NOTE 2 – SHAREHOLDERS’ EQUITY

Share-Based Compensation

Equity Plans

As of September 30, 2013, the Company maintained (i) its 2013 Equity Incentive Plan (the “2013 EI Plan”), which is a successor to the Company’s 2008 Equity Incentive Plan (the “2008 EI Plan”), (ii) its 2008 EI Plan, which is a successor to the Company’s 2004 Stock Option, Restricted and Non-Restricted Stock Plan (the “2004 Option Plan”, and together with each of the 2008 EI Plan and the 2013 EI Plan, the “Plans”) and (iii) its 2009 Employee Stock Purchase Plan (the “2009 ESPP”). The 2013 EI Plan was approved by the Company’s shareholders on July 18, 2013. The 2008 EI Plan and the 2009 ESPP were each approved by the Company’s shareholders on July 10, 2008, however, the 2009 ESPP was suspended for the 2012 and 2013 plan years. In addition, the Company may (and has) issued equity awards outside of the Plans. The exercise or measurement price for equity awards issued under the Plans or otherwise is generally equal to the closing price of KID’s common stock on the New York Stock Exchange on the date of grant. Generally, equity awards under the Plans (or otherwise) vest over a period ranging from zero to five years from the date of grant as provided in the relevant award agreement. 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 2013 EI Plan provides for awards in any one or a combination of: (a) Stock Options, (b) Stock Appreciation Rights (“SARs”), (c) Restricted Stock, (d) Stock Units, (e) Non-restricted Stock, and/or (f) Dividend Equivalent Rights. Any award under the 2013 EI Plan may, as determined by the committee administering the 2013 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 2013 EI Plan will be 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 2013 EI Plan, associated with such awards, as determined by the Plan Committee in its sole discretion. A total of 2,500,000 shares of Common Stock are reserved for issuance under the 2013 EI Plan. In the event all or a portion of an award is forfeited, terminated or cancelled, expired, 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 2013 EI Plan pursuant to a formula set forth therein. At September 30, 2013, 2,192,750 shares were available for issuance under the 2013 EI Plan.

The 2008 EI Plan, which became effective July 10, 2008 (at which time no further awards could be made under the 2004 Option Plan), provided for the same types of awards as are issuable under the 2013 EI Plan. All awards granted under the 2008 EI Plan were evidenced by a written agreement between the Company and each participant (which did not need to be identical with respect to each grant or participant) that provided the terms and conditions, not inconsistent with the requirements of the 2008 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 were reserved for issuance under the 2008 EI Plan. Any Unissued Shares were in each case again available for awards under the 2008 EI Plan pursuant to a formula set forth therein. The preceding sentence also applied 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. No further awards could be made under the 2008 EI Plan as of July 10, 2013.

As of September 30, 2013, an aggregate of 200,000 stock options and 597,015 SARs are outstanding that were granted as inducement awards outside any of the Plans. Of these non-Plan grants, the 200,000 stock options vested in full upon issuance, and if unexercised (unless terminated earlier) generally expire on March 15, 2023, and the SARs vest ratably over a five year period (commencing on the first anniversary of the date of grant), and if unexercised (unless terminated earlier), generally expire on September 14, 2022.

The 2009 ESPP became effective on January 1, 2009. A total of 200,000 shares of Common Stock were reserved for issuance under the 2009 ESPP. As noted above, the 2009 ESPP has been suspended for the 2012 and 2013 plan years, and any remaining shares available for issuance thereunder were deregistered in the second quarter of 2013.

Impact on Net (Loss)

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Stock option expense	$	82	$	84	$	347	$	216
Restricted stock expense		—		9		—		26
Restricted stock unit expense		31		62		131		172
SAR expense		160		88		528		414

Total share-based payment expense	$	273	$	243	$	1,006	$	828

The Company records share-based compensation expense in the statements of operations within selling, general and administrative expense. No share-based compensation expense was capitalized in inventory or any other assets for the three and nine months ended September 30, 2013 or 2012. The relevant Financial Accounting Standards Board (“FASB”) standard requires the cash flows related to tax benefits resulting from tax deductions in excess of compensation costs recognized for those equity compensation grants (excess tax benefits) to be classified as financing cash flows.

