,000 from its payment of outstanding amounts due (the Deduction). In connection with our investigation of the matter, we have determined that the Deduction
represents the customers annual accounting of product returns. The Company currently believes that a substantial portion of such claim is without merit or can be offset against other amounts owed to us by, or credited to, such customer. As a
result, no amount in excess of our previously accrued 2012 product return reserve for this customer was recorded for the period ended December 31, 2012. Although the Company believes that this matter can be successfully resolved without recording
any additional material amounts, there can be no assurance that this will be the case. As the matter has not been resolved, the Company and the Agent under the Credit Agreement have executed an amendment thereto, to amend the definition of Adjusted
EBITDA for purposes of determining compliance with the financial covenants under the Credit Agreement, commencing with the month ended December 31, 2012 through April 30, 2014 to include an additional add-back to net income for the amount of
any additional expense or accrual in excess of the Companys existing product return reserves in connection with the Deduction, up to a maximum aggregate amount of $600,000 (an Excess Accrual). The Borrowers paid a fee of $50,000 in
connection with the execution of the Amendment, and will pay an additional $50,000 if and when the Borrowers first use the amount of any Excess Accrual as an add-back to net income in determining compliance with the financial covenants as permitted
by the Amendment
For purposes of the definition of Adjusted EBITDA: (i) Duty Amounts refer to all customs
duties, interest, penalties and any other amounts payable or owed to U.S. Customs and Border Protection (U.S. Customs) by LaJobi, Kids Line, CoCaLo or Sassy, to the extent that such amounts relate to specified duty underpayments by such
subsidiaries to U.S. Customs and LaJobis business and staffing practices in Asia prior to March 30, 2011 (the Duty Events); and (ii) Consolidated Net Income means, as of any date of determination, the
Companys consolidated net income for the most recently completed trailing twelve-month period in accordance with GAAP, subject to specified exclusions including, among other things, extraordinary gains and losses for such period, and the
income (or loss) of the Companys subsidiaries under specified circumstances (e.g., the income (or loss) of a subsidiary in which another person has a joint interest, except to the extent of actual distributions received, the income (or loss)
of a subsidiary accrued prior to the date it became a subsidiary, and the income of any subsidiary to the extent distributions made by such subsidiary were not then-permitted).
Adjusted EBITDA is defined in the Credit Agreement as an amount equal to the Companys Consolidated Net Income for the most recently
completed trailing twelve-month period (from the date of determination),
plus
: (a) the following to the extent deducted in calculating such Consolidated Net Income: (i) specified consolidated interest charges; (ii) the
provision for income taxes; (iii) depreciation and amortization expense; (iv) other non-recurring non-cash expenses reducing such Consolidated Net Income for such period (such expenses will be deducted from Adjusted EBITDA during the
period when paid in cash); (v) (a) all Duty Amounts accrued or expensed, (b) the amount of any earnout consideration paid by LaJobi in connection with the Companys purchase of the LaJobi assets in April 2008 (LaJobi
Earnout Consideration), and (c) fees and expenses incurred by the Borrowers in connection with any investigations of the Duty Amounts and Duty Events, in an aggregate amount under clauses (a), (b) and (c) not to exceed the sum,
for all periods, of (x) $14,855,000 less (y) the amount of LaJobi Earnout Consideration, if any, paid by LaJobi other than in accordance with the terms of the Credit Agreement and/or to the extent not deducted in determining Consolidated
Net Income; (vi) professional fees and expenses incurred after July 1, 2012 in an aggregate amount not to exceed $2.0 million through December 31, 2013 plus, in each case, all reasonable and necessary fees and expenses of Alix
Partners in an aggregate amount not to exceed $0.75 million; (vii) restructuring and severance costs in an amount not to exceed $1.0 million (and such additional amounts as are approved by the Agent in its discretion); (viii) expenses
arising as a result of the recall of specified products, in an aggregate amount not to exceed $0.6 million; (ix) actual costs incurred as a result of the wind-down of the Borrowers operations in the United Kingdom, in an aggregate amount
not to exceed $0.1 million; (x) if expensed, reasonable costs, expenses and fees incurred in connection with the Credit Agreement in an aggregate amount not to exceed $0.5 million; and (xi) to the extent included in the Companys
business plan or otherwise acceptable to the Agent, non-cash stock-based compensation expenses; and (xii) for purposes of calculating the financial covenants set forth in Section 7.15, if required to be expensed or accrued during any period
commencing with the month ended December 31, 2012 through and including April 30, 2014 (in addition to related reserves recorded as of the date of the Amendment), the net amount of the deductions from invoices to a large customer of the Company as
reported to the Agent by KID prior to the date of the Amendment Date in an aggregate amount not to exceed $600,000 minus (b) the following to the extent included in calculating such Consolidated Net Income: (i) income tax credits and
(ii) all non-cash items increasing Consolidated Net Income (in each case by the Company and its subsidiaries for such period).
74
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
Consolidated Fixed Charge Coverage Ratio means, at any date of
determination, the ratio of: (a) (i) Adjusted EBITDA for the most recently completed trailing twelve-month period,
minus
(ii) unfinanced capital expenditures made during such period,
minus
(iii) the aggregate amount
of income taxes paid in cash during such period (but not less than zero); to (b) the sum of: (i) specified debt service charges,
plus
(ii) the aggregate amount of all restricted payments (defined generally to mean dividends or
distributions with respect to equity interests, or deposits, sinking funds or payments for the purchase, redemption, retirement or termination of any such equity interests) paid in cash by the Company and its subsidiaries, in each case determined on
a consolidated basis in accordance with GAAP.
Loans under the Credit Agreement are required to be prepaid upon the
occurrence, and with the net proceeds, of certain transactions, including the incurrence of specified indebtedness, most asset sales and debt or equity issuances, as well as extraordinary receipts, including tax refunds, litigation proceeds, certain
insurance proceeds and indemnity payments. Loans under the Credit Agreement are also required to be prepaid with cash collateral required to be held by letter of credit issuers pursuant to the Credit Agreement on account of expired or reduced
letters of credit. Such prepayments will be applied first to the repayment of amounts outstanding under the Tranche A Revolver until paid in full, and then to amounts outstanding under the Tranche A-1 Revolver.
The 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 requirements, notice requirements with respect to specified events, required compliance certificates, and certificates from the Companys independent auditors. As a
result of the delay in filing this Annual Report on Form 10-K, the Company was not in compliance with a covenant under the Credit Agreement that required the delivery of financial statements for 2012 within 90 days of the end of such fiscal year.
Such noncompliance was waived by the Agent on April 2, 2013. In addition, among other restrictions, the Loan Parties (the Borrowers and guarantors, if any) and their subsidiaries (other than specified inactive subsidiaries) are prohibited from:
consummating a merger or other fundamental change; paying cash dividends or distributions; purchasing or redeeming stock (including under the Companys stock purchase plan); incurring additional debt or allowing liens to exist on their assets;
making acquisitions; disposing of assets; issuing equity and consummating other transactions outside of the ordinary course of business; making specified payments and investments; engaging in transactions with affiliates; amending material contracts
to the extent such amendment would result in a default or event of default or would be materially adverse to the Lenders; paying Duty Amounts; or paying any LaJobi Earnout Consideration, subject in each case to limited specified exceptions, the more
significant of which are described below.
Duty Amounts and LaJobi Earnout Consideration may be paid either: (i) in
accordance with the business plan required to be provided to the Agent for the relevant year, or (ii) otherwise, so long as no default or event of default is continuing or would result therefrom, and availability, both before and after giving
effect to such payment, is at least $10.0 million.
With respect to acquisitions, the Borrowers will be permitted to make an
acquisition provided that the Company would be in pro forma compliance with the Financial Covenants, recomputed as of the last day of the most recently ended fiscal quarter for which financial statements are available, such acquisition is initiated
and consummated on a friendly basis, no default or event of default has occurred and is continuing or would result from such acquisition, and the aggregate consideration (including all acquired debt) for all such permitted acquisitions does not
exceed $500,000.
The Company will be permitted to issue and sell equity interests (other than equity interests that mature or
are mandatorily redeemable or redeemable at the option of the holder, in whole or in part, on or prior to the date that is ninety-one days after the Maturity Date), so long as the net proceeds therefrom are applied to repayment of outstanding
obligations under the Credit Agreement, or pursuant to other specified exceptions as set forth in the Credit Agreement.
75
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
The Credit Agreement also requires that the Borrowers provide the Agent with, among
other things, an annual business plan containing specified monthly information and projections, monthly compliance certificates, and frequent and detailed financial, business and collateral reports.
Substantially all cash, other than cash set aside for the benefit of employees (and certain other exceptions), will be swept and applied
to repayment of amounts outstanding under the Credit Agreement.
