Debt

6 Months Ended

Jun. 30, 2011

Debt [Abstract]

DEBT

NOTE 4 — DEBT

The Credit Agreement (as defined below) was amended and restated as of August 8, 2011. See Note 13-Subsequent Event, for a description of such amendment and restatement.

Consolidated long-term debt (as a result of the reclassification described below) at June 30, 2011 and December 31, 2010 was $66.4 million and $54.0 million, respectively. At June 30, 2011, revolving loan availability was $23.7 million pursuant to the terms of the Amended and Restated Credit Agreement described in Note 13 (the “New Credit Agreement”). At December 31, 2010, revolving loan availability was $28.3 million. At December 31, 2010, there was approximately $18.6 million borrowed under the Revolving Loan (defined below) which was classified a short-term debt as of December 31, 2010. Accounting Standards Codification 470.10.45.14 allows the reclassification of short term debt (including the Company’s revolver) upon the refinancing of short-term debt with long-term debt, which was effected by the New Credit Agreement. As a result, the current portion of the Term Loan, which was repaid in full in connection with such amendment and restatement, and all amounts outstanding under the Revolving Loan at June 30, 2011, were reclassified as Long-Term Revolving Loan as of such date.

As of June 30, 2011, prior to the New Credit Agreement, the applicable interest rate margins were: 3.25% for LIBOR Loans and 2.25% for Base Rate Loans. The weighted average interest rates for the outstanding loans as of June 30, 2011 was as follows:

	At June 30, 2011
	LIBOR Loans			Base Rate Loans
Revolving Loan		3.44	%		5.50	%

As of the Amended and Restated Credit Agreement on August 8, 2011, the applicable interest rate margins were 2.75% for LIBOR Loans and 1.75% for Base Rate Loans.

Pre-Amendment and Restatement Credit Agreement Summary

The following discussion (although in present tense) is of the Company’s Credit Agreement prior to the amendment and restatement as of August 8, 2011.

KID, its operating subsidiaries, and I&J Holdco, Inc. (such subsidiaries and I&J Holdco, Inc., the “Borrowers”) maintain a credit facility (the “Credit Agreement”) with certain financial institutions (the “Lenders”), including Bank of America, N.A. (as successor by merger to LaSalle Bank National Association), as Agent and Fronting Bank, Sovereign Bank as Syndication Agent, Wachovia Bank, N.A. as Documentation Agent and Banc of America Securities LLC as Lead Arranger. The credit facility provides for: (a) a $50.0 million revolving credit facility (the “Revolving Loan”), with a subfacility for letters of credit in an amount not to exceed $5.0 million, and (b) an $80.0 million term loan facility (the “Term Loan”). The total borrowing capacity is based on a borrowing base, which is defined as 85% of eligible receivables plus the lesser of (x) $25.0 million and (y) 55% of eligible inventory. The scheduled maturity date of the facility is April 1, 2013 (subject to customary early termination provisions).

The Loans under the Credit Agreement bear interest, at the Company’s option, at a base rate or at LIBOR, plus applicable margins based on the most recent quarter-end Total Debt to Covenant EBITDA Ratio. Applicable margins vary between 2.0% and 4.25% on LIBOR borrowings and 1.0% and 3.25% on base rate borrowings (base rate borrowings include a floor of 30 day LIBOR plus 1%). At June 30, 2011, the applicable margins were 3.25% for LIBOR borrowings and 2.25% for base rate borrowings. The principal of the Term Loan is required to be repaid in quarterly installments of $3.25 million through December 31, 2012, and a final payment of $28.0 million due on April 1, 2013. The Term Loan is also required to be prepaid upon the occurrence, and with the proceeds, of certain transactions, including most asset sales or debt or equity issuances, and extraordinary receipts. The Company is also required to pay an agency fee of $35,000 per annum, an annual non-use fee of 0.55% to 0.80% of the unused amounts under the Revolving Loan, as well as other customary fees as are set forth in the Credit Agreement.

Under the terms of the Credit Agreement, the Company is required to comply with the following financial covenants: (a) a quarterly minimum Fixed Charge Coverage Ratio of 1.35:1.00; (b) a quarterly maximum Total Debt to Covenant EBITDA Ratio of 2.75:1.00; and (c) an annual capital expenditure limitation.