The fair value of stock options and stock appreciation rights (SARs) granted under the Plans or otherwise is estimated on the date of grant using a Black-Scholes-Merton option pricing model using assumptions with respect to dividend yield, risk-free interest rate, volatility and expected term. Expected volatilities are calculated based on the historical volatility of KID’s Common Stock. The expected term of options or SARs granted is derived from the vesting period of the award, as well as historical exercise behavior, and represents the period of time that the award is expected to be outstanding. Management monitors exercises and employee termination patterns to estimate forfeiture rates within the valuation model. Separate groups of employees, directors and officers that have similar historical exercise behavior are considered separately for valuation purposes. The risk-free interest rate is based on the Treasury note interest rate in effect on the date of grant for the expected term of the award.

Stock Options

Stock options are rights to purchase KID’s Common Stock in the future at a predetermined per share exercise price (which is 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). Stock options are accounted for at fair value at the date of grant in the consolidated statement of operations, are amortized on a straight line basis over the vesting term, and are equity-classified in the consolidated balance sheets. No options will be exercisable later than ten (10) years after the date of grant. The options issued under the 2008 and 2013 EI Plans 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.

There were 150,000 and 0 options granted during the three months ended September 30, 2013 and 2012, respectively. There were 1,150,000 and 0 options granted during the nine months ended September 30, 2013 and 2012, respectively. Of the 1,150,000 options granted during the nine months ended September 30, 2013, 600,000 thereof represented SARs granted to the Company’s President and CEO on March 15, 2013, which at the time of grant were exercisable solely for cash. These SARs were converted into stock options, on a one-for-one basis, on July 18, 2013 upon the approval of such conversion at KID’s 2013 Annual Meeting of Shareholders (with no change to the grant date, exercise price, vesting schedule, or other terms thereof). As a result, the 600,000 SARs were terminated, and the stock options which replaced them (the “Replacement Options”) are equity classified in the consolidated balance sheets as of July 18, 2013. Prior to such conversion, the 600,000 SARs were classified as a short-term liability on the consolidated balance sheets, and the fair value of this award was recalculated each quarter based upon its fair value at each balance sheet date. Separately, pursuant to the terms of a consulting agreement with Marc Goldfarb, our former Senior Vice President and General Counsel, notwithstanding the terms of such awards, any outstanding vested options held by him at the time of his resignation from the Company (effective August 14, 2013) will continue to be exercisable until 90 days following expiration of the term of such consulting agreement. All options granted to Mr. Goldfarb had fully vested prior to the time of such resignation. No incremental compensation cost resulted from the modification of Mr. Goldfarb’s options. There were no options exercised in the three and nine months ended September 30, 2013 and 2012, respectively.

The assumptions used to estimate the fair value of the stock options granted during the nine months ended September 30, 2013* were as follows (no stock options were granted during the nine months ended September 30, 2012):


	Nine Months Ended September 30, 2013
Dividend yield		—	%
Risk-free interest rate		0.78	%
Volatility		73.6	%
Expected term (years)		3.9
Weighted average fair value of stock options granted	$	0.84

*	This table, as well as the remainder of the tables and discussion in this “Stock Options” section, includes the 600,000 Replacement Options described above.

As of September 30, 2013, the total remaining unrecognized compensation cost related to unvested stock options, net of forfeitures, was approximately $0.7 million, and is expected to be recognized over a weighted-average period of 3.1 years.

