Related Party Transactions

6 Months Ended

Jun. 30, 2011

Related Party Transactions [Abstract]

RELATED PARTY TRANSACTIONS

NOTE 12 — RELATED PARTY TRANSACTIONS

Lawrence Bivona, the President of LaJobi until March 14, 2011, along with various family members, established L&J Industries in Asia to provide quality control, compliance and other services to LaJobi for goods being shipped by LaJobi from Asian ports. Pursuant to the terms of a transition services agreement entered into in connection with the acquisition of LaJobi, commencing in April 2008, the Company had used the full-time services of approximately 28 employees of L&J Industries for such quality control and other services. To the Company’s knowledge, L&J Industries ceased operations in June 2010, thereby terminating the affiliated relationship. However, the Company continues to utilize the services of all or substantially all of such individuals (see Note 10 for more detail with respect to such arrangements), and is in the process of establishing subsidiaries in the PRC and Thailand, through which the Company intends to directly employ these quality control individuals in the future. For the three and six months ended June 30, 2010, the Company incurred costs, recorded in cost of goods sold, aggregating approximately $0.2 million and $0.5 million, respectively related to the services provided, based on the actual, direct costs incurred (by L&J Industries or otherwise) for the services of such individuals.

CoCaLo contracts for warehousing and distribution services from a company that, until October 15, 2009, had a partner that was the estate of the father of, and is managed by the spouse of, Renee Pepys Lowe, an employee of the Company until December 31, 2010. As of December 31, 2010, this company is owned by unrelated parties but the spouse of Renee Pepys Lowe is still a manager of the business. For the three and six months ended June 30, 2010, CoCaLo paid approximately $0.5 million and $1.1 million, respectively, to such company for these services.

TRC and KID entered into a transition services agreement in connection with the sale of KID’s former gift business to TRC, pursuant to which TRC and KID provided certain specified services to each other, including, among other things, the sublease of certain office and warehouse space (and related services) by the Company from TRC and its subsidiaries. As of March 31, 2011, KID terminated all subleases of space from TRC, and is no longer utilizing TRC services for operational support. KID had accrued approximately $1.8 million and $1.5 million at March 31, 2011 and December 31, 2010, respectively on its financial statements in connection therewith. See below for a description of the terms of the settlement agreement entered into in connection with TRC’s voluntary bankruptcy, which include, among other things, the set-off against a note payable by TRC to KID of all amounts owed by the Company to TRC and its subsidiaries, including the amounts described above (without the requirement of any cash payment). As a result of such set-off the Company has reduced the valuation reserve recorded against the note receivable by $2.0 million (which includes the $1.8 million accrued rent referenced above and $0.2 million of other liabilities to TRC extinguished by the settlement agreement) during the three and six months ended June 30, 2011.

Also see Note 10 for a discussion of potential obligations of KID with respect to the TRC Lease (and an accrual recorded with respect to amounts anticipated to be owed to the landlord thereunder), and potential liabilities for which KID may remain obligated under certain contracts and other obligations that were not novated in connection with their transfer.

As has been previously disclosed, on April 21, 2011, TRC and TRC’s domestic subsidiaries (collectively, the “Debtors”), filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code (the “Code”) in the United States Bankruptcy Court for the District of New Jersey (the “Bankruptcy Court”). On June 16, 2011, the Bankruptcy Court entered an order (the “Order”) which, among other things, approved a settlement with the secured creditors of the Debtors, including KID (the “Settlement”). The Order was effective and enforceable on its entry. The time for an aggrieved party to file an appeal from the Order expired on July 1, 2011.

Background

On December 23, 2008, KID completed the sales of its former gift business (the “Gift Sale”) to TRC. The aggregate purchase price payable by TRC for such gift business was: (i) 199 shares of the Common Stock of TRC, representing a 19.9% interest in TRC after consummation of the transaction; and (ii) a subordinated, secured promissory note issued by TRC to KID in the original principal amount of $19.0 million (the “Seller Note”). As has been previously disclosed, in the second quarter of 2009, KID fully impaired or reserved against all such consideration.