Due to the facts and circumstances discovered in connection with the Company’s ongoing internal investigation of LaJobi’s import, business and staffing practices in Asia (including misconduct by various LaJobi employees resulting in the underpayment of specified import duties), initiated as a result of the discovery of certain potential issues in the Company’s preparation for the “Focused Assessment” of LaJobi’s import practices, the approximately $6,860,000 charge the Company recorded in the fourth quarter and full year ended December 31, 2010 for anticipated import duties and interest related thereto, and additional amounts and penalties that may be required by U.S. Customs and Border Protection (the foregoing collectively, the “LaJobi Events”), the Company determined that various events of default and potential events of default under the Credit Agreement (and related loan documents) occurred as a result of breaches and potential breaches of various representations, warranties and covenants in the Credit Agreement, including, but not limited to, an unmatured event of default with respect to a breach of the Fixed Charge Coverage Ratio covenant for the quarter ending December 31, 2010 (as well as projected breaches of the Fixed Charge Coverage Ratio and Total Debt to Covenant EBITDA Ratio for certain future periods). In connection therewith, the Credit Agreement was amended on March 30, 2011 (the “March 2011 Amendment”), to permanently waive, among other things, specified existing events of default resulting from such LaJobi Events and related breaches and potential breaches (and future events of default as a result of the accrual or payment of specified “Duty Amounts” (as defined below)), and to amend the definition of “Covenant EBITDA” for all purposes under the Credit Agreement and related loan documents (including for the determination of the applicable interest rate margins and compliance with financial covenants) for the December 31, 2010 reporting period and all periods thereafter. The Borrowers paid fees of $131,000 during the first quarter of 2011 in connection with the execution of the March 2011 Amendment. As a result of the March 2011 Amendment, the Company must be in compliance with the financial covenants described above at the time of any accrual in excess of $1.0 million, or proposed payment, of any Duty Amounts.

Covenant EBITDA, as defined in the Credit Agreement, is a non-GAAP financial measure used to determine relevant interest rate margins and the Company’s compliance with the financial covenants set forth above, as well as the determination of whether certain dividends and repurchases can be made if other specified prerequisites are met. Covenant EBITDA under the Credit Agreement is defined generally as consolidated net income (after excluding specified non-cash, non-recurring and other specified items), as adjusted for interest expense; income tax expense; depreciation; amortization; other non-cash charges (gains); specified costs in connection with each of our senior financing, specified acquisitions, and specified requirements under the Credit Agreement and non-cash transaction losses (gains) due solely to fluctuations in currency values. As a result of the March 2011 Amendment, Covenant EBITDA is further adjusted (up to an aggregate maximum of $14.855 million for all periods, less any earnout consideration paid in respect of KID’s 2008 purchase of LaJobi (“LaJobi Earnout Consideration”) other than in accordance with the Credit Agreement and/or to the extent not deducted in determining consolidated net income) for: (i) all customs duties, interest, penalties and other related amounts (“Duty Amounts”) owed by LaJobi to U.S. Customs and Border Protection (“U.S. Customs”) to the extent they relate to the nonpayment or incorrect payment by LaJobi of import duties to U.S. Customs on certain wooden furniture imported by LaJobi from vendors in China resulting in a violation prior to March 30, 2011 of anti-dumping regulations, the related misconduct on the part of certain LaJobi employees, and LaJobi’s business and staffing practices in Asia prior to March 30, 2011 relating thereto (“Duty Events”); (ii) fees and expenses incurred in connection with the internal and U.S. Customs investigations of the Duty Amounts and Duty Events (the “Investigations”); and (iii) LaJobi Earnout Consideration, if any, paid in accordance with the terms of the Credit Agreement. For purposes of the Fixed Charge Coverage Ratio, Covenant EBITDA is further adjusted for unfinanced capital expenditures; specified cash taxes and distributions pertaining thereto; and specified cash dividends. The Fixed Charge Coverage Ratio is the ratio of Covenant EBITDA for such purpose (as described above) to an amount generally equal to, with respect to the Company, the sum for the applicable testing period of all scheduled interest and principal payments of debt, including the principal component of any capital lease, paid or payable in cash. Total Debt, as used in the Credit Agreement for purposes of the determination of the Total Debt to Covenant EBITDA Ratio, generally means, with respect to the Company, the outstanding principal amount of all debt (including debt of capital leases plus the undrawn face amount of all letters of credit).