The Credit Agreement contains customary events of default
(including any failure to remain in compliance with the Financial Covenants). If an event of default occurs and is continuing (in addition to default interest as described above and other remedies available to the Lenders), the Agent may, in its
discretion, declare the commitments under the Credit Agreement to be terminated, declare outstanding obligations thereunder to be due and payable, demand cash collateralization of letters of credit, and/or capitalize any accrued and unpaid interest
by adding such amount to the outstanding principal balance (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, without any action
of the Agent or any Lender). In addition, an event of default under the Credit Agreement could result in a cross-default under certain license agreements that the Company maintains.
The Credit Agreement also contains customary conditions to lending, including that no default or event of default shall exist, or would
result from any proposed extension of credit.
The Company paid fees to the Agent in the aggregate amount of approximately
$1.1 million in connection with the execution of the Credit Agreement. The Borrowers are also required to pay a monthly commitment fee of 0.50% per annum on the aggregate unused portion of each of the Tranche A Revolver and the Tranche A-1
Revolver (payable monthly in arrears); customary letter of credit fronting fees (plus standard issuance and other processing fees) to the applicable issuer; a monthly monitoring fee to the Agent; an annual agency fee, and other customary fees and
reimbursements of expenses. Financing costs, including fees and expenses paid upon execution of the Credit Agreement, were recorded in accordance with applicable financial accounting standards.
In order to secure the obligations of the Loan Parties under the Credit Agreement, each Borrower has pledged 100% of the equity interests
of its domestic subsidiaries (other than inactive subsidiaries), including a pledge of the capital stock of each Borrower (other than the Company), as well as 65% of the equity interests of specified foreign subsidiaries, to the Agent, and has
granted security interests to the Agent in substantially all of its personal property, all pursuant to a Security Agreement, dated as of December 21, 2012, by the Company and the other Borrowers and Loan Parties party thereto from time to time
in favor of the Agent, as Collateral Agent (the Security Agreement). As additional security for Sassy, Inc.s obligations under the Credit Agreement, Sassy, Inc. has granted a mortgage for the benefit of the Agent and the Lenders on
the real property located at 2305 Breton Industrial Park Drive, S.E., Kentwood, Michigan.
2012 Credit Agreement
Unless the context otherwise requires, the following is a summary of the 2012 Credit Agreement, as amended by the November Amendment.
The 2012 Credit Agreement provided for: (i) an aggregate maximum $52.0 million revolving credit facility (the 2012
Revolver), subject to a $47.0 million availability cap, and borrowing base limitations based on 80% of eligible receivables, plus the lesser of $20.0 million and 55% of the value of eligible inventory (minus specified reserves, including for
rent and dilution); (ii) a $5.0 million sub-facility for letters of credit; (iii) a sub-facility for swing-line loans in a maximum amount of $5.0 million; and (iv) a $23.0 million term loan (the 2012 Term Loan). Upon
execution of the 2012 Credit Agreement, $23.0 million of the amount outstanding under the Companys previous revolver was converted into the 2012 Term Loan, and the remaining amounts continued as outstanding under the 2012 Revolver.
Upon submission of the borrowing base certificate due on September 20, 2012, the Borrowers made a required principal repayment in
respect of the 2012 Term Loan in an amount equal to the amount by which the sum of the availability under the 2012 Revolver plus the Loan Parties cash and cash equivalents on such date exceeded $5.0 million (a $1.1 million payment was made).
If at any time thereafter, the borrowing base was increased as a result of specified increases in eligible inventory, the Borrowers were required to make an additional principal pay-down in the amount of such increase and therefore paid an
additional $0.4 million on October 18, 2012. The Borrowers were required to make monthly amortization payments on the 2012 Term Loan based on a 5-year amortization schedule (after giving effect to the September 20, 2012 payment described
above). Amounts repaid on the 2012 Term Loan could not be reborrowed.
76
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
The 2012 Revolver and the 2012 Term Loan bore interest, at the Borrowers option,
at a specified base rate (the highest of (x) the Administrative Agents prime rate, (y) the Federal Funds rate plus 0.50%, and (c) a specified Eurodollar base rate plus 1.0%), or a specified Eurodollar rate based on specified
British Bankers Association LIBOR, plus (in each case) applicable margins. As a result of the Refinancing, an in-kind interest rate of 2% (PIK Interest) previously applicable to the 2012 Term Loan (commencing on a specified date in
December 2012 to the extent the 2012 Term Loan had not been repaid by such date) was waived. With respect to the 2012 Revolver, applicable margins ranged from 1.75% to 3.00% on Eurodollar rate loans and 0.75% to 2.00% on base rate loans, based on
the Companys Consolidated Leverage Ratio for the applicable trailing twelve month period. With respect to the 2012 Term Loan, the applicable margin was 8% on Eurodollar rate loans and 7.0% on base rate loans. During the continuance of any
default under the 2012 Credit Agreement, the applicable margin would have increased by 2% (subject, in all cases other than a default in the payment of principal, to the written consent of the Required Lenders and prior written notice to KID).
Substantially all cash, other than cash set aside for the benefit of employees (and certain other exceptions), was required
to be swept and applied to repayment of the 2012 Revolver.
Under the terms of the 2012 Credit Agreement, the applicable
financial covenants (giving effect to the November Amendment, were as follows: (a) a maximum Consolidated Leverage Ratio for the trailing twelve month period as of the end of each month in the following amounts: September 30, 2012: 6.75 to
1.0; October 31, 2012: 6.65 to 1.0; November 30, 2012: 6.25 to 1.0; December 31, 2012: 5.00 to 1.0; January 31, 2013: 4.75 to 1.0: February 28, 2013: 4.50 to 1.0; March 31, 2013: 4.50 to
1.0; April 30, 2013: 4.25 to 1.0; May 31, 2013: 4.00 to 1.0; June 30, 2013: 4.00 to 1.0; July 31, 2013: 4.00 to 1.0; August 31, 2013: 3:75 to 1.0; September 30, 2013: 3.75 to
1.0; October 31, 2013: 3.50 to 1.0; November 30, 2013: 3.50 to 1.0; and December 31, 2013 (and each trailing 12-month period thereafter): 2.85 to 1.0; and (b) a minimum Consolidated Fixed Charge Coverage Ratio as of the
end of each month in the following amounts: for the three months ending September 30, 2012: 1.40 to 1.0; for the four months ending October 31, 2012: 1.20 to 1.0; for the five months ending November 30, 2012: 0.90 to 1.0; for the six
months ending December 31, 2012: 1.20 to 1.0; for the seven months ending January 31, 2013: 1.15 to 1.0; for the eight months ending February 28, 2013: 1.10 to 1.0; for the nine months ending March 31, 2013: 1.10 to 1.0; for the
ten months ending April 30, 2013: 1.10 to 1.0; for the eleven months ending May 31, 2013: 1.05 to 1.0; for the twelve months ending June 30, 2013: 1.10 to 1.0; for the twelve months ending July 31, 2013: 1.10 to 1.0, for the
twelve months ending August 31, 2013: 1.05 to 1.0; for the twelve months ending September 30, 2013: 1.10 to 1.0; for the twelve months ending October 31, 2013: 1.20 to 1.0; for the twelve months ending November 30, 2013: 1.25 to
1.0; and for the twelve months ending December 31, 2013 and each trailing twelve-month period thereafter: 1.25 to 1.0.
The definitions of Consolidated Fixed Charge Coverage Ratio, Consolidated Leverage Ratio and Covenant EBITDA under the 2012 Credit
Agreement are described in detail in Note 4 of the Notes to Unaudited Consolidated Financial Statements in the Q3 2012 10-Q.
The 2012 Credit Agreement contained customary representations and warranties, as well as various affirmative and negative covenants
described in Note 4 to the Notes to Unaudited Consolidated Financial Statements of the Q3 2012 10-Q, and customary events of default (including any failure to remain in compliance with the applicable amended financial covenants), the consequences of
which were substantially similar to those described in the event of a default under the Credit Agreement.
Security for the
obligations of the Loan Parties under the 2012 Credit Agreement was substantially similar to that described under the Credit Agreement.
The Company paid fees and expenses to the Administrative Agent in the aggregate amount of $375,000 in connection with the execution of the 2012 Credit Agreement (the Arrangement Fee). In
addition, the Company incurred a waiver and amendment fee of $375,000 to the Lenders (the Waiver and Amendment Fee). With respect to each of the Arrangement Fee and the Waiver and Amendment Fee, $187,500 was paid on August 13, 2012,
and as a result of the provisions of the November Amendment (which granted a waiver of specified fees in the event of the pay-off of the obligations under the 2012 Credit Agreement by a specified date), the remaining balance of each of such fees was
waived. The Borrowers were also required to pay a quarterly commitment fee ranging from 0.30% to 0.50% (based on the Consolidated Leverage Ratio) on the daily unused portions of the 2012 Revolver; letter of credit fees ranging from 1.75% to 3.00%
(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 2012 Credit Agreement. The Company paid fees and expenses to the Administrative Agent
and the consenting Lenders in the aggregate amount of approximately $180,000 in connection with the execution of the November Amendment. Financing costs, including the fees and expenses paid upon execution of the 2012 Credit Agreement and the
November Amendment, were recorded in accordance with applicable financial accounting standards.