Activity regarding outstanding stock options for the nine months ended September 30, 2013 is as follows:


	All Stock Options Outstanding
				Weighted Average
	Shares			Exercise Price
Options Outstanding as of December 31, 2012		415,575		$	12.41
Options Granted ¹		1,150,000		$	1.52
Options Forfeited/Cancelled ^1,2		(40,900	)	$	15.86

Options Outstanding as of September 30, 2013		1,524,675		$	4.10

Option price range September 30, 2013	$	1.51 - 34.05

¹	Modifications of option grants are included on a net basis in the table

²	See disclosure below regarding forfeitures

The aggregate intrinsic value of the unvested and vested outstanding stock options was $0 and $0 at September 30, 2013 and December 31, 2012, respectively. The aggregate intrinsic value is the total pretax value of in-the-money stock options, which is the difference between the fair value at the measurement date and the exercise price of each stock option. No stock options were exercised during the three and nine months ended September 30, 2013 and 2012, respectively.

A summary of the Company’s unvested stock options at September 30, 2013 and changes during the nine months ended September 30, 2013 is as follows:


	Options			Weighted Average Grant Date Fair Value
Unvested stock options
Unvested at December 31, 2012		45,000		$	3.90
Granted		1,150,000		$	0.84
Vested		(389,375	)	$	1.03
Forfeited/cancelled		—		$	—

Unvested stock options at September 30, 2013		805,625		$	0.92

Restricted Stock

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

During the three and nine months ended September 30, 2013 and 2012, respectively, there were no shares of restricted stock granted under the Plans or otherwise. At September 30, 2013 and December 31, 2012, there were no shares of unvested restricted stock outstanding. Restricted stock grants, when made, typically have vesting periods of five years, with fair values (per share) at date of grant. Compensation expense is determined for the issuance of restricted stock by amortizing over the requisite service period, or the vesting period, the aggregate fair value of the restricted stock awarded based on the closing price of KID’s Common Stock on the date of grant.

Restricted Stock Units

A Restricted Stock Unit (“RSU”) is a notional account representing a grantee’s conditional right to receive at a future date one (1) share of Common Stock or its equivalent in value. Shares of Common Stock issued in settlement of an RSU may be issued with or without other consideration as determined by the Plan Committee in its sole discretion. RSUs may be settled in the sole discretion of the Plan Committee: (i) by the distribution of shares of Common Stock equal to the grantee’s RSUs, (ii) by a lump sum payment of an amount in cash equal to the fair value of the shares of Common Stock which would otherwise be distributed to the grantee, or (iii) by a combination of cash and Common Stock. The RSUs granted under the 2008 and 2013 EI Plans vest (and will be settled) ratably over a 5-year period and are equity classified in the consolidated balance sheets. There were 25,000 and 25,000 RSUs granted to employees of the Company during the three months ended September 30, 2013 and 2012, respectively. There were 25,000 and 127,250 RSUs granted to employees of the Company during the nine months ended September 30, 2013 and 2012, respectively.

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

A summary of the Company’s unvested RSUs at September 30, 2013 and changes during the nine months ended September 30, 2013 is as follows:


				Weighted
	Restricted			Average
	Stock			Grant-Date
	Units			Fair Value
Unvested at December 31, 2012		193,250		$	3.96
Granted		25,000		$	1.54
Vested		(41,000	)	$	4.01
Forfeited/cancelled*		(46,430	)	$	3.63

Unvested at September 30, 2013		130,820		$	3.60

*	See disclosure below regarding forfeitures.

As of September 30, 2013, there was approximately $0.4 million of unrecognized compensation cost related to unvested RSUs. That cost is expected to be recognized over a weighted-average period of 2.9 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 (other than with respect to 600,000 cash SARs granted to our current President and CEO discussed below), 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 2008 and 2013 EI Plans 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 granted at an exercise price equal to the closing price of KID’s Common Stock on the New York Stock Exchange on the date of grant.