The Credit Agreement also contains customary affirmative and negative covenants. Among other restrictions, the Company is restricted in its ability to purchase or redeem stock, incur additional debt, make acquisitions above certain amounts and pay any LaJobi Earnout Consideration, any earnout consideration in respect of KID’s 2008 acquisition of CoCaLo (“CoCaLo Earnout Consideration”), or any amounts due with respect to a promissory note to CoCaLo as part of such acquisition (the “CoCaLo Note”), unless in each case certain conditions are satisfied. With respect to the payment of LaJobi Earnout Consideration, if any, as a result of the March 2011 Amendment, such conditions include that excess revolving loan availability equal or exceed the greater of (A) $18,000,000 less the amount of any Duty Amounts previously paid by LaJobi to U.S. Customs and (B) $9,000,000, until such time that the Focused Assessment has been deemed concluded and all Duty Amounts required thereby have been remitted by LaJobi (the “Conclusion Date”), such that after the Conclusion Date, this condition shall require only that excess revolving loan availability equal or exceed $9,000,000 (previously, such condition with respect to the payment of any Earnout Consideration (LaJobi or CoCaLo) was limited to excess revolving loan availability being equal to or exceeding $9,000,000, and such requirement with respect to the payment of any CoCaLo Earnout Consideration remains unchanged). See Note 10 for a discussion of the LaJobi Earnout Consideration (and related finder’s fee) in light of the LaJobi Events and a demand letter from Mr. Bivona’s counsel in connection therewith. No CoCaLo Earnout Consideration was earned, and the final installment of the CoCaLo Note was paid on April 2, 2011. The Credit Agreement also contains specified events of default related to the CoCaLo Earnout Consideration and LaJobi Earnout Consideration. In addition, KID may not pay a dividend to its shareholders unless earned Earnout Consideration (LaJobi or CoCaLo), if any; has been paid; no default exists or would result therefrom (including compliance with the financial covenants), Excess Revolving Loan Availability is at least $4.0 million, and the Total Debt to Covenant EBITDA Ratio for the two most recently completed fiscal quarters is less than 2.00:1.00.

Upon the occurrence of an event of default under the Credit Agreement, including a failure to remain in compliance with all applicable financial covenants, the lenders could elect to declare all amounts outstanding under the Credit Agreement to be immediately due and payable. In addition, an event of default under the Credit Agreement could result in a cross-default under certain license agreements that are maintained by the Company. As a result of the March 2011 Amendment, among other things, specified existing events of default related to the Duty Events (and specified future events of default relating to the payment of any Duty Amounts) were waived, and the Borrowers were deemed to be in compliance with all applicable financial covenants in the Credit Agreement as of December 31, 2010 (see discussion above). The Borrowers were in compliance with all applicable financial covenants as of June 30, 2011.

The Borrowers are required to maintain in effect Hedge Agreements that protect against potential fluctuations in interest rates with respect to a minimum of 50% of the outstanding amount of the Term Loan. Pursuant to the requirement to maintain Hedge Agreements, on May 2, 2008, the Borrowers entered into an interest rate swap agreement with a notional amount of $70 million which expired on April 30, 2010. Changes in the cost of the swap agreement and its fair value resulted in income of approximately $170,000 and $678,000 for the three and six months ended June 30, 2010, respectively, which was included in interest expense for such period in the consolidated statement of operations.

The Borrowers entered into a new interest rate swap agreement with a notional amount of $31.9 million on April 30, 2010 which expired December 21, 2010 and was replaced by a new interest rate swap agreement on such date with a notional amount of $28.6 million. An unrealized net loss of $56,000 for the existing interest rate agreement for the six months ended June 30, 2011 was recorded as a component of comprehensive (loss)/ income, and as a result of the execution of the New Credit Agreement as of August 8, 2011, all changes in fair value of the interest rate swap will be recorded directly in earnings (see Note 7).

The Credit Agreement is secured by substantially all of the Company’s domestic assets, including a pledge of the capital stock of each Borrower and RB Trademark Holdco, LLC (“Licensor”), a limited liability company wholly owned by KID that licensed specified intellectual property to The Russ Companies, Inc., the purchaser of KID’s former gift business, prior to its bankruptcy, and a portion of KID’s equity interests in its active foreign subsidiaries, and is also guaranteed by KID.

The fees for the March 2011 Amendment ($131,000), were recorded as expense in the consolidated statements of operations for the three months ended March 31, 2011. Financing costs associated with the Revolving Loan and Term Loan have been deferred and amortized over the contractual term, of the Credit Agreement. A portion of such costs are expected to be written-off during the three months ended September 30, 2011 as a result of the New Credit Agreement as of August 8, 2011.