77
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
Note 8 Accrued Expenses
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Payroll and incentive compensation
|
|
$
|
1,218
|
|
|
$
|
1,938
|
|
Customs duty
|
|
|
9,591
|
|
|
|
9,698
|
|
Royalties
|
|
|
2,897
|
|
|
|
2,881
|
|
LaJobi Earnout Consideration
|
|
|
11,719
|
|
|
|
11,719
|
|
Other (a)
|
|
|
3,096
|
|
|
|
6,082
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,521
|
|
|
$
|
32,318
|
|
|
|
|
|
|
|
|
|
|
(a)
|
No individual item exceeds five percent of current liabilities
|
Note 9 Income Taxes
The Company and its domestic subsidiaries file a consolidated Federal income tax return.
The U.S. and foreign components of (loss) income from operations before income tax provision (benefit) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
United States
|
|
$
|
(4,734
|
)
|
|
$
|
(40,337
|
)
|
|
$
|
20,036
|
|
Foreign
|
|
|
(552
|
)
|
|
|
201
|
|
|
|
990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5,286
|
)
|
|
$
|
(40,136
|
)
|
|
$
|
21,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit) consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(666
|
)
|
|
$
|
(1,426
|
)
|
|
$
|
(2,704
|
)
|
Foreign
|
|
|
127
|
|
|
|
198
|
|
|
|
77
|
|
State
|
|
|
(243
|
)
|
|
|
35
|
|
|
|
561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current
|
|
$
|
(782
|
)
|
|
$
|
(1,193
|
)
|
|
$
|
(2,066
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
41,531
|
|
|
|
(390
|
)
|
|
|
(11,789
|
)
|
Foreign
|
|
|
80
|
|
|
|
21
|
|
|
|
260
|
|
State
|
|
|
7,985
|
|
|
|
72
|
|
|
|
(1,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deferred
|
|
|
49,596
|
|
|
|
(297
|
)
|
|
|
(13,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48,814
|
|
|
$
|
(1,490
|
)
|
|
$
|
(15,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
The income tax provision for 2012 primarily relates to the Company recording valuation
allowances on its deferred tax assets during the year ended December 31, 2012. The valuation allowance for deferred tax assets as of December 31, 2012 and December 31, 2011 was $73.8 million and $23.5 million, respectively. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and other factors. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates all available positive and
negative evidence, including the Companys past operating results, the existence of cumulative losses and near-term forecasts of future taxable income that is consistent with the plans and estimates management is using to manage its underlying
businesses, the amount of taxes paid in available carry-back years, and tax planning strategies. This analysis is updated quarterly. Based on this analysis, the Company determined that an increase in its valuation allowance of $50.3 million was
required for the year ended December 31, 2012 as a result of the Companys reduced estimates of current and future taxable income during the carry forward period, and the fact that it is in a three-year cumulative loss position. The weight
of these negative factors and level of economic uncertainty in our current business supported the Companys conclusion. Management will continue to periodically evaluate the valuation allowance and, to the extent that conditions change, a
portion of such valuation allowance could be reversed in future periods. The valuation allowance increased by approximately $15.5 million in 2011 primarily related to a change in the valuation allowance against deferred tax assets for foreign tax
credit carry-forwards of $12.0 million as a result of the Companys then-current year net operating loss and scheduled expiration dates of the carry-forwards as well as a change in the valuation allowance against deferred tax assets for capital
loss carry-forwards associated with the sale of the Companys former gift business in light of the TRC bankruptcy in the amount of $3.6 million.
The Company is anticipating it will have a loss for Federal income tax purposes for 2012. The Company has taxable income in 2010 to utilize a portion of the anticipated loss. The Company estimates it will
receive approximately a $0.7 million Federal income tax refund related to the net operating loss carry back, which has been recorded as a current income tax receivable, as settlement is expected within the next 12 months.
A reconciliation of the provision (benefit) for income taxes on operations with amounts computed at the statutory Federal rate
(35%) is shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Income tax (benefit) provision at U.S. Federal statutory rate
|
|
$
|
(1,850
|
)
|
|
$
|
(14,048
|
)
|
|
$
|
7,359
|
|
State income tax, net of Federal tax benefit
|
|
|
5,032
|
|
|
|
70
|
|
|
|
(650
|
)
|
Foreign rate differences
|
|
|
401
|
|
|
|
147
|
|
|
|
132
|
|
Change in federal valuation allowance affecting income tax expense
|
|
|
45,023
|
|
|
|
15,350
|
|
|
|
(17,688
|
)
|
Change in unrecognized tax benefits
|
|
|
(334
|
)
|
|
|
187
|
|
|
|
(3,927
|
)
|
Changes in federal rate used
|
|
|
|
|
|
|
|
|
|
|
(1,203
|
)
|
Foreign tax credits/dividends
|
|
|
3
|
|
|
|
(3,413
|
)
|
|
|
489
|
|
Other, net
|
|
|
539
|
|
|
|
217
|
|
|
|
333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,814
|
|
|
$
|
(1,490
|
)
|
|
$
|
(15,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income tax, net of Federal tax benefit and Foreign rate differences for 2012 reflected above
includes increases of approximately $5.1 million and $0.2 million, respectively to the valuation allowance on the Companys deferred tax assets. State income tax, net of Federal tax benefit and Foreign rate differences for 2011 reflected above
includes increases of approximately $0.3 million and $0.1 million, respectively to the valuation allowance on the Companys deferred tax assets.
79
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
The components of the deferred tax asset and the valuation allowance, resulting from
temporary differences between accounting for financial and tax reporting purposes, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Assets (Liabilities)
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
972
|
|
|
$
|
1,172
|
|
Accruals / reserves
|
|
|
4,464
|
|
|
|
5,594
|
|
Capital loss carry forward
|
|
|
8,723
|
|
|
|
8,784
|
|
Foreign tax credit carry forward
|
|
|
17,192
|
|
|
|
15,155
|
|
Federal net operating loss carry forwards
|
|
|
4,810
|
|
|
|
|
|
State net operating loss carry forwards
|
|
|
1,731
|
|
|
|
1,088
|
|
Foreign net operating loss carry forwards
|
|
|
835
|
|
|
|
647
|
|
Intangible assets
|
|
|
34,097
|
|
|
|
39,702
|
|
Depreciation
|
|
|
46
|
|
|
|
39
|
|
Other
|
|
|
1,628
|
|
|
|
1,487
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax asset
|
|
|
74,498
|
|
|
|
73,668
|
|
Less: valuation allowance
|
|
|
(73,824
|
)
|
|
|
(23,522
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
674
|
|
|
|
50,146
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Unrepatriated earnings of foreign subsidiaries
|
|
|
(320
|
)
|
|
|
(333
|
)
|
Depreciation
|
|
|
(146
|
)
|
|
|
(120
|
)
|
Intangible assets
|
|
|
(272
|
)
|
|
|
(75
|
)
|
Cumulative translation adjustment
|
|
|
(695
|
)
|
|
|
(711
|
)
|
Other
|
|
|
|
|
|
|
(139
|
)
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liability
|
|
|
(1,433
|
)
|
|
|
(1,378
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax (liability) asset
|
|
$
|
(759
|
)
|
|
$
|
48,768
|
|
|
|
|
|
|
|
|
|
|
Provisions are made for estimated United States and foreign income taxes, less available tax credits and
deductions, which may be incurred on the remittance of foreign subsidiaries undistributed earnings. At December 31, 2012 and 2011, the Company has recorded a deferred tax liability of $0.3 million and $0.3 million, respectively,
related to the repatriation of its foreign subsidiaries undistributed earnings that are not treated as permanently reinvested. The Company has sufficient foreign tax credit carry forwards to offset this deferred tax liability.
The Company has federal net operating loss carry forwards of $13.7 million which expire in 2032, state net operating loss carry forwards
of $85.2 million which expire in 2018-2032, and foreign net operating loss carry forwards of $3.6 million which are indefinite in nature. The Company has foreign tax credits carry forwards of $17.1 million which expire in 2015-2022 and a
capital loss carry forward of $23.0 million which expires in 2016.
To evaluate a tax position, the Company must first
determine whether it is more likely than not that the tax position will be sustained upon examination by the relevant tax authorities based on its technical merits. If a tax position meets such recognition threshold, it is then measured at the
largest amount of benefit that is greater than 50 percent likely of being realized upon settlement with a taxing authority to determine the amount of benefit to recognize in the financial statements. The liability for unrecognized tax benefits
is classified as non-current unless the liability is expected to be settled in cash within 12 months of the reporting date.
80
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Balance at January 1
|
|
$
|
729
|
|
|
$
|
542
|
|
Increases related to prior year tax positions
|
|
|
38
|
|
|
|
372
|
|
Decreases related to prior year tax positions
|
|
|
(15
|
)
|
|
|
|
|
Reductions due to lapsed statute of limitations
|
|
|
(357
|
)
|
|
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
395
|
|
|
$
|
729
|
|
|
|
|
|
|
|
|
|
|
The above table includes interest and penalties of $78,000 as of December 31, 2012 and interest and
penalties of $149,000 as of December 31, 2011. The Company has elected to record interest and penalties as an income tax expense, in accordance with applicable accounting standards. Included in the liability for unrecorded tax
benefits as of December 31, 2012 is $291,000 of unrecognized tax benefits that, if recognized, would impact the effective tax rate. 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 $235,000 within twelve months of December 31, 2012 and such amount is reflected on
the Companys consolidated balance sheet as current income taxes payable.