In connection with the Seller Note: (i) TRC and specified subsidiaries granted a lien (junior to the lien of Wells Fargo Bank, National Association (“WF”), TRC’s senior lender) to KID on substantially all of their respective assets, and such subsidiaries guaranteed the payment (subject to intercreditor arrangements described below) of all obligations to KID under the Seller Note; and (ii) KID entered into an Intercreditor Agreement with WF, pursuant to which payment of the Seller Note was fully subordinated to payment of TRC’s obligations under its credit facility with WF.

In addition, in connection with the Gift Sale, a limited liability company wholly-owned by KID (the “Licensor”) executed a license agreement (the “License Agreement”) with TRC permitting TRC to use specified intellectual property, consisting generally of the “Russ” and “Applause” trademarks and trade names (the “Retained IP”). Pursuant to the License Agreement, TRC was required to pay the Licensor a fixed, annual royalty (the “Royalty”) equal to $1,150,000. The initial annual royalty payment was due and payable in one lump sum on December 31, 2009. Thereafter, the Royalty was required to be paid quarterly at the close of each three-month period during the term. TRC did not pay the initial lump sum Royalty payment. KID received $287,500 in respect of the Royalty payment due March 23, 2010, which was recorded as other income in the first quarter of 2010, but did not receive any other payments in respect of the Royalty, and therefore recorded no further income related to such Royalties.

The Settlement

The Settlement, among other things: (i) includes a release of KID by and on behalf of the Debtors’ estates (without the requirement of any cash payment) from all claims, including fraudulent conveyance and preference claims under the Code, and claims pertaining to KID’s sale of the gift business to TRC; (ii) confirms that the Seller Note and KID’s security interests therein are valid, and are junior only to TRC’s senior lender; (iii) allows KID to retain ownership of the Retained IP, provided, that the trustee in the bankruptcy may include such intellectual property as part of a global sale of TRC’s business as long as KID receives at least $6.0 million therefor; (iv) includes a set-off against the Seller Note of all amounts owed by KID and its subsidiaries to TRC and its subsidiaries, for which KID had accrued an aggregate of approximately $2.0 million, without the requirement of any cash payment; (v) establishes distribution priorities for any proceeds obtained from the sale of TRC’s assets under which KID is generally entitled to receive, to the extent proceeds are available therefor after the payment of amounts owed to TRC’s senior lender and approximately $1.4 million in specified expenses have been funded, approximately $1.0 million, and to the extent further proceeds are available subsequent to the payment of approximately $1.0 million to the Debtors’ estates for additional specified expenses, 60% of any remaining proceeds (40% of any such remaining proceeds will go to the Debtors’ estates for the benefit of general unsecured creditors, and KID may participate therein as an unsecured creditor to the extent of 50% of any deficiency claims, including for unpaid royalties). As it is not possible to determine the amount, if any, that the trustee in the bankruptcy will obtain through the sale of TRC’s assets, KID may obtain only limited recovery on its claims, or may obtain no recovery at all. In addition, the Settlement provides that the Trustee will cooperate, at KID’s expense, with KID’s efforts to resolve the claim asserted by the landlord under the TRC Lease described above (however, the Settlement does not impact amounts potentially owed to the landlord under such TRC Lease). The Debtors’ estates’ rights with respect to the Retained IP will terminate at the earlier of 6 months from the date of the entry of the Bankruptcy Court’s sale order and the date of liquidation of TRC’s operations in the United States, Canada, the United Kingdom and Australia. Pursuant to the Settlement, KID waives its claims to Royalties as a result of the liquidation, except that it will be entitled to a 5% royalty on any inventory sold by a third party liquidator retained by the Trustee as part of the liquidation process. In addition, any bidder for the stock of the Debtors’ U.K., Australia or Canada subsidiaries may include a request to use KID’s Retained IP on a non-exclusive basis in the U.K., Australia or Canada, respectively, for a five percent (5%) royalty for a period of up to two (2) years. The Trustee has also agreed to cooperate in the removal of any persons designated by TRC to the board of directors of the Licensor, and shall waive the right to designate any additional members to such board. Further details of the Settlement are described in the Current Report on Form 8-K filed by the Company on June 22, 2011.