SARs are accounted for at fair value at the date of grant in the consolidated statements of operations, are amortized on a straight line basis over the vesting term, and are equity-classified in the consolidated balance sheets, with the exception of 600,000 SARs granted to the Company’s President and CEO (until their conversion to the Replacement Options as described above). There were 520,000 and 668,265 SARs granted during the three months ended September 30, 2013 and 2012, respectively. There were 1,220,000 and 975,015 SARs granted during the nine months ended September 30, 2013 and 2012, respectively. Of the 1,220,000 SARs granted during the nine months ended September 30, 2013, 600,000 thereof represented SARs granted to the Company’s President and CEO on March 15, 2013, which at the time of grant could be exercised solely for cash (the “Cash SARs”). The Cash SARs were converted into the Replacement Options, on a one-for-one basis, on July 18, 2013 upon the approval of such conversion at KID’s 2013 Annual Meeting of Shareholders (with no change to the grant date, exercise price, vesting schedule, or other terms thereof). As a result, the 600,000 Cash SARs were terminated, and the Replacement Options are equity classified in the consolidated balance sheets as of July 18, 2013. Prior to such conversion, the 600,000 Cash SARs were classified as a short-term liability on the consolidated balance sheets, and the fair value of this award was recalculated each quarter based upon its fair value at each balance sheet date. No incremental compensation cost resulted from the modification. In addition, pursuant to the terms of a consulting agreement with Marc Goldfarb, notwithstanding the terms of such awards, any outstanding vested SARs held by him at the time of his resignation will continue to be exercisable until 90 days following expiration of the term of such consulting agreement (unvested SARs were forfeited at the time of such resignation). Incremental compensation cost in the three and nine months ended September 30, 2013 of $11,000 resulted from the modification of Mr. Goldfarb’s SARs. There were no SARs exercised in the three and nine months ended September 30, 2013 and 2012, respectively.

The assumptions used to estimate the fair value of the SARs granted during the nine months ended September 30, 2013 and 2012 were as follows (excludes the 600,000 Cash SARs granted on March 15, 2013 which were converted to the Replacement Options on July 18, 2013):


	Nine Months Ended September 30,
	2013			2012
Dividend yield		—	%		—	%
Risk-free interest rate		1.37	%		0.78	%
Volatility		91.0	%		86.9	%
Expected term (years)		5.0			5.0
Weighted-average fair value of SARs granted	$	1.08		$	1.26

The amount of SARs granted and cancelled in the following table excludes 600,000 Cash SARs granted on March 15, 2013 which were converted into the Replacement Options, on a one-for-one basis, on July 18, 2013. Activity regarding outstanding SARs for the nine months ended September 30, 2013 is as follows:


	All SARs Outstanding
				Weighted Average
	Shares			Exercise Price
SARs Outstanding as of December 31, 2012		1,521,385		$	3.38
SARs Granted ¹		620,000		$	1.54
SARs Exercised		—		$	—
SARs Forfeited/Cancelled ^1,2		(289,570	)	$	3.65

SARs Outstanding as of September 30, 2013		1,851,815		$	2.72

SAR price range at September 30, 2013	$	1.34 – 8.50

¹	Modifications of grants are included on a net basis in the table

²	See disclosure below regarding forfeitures

The aggregate intrinsic value of the unvested and vested outstanding SARs at September 30, 2013 and December 31, 2012 was $81,032 and $136,348, respectively. The aggregate intrinsic value is the total pretax value of in-the-money SARs, which is the difference between the fair value at the measurement date and the exercise price of each SAR.

A summary of the Company’s unvested SARs at September 30, 2013 and changes during the nine months ended September 30, 2013 is as follows:


				Weighted-Average Grant
	Shares			Date Fair Value Per Share
Unvested at December 31, 2012		1,265,645		$	1.94
Granted		620,000		$	1.08
Vested		(265,802	)	$	1.98
Forfeited*		(220,580	)	$	2.01

Unvested at September 30, 2013		1,399,263		$	1.54

*	See disclosure below regarding forfeitures.

As of September 30, 2013, there was approximately $1.8 million of unrecognized compensation cost related to unvested SARs, which is expected to be recognized over a weighted-average period of 3.6 years.

Option/SAR Forfeitures

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

RSU Forfeitures

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

Employee Stock Purchase Plan

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