The Company files federal and state income tax
returns, as applicable, in the United States, Australia, the European Union, and the United Kingdom. The Company is currently under examination in several tax jurisdictions and remains subject to examination until the statute of limitations
expires for the applicable tax jurisdiction. For U.S. federal income tax purposes, all years prior to 2009 are closed. The Company received a letter from the Internal Revenue Service indicating the 2011 tax year has been selected for examination.
The examination is expected to commence in the second quarter of 2013. In states and foreign jurisdictions, the years subsequent to 2008 remain open and are currently under examination or are subject to examination by the taxing authorities.
Note 10 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 Companys 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.
The weighted average common shares outstanding included in the computation of basic and diluted net earnings (loss) per share are set
forth below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Weighted average common shares outstanding Basic
|
|
|
21,829
|
|
|
|
21,671
|
|
|
|
21,547
|
|
Dilutive effect of common shares issuable upon exercise of stock options, RSUs and SARs
|
|
|
|
|
|
|
|
|
|
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding assuming dilution
|
|
|
21,829
|
|
|
|
21,671
|
|
|
|
21,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
The computation of net loss per diluted common share for the years ended
December 31, 2012 and 2011, and net income per diluted common share for the year ended December 31, 2010, excluded 427,883, 662,804 and 744,403 stock options, respectively, because their inclusion would be anti-dilutive as a result of the
net loss in 2012 and 2011, and their exercise price exceeded the average market price in 2010.
The computation of net loss
per diluted common share for the years ended December 31, 2012 and 2011, and net income per diluted common share for the year ended December 31, 2010, excluded 1,172,556, 1,052,905 and 341,058 stock appreciation rights (SARs),
respectively, because their inclusion would be anti-dilutive as a result of the net loss in 2012 and 2011, and their exercise price exceeded the average market price in 2010.
Note 11 Related Party Transactions
Effective September 12, 2012, Renee Pepys Lowe was appointed to the position of President of Kids Line and CoCaLo.
CoCaLo contracts for warehousing and distribution services from a company that is managed by the spouse of Ms. Lowe. For the year ended December 31, 2012, CoCaLo paid approximately $2.9 million to such company for these services.
From September 12, 2011 through March 13, 2013, Mr. Benaroya served as interim Executive Chairman and acting Chief Executive
Officer of the Company Pursuant to an agreement between the Company and RB, Inc., a Delaware corporation wholly-owned by Mr. Benaroya (the Interim Agreement), which provided for the full-time services of Mr. Benaroya for a fee of
$100,000 per calendar month during its term. Notwithstanding the stated contractual amount, commencing as of September 2012, RB, Inc. advised the Company to reduce the fee to $75,000 per calendar month. Mr. Benaroya was not paid directors fees
during the term of his engagement as interim Executive Chairman, nor did he participate in any bonus program, employee benefit plan or other compensation arrangement with the Company. The interim Agreement was terminated on March 13, 2013, in
connection with the appointment of Mr. Benaroya as President and Chief Executive Officer of the Company. The Company paid $1,050,000 and $431,500 to RB, Inc. for the services of Mr. Benaroya pursuant to the Interim Agreement for the year ended
December 31, 2012 and 2011, respectively.
Note 12 Leases
At December 31, 2012, the Company and its subsidiaries were obligated under operating lease agreements
(principally for buildings and other leased facilities) for remaining lease terms ranging from one year to five years.
Rent
expense for the years ended December 31, 2012, 2011, and 2010 amounted to approximately $3.5 million, $3.5 million and $3.2 million, respectively.
The approximate aggregate minimum future rental payments as of December 31, 2012 under operating leases are as follows (in thousands):
|
|
|
|
|
2013
|
|
$
|
3,197
|
|
2014
|
|
|
1,114
|
|
2015
|
|
|
985
|
|
2016
|
|
|
816
|
|
2017
|
|
|
754
|
|
Thereafter
|
|
|
128
|
|
|
|
|
|
|
Total
|
|
$
|
6,994
|
|
|
|
|
|
|
Note 13 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 1990 Program)). 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
Companys sole discretion, however, the Credit Agreement currently prohibits the Company from making purchases under this share repurchase program. The share repurchase program may be suspended or discontinued at any time without prior notice.
During the twelve-month periods ended December 31, 2012, 2011, and 2010, the Company did not repurchase any shares
pursuant to the current share repurchase program, the 1990 Program or otherwise. The 1990 Program authorized KID to repurchase an aggregate of 7,000,000 shares of its common stock, and in connection therewith, a total of 5,643,284 shares had been
repurchased in prior years. During the years ended December 31, 2012, 2011, and 2010, the Company issued from treasury stock 85,961, 191,329 and 65,631 shares, respectively, that had been previously purchased under the 1990 Program.
82
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
Note 14 Shareholders Equity
Share-Based Compensation
Equity Plans
As of December 31, 2012, the Company maintained
(i) its Equity Incentive Plan (the EI Plan), which is a successor to the Companys 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 Companys Amended and Restated 2004 Employee Stock Purchase Plan (the 2004 ESPP). The EI Plan and the
2009 ESPP were each approved by the Companys shareholders on July 10, 2008, and the 2009 ESPP was suspended for the 2012 and 2013 plan years. In addition, the Company may issue equity awards outside of the Plans. As of December 31,
2012, an aggregate of 597,015 stock appreciation rights are outstanding that were granted as inducement awards outside of the EI Plan as a result of the limited number of shares remaining available for issuance thereunder. These grants vest ratably
over a five year period, and if unexercised, generally expire on September 14, 2017. The exercise or measurement price for equity awards issued under the Plans or otherwise is generally equal to the closing price of KIDs 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 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 December 31, 2012, 980,914 shares were available for
issuance under the EI Plan. No further awards may be made under the EI Plan as of July 10, 2013.
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 December 31, 2012, 6,663 shares were available for issuance under the 2009 ESPP. As noted above, the 2009 ESPP
has been suspended for the 2012 and 2013 plan years.
Impact on Net (Loss)/Income
The components of share-based compensation expense for each of 2012, 2011, and 2010 follow (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Stock option expense
|
|
$
|
301
|
|
|
$
|
823
|
|
|
$
|
907
|
|
Restricted stock expense
|
|
|
36
|
|
|
|
355
|
|
|
|
433
|
|
Restricted stock unit expense
|
|
|
215
|
|
|
|
193
|
|
|
|
154
|
|
SAR expense
|
|
|
543
|
|
|
|
627
|
|
|
|
511
|
|
ESPP expense
|
|
|
|
|
|
|
182
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based payment expense
|
|
$
|
1,095
|
|
|
$
|
2,180
|
|
|
$
|
2,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
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 years ended December 31, 2012, 2011, and
2010. 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 options pricing model using assumptions with respect to dividend yield, risk-free interest rate, volatility and expected term, which are discussed
below for SARs only, as there were no stock options granted during the years ended December 31, 2012, 2011 and 2010. Expected volatilities are calculated based on the historical volatility of KIDs 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 awards granted are expected to be outstanding. Management monitors stock option exercises and
employee termination patterns to estimate forfeitures 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 KIDs Common Stock in the future at a pre-determined 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 Non-Qualified Stock Options (stock options which are not Incentive Stock Options).
As of December 31, 2012, the total remaining unrecognized compensation cost related to unvested stock options, net of forfeitures,
was approximately $0.1 million, and is expected to be recognized over a weighted-average period of 1.5 years.
Activity
regarding outstanding options for 2012, 2011, and 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
All Stock Options Outstanding
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
Options Outstanding as of December 31, 2009
|
|
|
880,615
|
|
|
$
|
13.14
|
|
Options Granted
|
|
|
|
|
|
|
|
|
Options Forfeited/Cancelled*
|
|
|
(176,440
|
)
|
|
|
11.61
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding as of December 31, 2010
|
|
|
704,175
|
|
|
|
13.53
|
|
Options Granted
|
|
|
|
|
|
|
|
|
Options Forfeited/Cancelled*
|
|
|
(257,200
|
)
|
|
|
15.23
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding as of December 31, 2011
|
|
|
446,975
|
|
|
|
12.55
|
|
Options Granted
|
|
|
|
|
|
|
|
|
Options Forfeited/Cancelled*
|
|
|
(31,400
|
)
|
|
|
14.40
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding as of December 31, 2012
|
|
|
415,575
|
|
|
$
|
12.41
|
|
|
|
|
|
|
|
|
|
|
Option price range at December 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, $0 and $239,050 at December 31, 2012, 2011 and 2010, respectively. The aggregate intrinsic value is the
total pre-tax value of in-the-money options, which is the difference between the fair value at the measurement date and the exercise price of each option. There were no stock options exercised and 59,920, 154,200 and 147,400 stock options vested for
the years ended December 31, 2012, 2011, and 2010, respectively. The weighted average fair value of stock options vested for the years ended December 31, 2012, 2011, and 2010, was $306,384, $868,226, and $806,518, respectively.
84
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
The following table summarizes information about fixed-price stock options outstanding
at December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
Options Exercisable
|
|
|
|
|
Number
|
|
|
Weighted Average
|
|
Weighted
|
|
|
Number
|
|
|
Weighted
|
|
|
|
|
Outstanding
|
|
|
Remaining
|
|
Average
|
|
|
Exercisable
|
|
|
Average
|
|
Exercise Prices
|
|
|
at 12/31/12
|
|
|
Contractual Life
|
|
Exercise Price
|
|
|
at 12/31/12
|
|
|
Exercise Price
|
|
$
|
34.05
|
|
|
|
975
|
|
|
1 Year
|
|
$
|
34.05
|
|
|
|
975
|
|
|
$
|
34.05
|
|
|
13.05
|
|
|
|
20,000
|
|
|
2.25 Years
|
|
|
13.05
|
|
|
|
20,000
|
|
|
|
13.05
|
|
|
13.06
|
|
|
|
15,000
|
|
|
2.25 Years
|
|
|
13.06
|
|
|
|
15,000
|
|
|
|
13.06
|
|
|
11.52
|
|
|
|
20,000
|
|
|
3 Years
|
|
|
11.52
|
|
|
|
20,000
|
|
|
|
11.52
|
|
|
15.05
|
|
|
|
60,000
|
|
|
3.75 Years
|
|
|
15.05
|
|
|
|
60,000
|
|
|
|
15.05
|
|
|
14.90
|
|
|
|
10,000
|
|
|
4.5 Years
|
|
|
14.90
|
|
|
|
10,000
|
|
|
|
14.90
|
|
|
16.77
|
|
|
|
139,600
|
|
|
5 Years
|
|
|
16.77
|
|
|
|
139,600
|
|
|
|
16.77
|
|
|
7.28
|
|
|
|
75,000
|
|
|
5.5 Years
|
|
|
7.28
|
|
|
|
60,000
|
|
|
|
7.28
|
|
|
6.63
|
|
|
|
75,000
|
|
|
6.75 Years
|
|
|
6.63
|
|
|
|
45,000
|
|
|
|
6.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
415,575
|
|
|
|
|
|
$ 12.41
|
|
|
|
370,575
|
|
|
$
|
13.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining life of the outstanding options as of December 31, 2012, 2011, and
2010, is 4.8 years, 5.8 years, and 6.8 years, respectively.
A summary of the Companys unvested stock options at
December 31, 2012, and changes during 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
|
|
|
(59,920
|
)
|
|
$
|
5.11
|
|
Forfeited/cancelled*
|
|
|
(2,280
|
)
|
|
$
|
6.58
|
|
|
|
|
|
|
|
|
|
|
Unvested options at December 31, 2012
|
|
|
45,000
|
|
|
$
|
3.90
|
|
|
|
|
|
|
|
|
|
|
*
|
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 KIDs Common Stock on the New York Stock Exchange on the date of grant.
During the years ended
December 31, 2012, 2011, and 2010, there were no shares of restricted stock issued under the EI Plan or otherwise. At December 31, 2012, there were no shares of unvested restricted stock outstanding. Restricted stock grants generally have
a vesting period of five years. 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 KIDs Common Stock effective on the date the award is made.
85
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
A summary of the Companys unvested restricted stock for the years 2012, 2011 and
2010 is as follows:
|
|
|
|
|
|
|
|
|
Unvested Restricted Stock
|
|
Restricted
Stock
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Unvested restricted stock at December 31, 2009
|
|
|
56,980
|
|
|
$
|
15.84
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(25,550
|
)
|
|
$
|
15.94
|
|
Forfeited/cancelled*
|
|
|
(2,160
|
)
|
|
$
|
13.65
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock at December 31, 2010
|
|
|
29,270
|
|
|
$
|
15.91
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(23,970
|
)
|
|
$
|
16.09
|
|
Forfeited/cancelled*
|
|
|
(2,580
|
)
|
|
$
|
13.65
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock at December 31, 2011
|
|
|
2,720
|
|
|
$
|
16.43
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(2,380
|
)
|
|
$
|
16.38
|
|
Forfeited/cancelled*
|
|
|
(340
|
)
|
|
$
|
16.77
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock at December 31, 2012
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
*
|
See disclosure below regarding forfeitures.
|
As of December 31, 2012, there was no unrecognized compensation cost related to issuances of restricted stock.
Restricted Stock Units
A Restricted Stock Unit (RSU) is a
notional account representing a participants 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 grantees 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. RSUs issued under the EI Plan vest (and will be
settled) ratably over a five-year period commencing from the date of grant and are classified as equity in the consolidated balance sheets.
The fair value of each RSU grant is estimated on the grant date. The fair value of RSUs is set using the closing price of KIDs 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. There were 127,250, 54,000 and 157,750 RSUs granted, and 33,590, 37,010 and
8,740 RSUs vested during the years ended December 31, 2012, 2011 and 2010, respectively.
86
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
The following table summarizes information about RSU activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Restricted
|
|
|
Average
|
|
|
|
Stock
|
|
|
Grant-Date
|
|
Unvested RSUs
|
|
Units
|
|
|
Fair Value
|
|
Unvested at December 31, 2009
|
|
|
41,120
|
|
|
$
|
5.23
|
|
Granted
|
|
|
157,750
|
|
|
$
|
5.20
|
|
Vested
|
|
|
(8,740
|
)
|
|
$
|
5.30
|
|
Forfeited/cancelled*
|
|
|
(15,400
|
)
|
|
$
|
5.07
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2010
|
|
|
174,730
|
|
|
$
|
5.22
|
|
Granted
|
|
|
54,000
|
|
|
$
|
5.80
|
|
Vested
|
|
|
(37,010
|
)
|
|
$
|
5.24
|
|
Forfeited/cancelled*
|
|
|
(43,160
|
)
|
|
$
|
5.04
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2011
|
|
|
148,560
|
|
|
$
|
5.47
|
|
Granted
|
|
|
127,250
|
|
|
$
|
2.70
|
|
Vested
|
|
|
(33,590
|
)
|
|
$
|
5.22
|
|
Forfeited/cancelled*
|
|
|
(48,970
|
)
|
|
$
|
4.41
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2012
|
|
|
193,250
|
|
|
$
|
3.96
|
|
|
|
|
|
|
|
|
|
|
*
|
See disclosure below regarding forfeitures.
|
As of December 31, 2012, there was approximately $0.6 million of unrecognized compensation cost related to unvested RSUs. That cost is expected to be recognized over a weighted-average period of 3.2
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 the Companys Common Stock on the New York Stock Exchange on the date of
grant. There were 975,015, 182,500 and 536,250 SARs granted, and 121,230, 227,310 and 139,960 SARs vested during the years ended December 31, 2012, 2011, and 2010, respectively. SARs are accounted for at fair value at the date of grant in the
consolidated income statement, 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 2012. There were 176,043 SARs exercised in 2011, of which
1,100 were settled in cash. There were 55,180 SARs exercised in 2010, of which 24,089 were settled in cash.
The assumptions
used to estimate the fair value of the SARs granted during the years ended December 31, 2012, 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Dividend yield
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
Risk-free interest rate
|
|
|
0.78
|
%
|
|
|
1.39
|
%
|
|
|
2.24
|
%
|
Volatility
|
|
|
86.9
|
%
|
|
|
89.5
|
%
|
|
|
83.2
|
%
|
Expected term (years)
|
|
|
5.0
|
|
|
|
4.5
|
|
|
|
5.0
|
|
Weighted-average fair value of SARs granted
|
|
$
|
1.26
|
|
|
$
|
3.98
|
|
|
$
|
3.78
|
|
87
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
Activity regarding outstanding SARs for 2012, 2011, and 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
All Stock Appreciation Rights Outstanding
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
SARs Outstanding as of December 31, 2009
|
|
|
717,943
|
|
|
$
|
3.02
|
|
SARs Granted
|
|
|
536,250
|
|
|
$
|
5.67
|
|
SARs Exercised
|
|
|
(55,180
|
)
|
|
$
|
4.84
|
|
SARs Forfeited/Cancelled*
|
|
|
(87,500
|
)
|
|
$
|
3.51
|
|
|
|
|
|
|
|
|
|
|
SARs Outstanding as of December 31, 2010
|
|
|
1,111,513
|
|
|
$
|
4.17
|
|
SARs Granted
|
|
|
182,500
|
|
|
$
|
6.08
|
|
SARs Exercised
|
|
|
(176,043
|
)
|
|
$
|
1.44
|
|
SARs Forfeited/Cancelled*
|
|
|
(330,280
|
)
|
|
$
|
3.19
|
|
|
|
|
|
|
|
|
|
|
SARs Outstanding as of December 31, 2011
|
|
|
787,690
|
|
|
$
|
5.63
|
|
SARs Granted
|
|
|
975,015
|
|
|
$
|
1.87
|
|
SARs Exercised
|
|
|
|
|
|
$
|
|
|
SARs Forfeited/Cancelled*
|
|
|
(241,320
|
)
|
|
$
|
4.67
|
|
|
|
|
|
|
|
|
|
|
SARs Outstanding as of December 31, 2012
|
|
|
1,521,385
|
|
|
$
|
3.38
|
|
|
|
|
|
|
|
|
|
|
SARs price range at December 31, 2012
|
|
$
|
1.34-8.50
|
|
|
|
|
|
*
|
See disclosure below regarding forfeitures.
|
The following table summarizes information about SARs outstanding at December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs Outstanding
|
|
|
|
|
SARs Exercisable
|
|
|
|
|
Number
|
|
|
Weighted Average
|
|
Weighted
|
|
|
Number
|
|
|
Weighted
|
|
|
|
|
Outstanding
|
|
|
Remaining
|
|
Average
|
|
|
Exercisable
|
|
|
Average
|
|
Exercise Prices
|
|
|
at 12/31/12
|
|
|
Contractual Life
|
|
Exercise Price
|
|
|
at 12/31/12
|
|
|
Exercise Price
|
|
$
|
6.43
|
|
|
|
83,920
|
|
|
5.75 Years
|
|
$
|
6.43
|
|
|
|
67,940
|
|
|
$
|
6.43
|
|
|
1.53
|
|
|
|
50,000
|
|
|
6.25 Years
|
|
|
1.53
|
|
|
|
30,000
|
|
|
|
1.53
|
|
|
5.34
|
|
|
|
10,000
|
|
|
6.50 Years
|
|
|
5.34
|
|
|
|
6,000
|
|
|
|
5.34
|
|
|
4.79
|
|
|
|
30,000
|
|
|
7.25 Years
|
|
|
4.79
|
|
|
|
12,000
|
|
|
|
4.79
|
|
|
5.03
|
|
|
|
160,950
|
|
|
7.25 Years
|
|
|
5.03
|
|
|
|
70,500
|
|
|
|
5.03
|
|
|
8.17
|
|
|
|
90,000
|
|
|
7.50 Years
|
|
|
8.17
|
|
|
|
36,000
|
|
|
|
8.17
|
|
|
7.35
|
|
|
|
17,000
|
|
|
7.50 Years
|
|
|
7.35
|
|
|
|
6,800
|
|
|
|
7.35
|
|
|
8.50
|
|
|
|
50,000
|
|
|
8.00 Years
|
|
|
8.50
|
|
|
|
|
|
|
|
|
|
|
7.02
|
|
|
|
3,000
|
|
|
8.25 Years
|
|
|
7.02
|
|
|
|
3,000
|
|
|
|
7.02
|
|
|
4.65
|
|
|
|
20,000
|
|
|
8.50 Years
|
|
|
4.65
|
|
|
|
4,000
|
|
|
|
4.65
|
|
|
5.17
|
|
|
|
85,500
|
|
|
8.50 Years
|
|
|
5.17
|
|
|
|
17,100
|
|
|
|
5.17
|
|
|
3.65
|
|
|
|
12,000
|
|
|
8.50 Years
|
|
|
3.65
|
|
|
|
2,400
|
|
|
|
3.65
|
|
|
3.02
|
|
|
|
240,750
|
|
|
9.25 Years
|
|
|
3.02
|
|
|
|
|
|
|
|
|
|
|
1.41
|
|
|
|
71,250
|
|
|
9.50 Years
|
|
|
1.41
|
|
|
|
|
|
|
|
|
|
|
1.34
|
|
|
|
597,015
|
|
|
9.75 Years
|
|
|
1.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,521,385
|
|
|
|
|
$
|
3.38
|
|
|
|
255,740
|
|
|
$
|
5.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining life of the outstanding SARs as of December 31, 2012, 2011 and 2010 is 8.6 years, 8.2
years and 8.6 years, respectively.
88
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
A summary of the Companys unvested SARs at December 31, 2012, and changes
during 2012 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Shares
|
|
|
Grant Date
Fair
Value
|
|
Unvested, December 31, 2011
|
|
|
583,740
|
|
|
$
|
3.64
|
|
Granted
|
|
|
975,015
|
|
|
$
|
1.26
|
|
Vested
|
|
|
(121,230
|
)
|
|
$
|
3.41
|
|
Forfeited*
|
|
|
(171,880
|
)
|
|
$
|
2.85
|
|
|
|
|
|
|
|
|
|
|
Unvested, December 31, 2012
|
|
|
1,265,645
|
|
|
$
|
1.94
|
|
|
|
|
|
|
|
|
|
|
*
|
See disclosure below regarding forfeitures.
|
As of December 31, 2012, there was approximately $2.0 million of unrecognized compensation cost related to non-vested SARs. That cost is expected to be recognized over a weighted average period of
3.4 years.
The aggregate intrinsic value of the non-vested and vested outstanding SARs at December 31, 2012, 2011, and
2010, was $136,348, $81,500 and $4,877,000, respectively. The aggregate intrinsic value is the total pre-tax 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. The
weighted average fair value of SARs vested for the years ended December 31, 2012, 2011, and 2010, was $413,000, $634,000 and $270,000, respectively.
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 non-vested and/or vested but unexercised Options/SARs. Pursuant to the Companys Plans, upon the termination of
employment of a grantee, such grantees 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.
Notwithstanding the foregoing, with respect to the termination of the employment with the Company of Bruce G. Crain, the Companys
former CEO as of September 12, 2011, an aggregate of 80,000 unvested options that would otherwise have been forfeited in connection with such termination were automatically vested in accordance with the terms of his employment agreement with
the Company. Such accelerated options remained exercisable until December 11, 2011, and then terminated
.
The acceleration of Mr. Crains vesting resulted in acceleration of compensation expense.
Restricted Stock/RSU Forfeitures
All of the forfeited Restricted Stock and RSUs described in the chart 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 Companys Restricted Stock and RSUs, upon a grantees termination of employment, such grantees outstanding unvested Restricted Stock and RSUs are typically forfeited,
except in the event of disability or death, in which case all restrictions lapse. Notwithstanding the foregoing, with respect to Mr. Crains termination of employment as of September 12, 2011, an aggregate of 21,250 unvested shares of
restricted stock that would otherwise have been forfeited in connection with such termination were automatically vested in accordance with the terms of his employment agreement with the Company. The acceleration of Mr. Crains vesting
resulted in acceleration of compensation expense.
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
KIDs 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 KIDs 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 KIDs 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
December 31, 2012 and 2011, 6,663 shares remained available for future issuance under the 2009 ESPP. The Company has suspended the 2009 ESPP for fiscal years 2012 and 2013, and deregistered such remaining shares.
89
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
The following table summarizes the exercise prices of options exercised under the 2009
ESPP for the 2011 and 2010 plan years, and the aggregate number of shares purchased thereunder, is as follows:
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan
|
|
|
|
2011
|
|
|
2010
|
|
Exercise Price
|
|
$
|
2.69
|
|
|
$
|
3.98
|
|
Shares Purchased
|
|
|
54,284
|
|
|
|
61,149
|
|
The fair value of each option granted under the 2009 ESPP for the 2011 and 2010 plan years was estimated
on the date of grant using the Black-Scholes-Merton option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Risk-free interest rate
|
|
|
0.29
|
%
|
|
|
0.45
|
%
|
Volatility
|
|
|
73.5
|
%
|
|
|
89.2
|
%
|
Expected term (years)
|
|
|
1.0
|
|
|
|
1.0
|
|
Expected volatilities are calculated based on the historical volatility of KIDs 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 under each of the 2009 ESPP is one year, or the equivalent of the annual plan year.
Note 15 401(k) Plan
KID and its U.S. subsidiaries maintain 401(k) Plans to which employees may, up to certain prescribed limits, contribute
a portion of their compensation, and a portion of these contributions is matched by the relevant employer (other than CoCaLo). The provision for contributions charged to operations for the years ended December 31, 2012, 2011, and 2010, was
approximately $0.3 million, $0.3 million and $0.4 million, respectively.
Note 16 Concentrations of Risk and Geographic Information
The following table represents net sales and assets of the Company by geographic area (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Net domestic sales
|
|
$
|
220,245
|
|
|
$
|
243,003
|
|
|
$
|
266,347
|
|
Net foreign sales (Australia and United Kingdom)**
|
|
|
9,241
|
|
|
|
9,607
|
|
|
|
9,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
229,486
|
|
|
$
|
252,610
|
|
|
$
|
275,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic assets
|
|
$
|
137,645
|
|
|
$
|
186,424
|
|
|
|
|
|
Foreign assets (Australia, United Kingdom and Asia)
|
|
|
3,249
|
|
|
|
6,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
140,894
|
|
|
$
|
192,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
|
Excludes export sales from the United States
|
90
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
Closure of U.K. Operations
. In light of the unprofitability of Kids Lines
U.K. operations, the Company substantially completed the wind-down of such operations, as of December 31, 2012 with minimal negative financial impact to the Company.
The Companys consolidated foreign sales from operations, including export sales from the United States, aggregated $25.0 million, $18.9 million and $22.9 million for the years ended
December 31, 2012, 2011, and 2010, respectively.
A measure of profit or loss and long lived assets for each of the last
three fiscal years can be found in the Consolidated Statements of Operations and the Consolidated Balance Sheets, respectively.
The Company currently categorizes its sales in five product categories: Hard Good Basics, Soft Good Basics, Toys and Entertainment,
Accessories and Décor, and Other. Hard Good Basics includes cribs and other nursery furniture, feeding, food preparation and kitchen products, baby gear and organizers. Soft Good Basics includes bedding, blankets and mattresses. 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 Companys
consolidated net sales by product category, as a percentage of total consolidated net sales, for the years ended December 31, 2012, 2011, and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Hard Good Basics
|
|
|
37.3
|
%
|
|
|
35.5
|
%
|
|
|
38.9
|
%
|
Soft Good Basics
|
|
|
35.2
|
%
|
|
|
38.3
|
%
|
|
|
38.1
|
%
|
Toys and Entertainment
|
|
|
17.9
|
%
|
|
|
14.2
|
%
|
|
|
11.8
|
%
|
Accessories and Décor
|
|
|
8.4
|
%
|
|
|
10.1
|
%
|
|
|
10.3
|
%
|
Other
|
|
|
1.2
|
%
|
|
|
1.9
|
%
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During each of 2012, 2011, and 2010, approximately 74%, of the Companys dollar volume of purchases
was attributable to manufacturing in the Peoples Republic of China (PRC). The PRC currently enjoys permanent normal trade relations (PNTR) status under U.S. tariff laws, which generally 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. In addition, certain categories of wooden bedroom furniture previously imported from the PRC by the Companys LaJobi subsidiary were also subject to anti-dumping duties. See Note 17.
In 2012, 2011, and 2010, the suppliers accounting for the greatest dollar volume of the Companys purchases accounted for
approximately 19%, 24%, and 18%, respectively, of such purchases and the five largest suppliers accounted for approximately 44%, 48%, and 44%, respectively, in the aggregate.
See Note 5 above for information regarding dependence on certain large customers.
Note 17 Litigation, Commitments and Contingencies
(a) LaJobi Anti-Dumping Duties and LaJobi Earnout Consideration
In late December 2010, the Companys 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 companys 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 LaJobis import practices. As a result, the Board initiated an
investigation, supervised by a Special Committee of three non-management members of the Board. The Boards 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, LaJobis then-President, Lawrence Bivona, and LaJobis then-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.
91
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
In connection with the forgoing, 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 December 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 $7.9 million (including approximately $0.8 million in interest). Of the total amount accrued as of December 31, 2012, $58,000 was recorded for anticipated interest expense in the quarter ended December 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 previously-disclosed restatement of certain prior period financial statements (the
Restatement), these amounts are recorded in the periods to which they relate. Previously, the Company had recorded the applicable anticipated anti-dumping duty payment requirements (and related interest) as of 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.
In the fourth quarter of 2012, the Company completed and submitted to U.S. Customs a voluntary prior disclosure, which included the
Companys final determination of amounts it believes are owed, as well as proposed settlement amounts and proposed payment terms with respect to anti-dumping duties owed by LaJobi (the Settlement Submission). As part of the
Settlement Submission, the Company included a payment of $0.3 million in respect of the LaJobi matters, such payment to be credited against the amounts that U.S. Customs determines is to be paid in satisfaction of the Companys anti-dumping
duty matters (see paragraph (b) below for a discussion of payments made with respect to certain of the Companys other operating subsidiaries).
As the Focused Assessment is still pending, and U.S. Customs has not yet responded to the Settlement Submission, it is possible that the actual amount of duties owed for the periods covered thereby will
be higher than the amounts determined to be owed by the Company (and accrued in connection therewith). In any event, additional interest will continue to accrue until full 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 duties determined
by U.S. Customs to be owed by LaJobi, and any such 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 remains committed to working closely with U.S. Customs to address issues relating to incorrect duties. The Company has also implemented 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 Companys 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 and the facts and circumstances discovered in the Companys preparation for the Focused Assessment and in its related investigation into LaJobis 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 finders fee) was payable. Accordingly, prior to the Restatement,
the Company had not recorded any amounts related thereto in the Companys 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. Bivonas 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. Bivonas brother, Joseph Bivona, and the LaJobi seller. Hearings with respect to the arbitration are currently in
progress.
92
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
Because the Restatement 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 Companys affirmative defenses, counterclaims and third party claims. Accordingly, in connection with the Restatement, 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 finders fee), with an offset in equal amount to goodwill, all of which goodwill was
impaired as of December 31, 2011 (See Note 4). While we intend to vigorously defend against all of Mr. Bivonas claims (including his latest motion described above), 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
or escrow 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 7 for a description of the Companys
senior secured financing facility in effect as of December 21, 2012, including a discussion of restrictions on the ability of the Company to pay Customs duties and LaJobi earnout payment requirements, if any, and the financial covenants
applicable to the Company, and see Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources for a discussion of the potential impact of any such
payment on our compliance with such financial covenants.
(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 Companys 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. Promptly after becoming aware of the foregoing, the Company submitted voluntary prior disclosures to U.S. Customs identifying such issues.
As of December 31, 2012, the Company estimates that it will incur aggregate costs of approximately $2.6 million (including
approximately $0.3 million in interest), relating to such customs duties for the years ended 2006 through 2012. Of the total amount accrued as of December 31, 2012, $15,000 was recorded for anticipated interest expense in the quarter ended
December 31, 2012 (decreased from previous quarters as a result of the Companys final determination of amounts owed, described below). 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, 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) as of 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.
In the fourth quarter of 2012 (upon completion of the Customs Review), the Company completed and submitted to U.S. Customs a voluntary
prior disclosure, which included the Companys final determination of amounts it believes are owed by Kids Line and CoCaLo. Such submission with respect to Kids Line included proposed payment terms with respect to customs duties believed to be
owed by Kids Line. As part of such settlement submissions, the Company included the following initial payments to U.S. Customs, such payments to be credited against the amounts that U.S. Customs determines is to be paid in satisfaction of the
Companys customs duties matters: $0.2 million with respect to Kids Line customs duties and $0.3 million with respect to CoCaLo customs duties. With respect to CoCaLo, the Companys payment represents the Companys determination of
all amounts it believes are owed by CoCaLo for the relevant periods.
As U.S. Customs has not yet responded to the settlement
submissions, it is possible that the actual amount of duties owed for the relevant periods will be higher than the amounts determined to be owed by the Company (and accrued in connection therewith). In any event, additional interest will continue to
accrue until full 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 determined by U.S. Customs to be owed, and any such 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.
93
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
In connection with the Customs Review, our Board also authorized an investigation,
supervised by the Special Committee and conducted by a second outside counsel specializing in customs matters, 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, and continues to work closely with U.S. Customs to address issues relating to incorrect
duties.
The Customs Investigation is now complete, and the Special Committee has not discovered evidence that would lead it
to conclude that there was intentional misconduct on the part of Company personnel. However, the Company has discontinued the practices that resulted in the charge for customs duties discussed above, and has implemented certain enhancements to its
processes and procedures in areas where underpayments were found.
(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 KIDs common stock
between specified dates. In addition to KID, various executives, and members and former members of KIDs Board, were named as defendants. Details of the substance of the allegations and procedural history of the Putative Class Action are set
forth in Part I, Item 3, Legal Proceedings of this Annual Report on Form 10-K.
All of the current defendants
in the Putative Class Action filed motions to dismiss the current complaint on June 29, 2012. On October 17, 2012, the United States District Court for the District of New Jersey granted the defendants motion to dismiss such
complaint with prejudice. On November 14, 2012, plaintiff filed a Notice of Appeal to the U.S. Court of Appeals for the Third Circuit from the judgment of the U.S. District Court, which appeal is currently pending.
The Company intends to continue to defend the Putative Class Action vigorously. No amounts have been accrued in connection therewith,
although legal costs are being expensed as incurred. As the Company has satisfied the deductible under its applicable insurance policy, the Company has been receiving reimbursement of substantially all of the legal costs being incurred, which
receivables are netted against the expense.
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, KIDs then CEO, Guy Paglinco, KIDs CFO, Marc Goldfarb, KIDs Senior Vice President and General Counsel, each member of KIDs current Board, and John Schaefer, a former member of KIDs Board
(collectively, the Defendants). In addition, KID was named as a nominal defendant. Details of the substance of the allegations and procedural history of the Putative Derivative Action are set forth in Part I, Item 3, Legal
Proceedings of this Annual Report on form 10-K.
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. 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. On April 28, 2012, Roseville filed a motion to compel inspection
of documents beyond those previously provided by the Company. On November 8, 2012, the Court issued an Order granting Rosevilles request in part and denying the request in part. The Order provided that any non-privileged
documents that were responsive to the narrow scope of the inspection permitted by the Order be produced by the Company on December 3, 2012. The Company produced such documentation on December 3, 2012 however, Roseville has retained certain
purported objections to the December 3, 2012 inspection, which the Company disputes. Some of the objections were overruled by the Court on February 5, 2013. The remaining issues were submitted to the Court on February 21,
2013. Rosevilles time to amend its complaint has been extended by the Court until the issues raised by the books and records inspection are resolved.
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. As the Company has satisfied the deductible under its applicable insurance policy, the Company has been receiving reimbursement of substantially all of the legal
costs being incurred, which receivables are netted against the expense.
94
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
(d) SEC Informal Investigation
The Company voluntarily disclosed to the SEC the findings of its internal investigation of LaJobis customs practices, as well as certain previously-disclosed Asia staffing matters. 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 Companys financial condition or results of operations.
(e) U.S. Attorneys Office Investigation
On August 19, 2011, the United
States Attorneys 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 defendants 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 attorneys 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).
On
January 30, 2013, the Court denied plaintiffs motion for class certification with respect to two of the proposed classes and continued for further briefing the motion for class certification with respect to the remaining proposed classes.
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) Australia Distributorship
Dispute
In November 2009, a complaint was filed in the United States District Court for the Northern District of Illinois,
encaptioned Sahai Pty. Ltd. v. Sassy, Inc. (the Australia Action). The plaintiff claims that Sassy breached the distribution agreement previously entered into between the parties by wrongfully terminating plaintiffs distributorship
following plaintiffs failure to achieve the minimum sales requirements included in the distribution agreement. Plaintiff seeks damages of approximately $2.0 million. In November and December 2012, the Australia Action was tried before a jury,
and a mistrial was declared when the jury failed to reach a unanimous verdict. A new trial has been scheduled to commence on May 6, 2013.
Sassy believes that the termination was not wrongful and intends to continue to vigorously defend the Australia Action, although there can be no assurance that Sassy will prevail. 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.
95
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
(h) Consumer Product Safety Commission Staff Investigation
By letter dated July 26, 2012, the staff (the CPSC Staff) of the U.S. Consumer Product Safety Commission
(CPSC) informed the Company that it has investigated whether LaJobi timely complied with certain reporting requirements of the Consumer Product Safety Act (the CPSA) with respect to various models of drop-side and wooden-slat
cribs distributed by LaJobi during the period commencing in 1999 through 2010, which cribs were recalled voluntarily by LaJobi during 2009 and 2010. The letter states that, unless LaJobi is able to resolve the matter with the CPSC Staff, the
CPSC Staff intends to recommend to the CPSC that it seek the imposition of a substantial civil penalty for the alleged violations.
The Company disagrees with the position of the CPSC Staff, and believes that such position is unwarranted under the circumstances. As permitted by the notice, the Company has provided the CPSC Staff
with additional supplemental information in support of the Companys position, including relevant factors in the Companys favor that are required to be considered by the CPSC prior to the imposition of any civil penalty, and the Company
intends to work closely with the CPSC Staff in an effort to resolve this issue.
Given the current status of this matter,
however, it is not yet possible to determine what, if any, actions will be taken by the CPSC, whether a civil penalty will be assessed, and if so assessed, the amount thereof. Based on currently available information, the Company cannot estimate the
amount of the loss (or range of loss), if any, in connection with this matter. As a result, no amounts have been accrued in connection therewith, although legal costs will be expensed as incurred. In addition, as this matter is ongoing, the Company
is currently unable to predict its duration, resources required or outcome, or the impact it may have on the Companys financial condition, results of operations and/or cash flows.
(i) 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 Companys 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 Companys
consolidated results of operations, financial condition or cash flows.
(j) Kokopax Earnout
As partial consideration for the purchase of the Kokopax
®
assets (described in Note 4), Sassy has agreed to pay to the seller of such assets, on a quarterly basis (when and if applicable), an amount equal to 10% of net sales
achieved in respect of Kokopax products (commencing July 3, 2012) in excess of the first $2.0 million of such net sales until the earlier of: (i) March 31, 2015, and (ii) the date that such Kokopax net sales equal at least $10.0
million (the Additional Consideration); provided, that the aggregate amount paid in respect of the Additional Consideration (including an advance of $200,000 accrued by Sassy at closing) shall not exceed $1.0 million. Based on currently
available information, the Company cannot estimate the amount of such earnout if any, that will be earned. As a result, no amounts have been accrued in connection therewith.
(k) Purchase Commitments
The Company has approximately $22.9 million in
outstanding purchase commitments at December 31, 2012, consisting primarily of purchase orders for inventory.
(l) 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 LaJobi Graco
®
license (which expires on
December 31, 2013, subject to renewals) and the Kids Line Carters
®
license 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. Although the Carters
®
license expired on December 31, 2012, the parties are continuing to operate under the license and are
negotiating a renewal agreement, although there can be no assurance that any such renewal will be consummated. 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, 2013, subject to renewals is material to and accounted for a
significant percentage of the net revenues of Kids Line; and the Garanimals
®
license (which has been renewed and
expires on December 31, 2014) is material to and accounted for a significant percentage of the net revenues of Sassy, in each case for the last three years. While historically the Company has been able to renew the license agreements that it
wishes to continue on terms acceptable to it, there can be no assurance that this will be the case, and the loss of any of the foregoing and/or other significant license agreements could have a material adverse effect on the Companys results
of operations. Several of these agreements require pre-payments of certain minimum guaranteed royalty amounts. The aggregate amount of minimum guaranteed royalty payments with respect to all license agreements pursuant to their original terms
aggregates approximately $18.6 million, of which approximately $4.3 million remained unpaid at December 31, 2012. Royalty expense for the years ended December 31, 2012, 2011 and 2010 was $9.3 million, $8.9 million and $7.7 million,
respectively.
96
KID BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 (CONTINUED)
(m) Letters of Credit
As of December 31, 2012, the Company had obligations under certain letters of credit that require the Company to make payments to parties aggregating $50,000 upon the occurrence of specified events.
Note 18 Quarterly Financial Information (Unaudited)
The following quarterly financial data for the four quarters ended December 31, 2012, and 2011, was derived from
unaudited financial statements and includes all adjustments which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of the results for the interim periods presented.
The quarters ended December 31, 2012 and September 30, 2012 include non-cash increases in valuation allowance for deferred tax
assets of $5.3 million and $45.0 million, respectively.
The quarter ended December 31, 2011 includes non-cash impairment
charges of: (i) $11.7 million with respect to the total impairment of the Companys goodwill, (ii) $9.9 million with respect to the impairment of the Companys LaJobi trade name, and (iii) $19.0 million with respect to the
impairment of the Companys Kids Line customer relationships. See Note 4.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Quarters Ended
|
|
2012
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(Dollars in Thousands, Except Per Share Data)
|
|
Net sales
|
|
$
|
55,228
|
|
|
$
|
55,470
|
|
|
$
|
60,909
|
|
|
$
|
57,879
|
|
Gross profit(1)
|
|
|
15,209
|
|
|
|
14,359
|
|
|
|
14,438
|
|
|
|
13,783
|
|
Income (loss) from operations
|
|
|
(655
|
)
|
|
|
873
|
|
|
|
1,054
|
|
|
|
(395
|
)
|
Net (loss) income
|
|
$
|
(803
|
)
|
|
$
|
209
|
|
|
$
|
(49,562
|
)
|
|
$
|
(3,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (Loss) Earnings per Common Share
|
|
$
|
(0.04
|
)
|
|
$
|
0.01
|
|
|
$
|
(2.27
|
)
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (Loss) Earnings per Common Share
|
|
$
|
(0.04
|
)
|
|
$
|
0.01
|
|
|
$
|
(2.27
|
)
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Quarters Ended
|
|
2011
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(Dollars in Thousands, Except Per Share Data)
|
|
Net sales
|
|
$
|
59,836
|
|
|
$
|
60,292
|
|
|
$
|
69,475
|
|
|
$
|
63,007
|
|
Gross profit(1)
|
|
|
17,459
|
|
|
|
17,720
|
|
|
|
19,882
|
|
|
|
(13,774
|
)
|
Income (loss) from operations
|
|
|
760
|
|
|
|
3,591
|
|
|
|
2,256
|
|
|
|
(41,582
|
)
|
Net (loss) income
|
|
$
|
(325
|
)
|
|
$
|
(2,713
|
)
|
|
$
|
(177
|
)
|
|
$
|
(35,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (Loss) Earnings per Common Share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(1.63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (Loss) Earnings per Common Share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(1.63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As adjusted for the immaterial corrections of certain expenses, as more fully described in Note 2 to the Notes to Consolidated Financial
Statements.
|
Earnings per share are computed independently for each of the quarters presented and the cumulative
amount may not agree to annual amount.
97