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KID Brands

Turnaround Management Research Report

December 16, 2011

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Prepared By:

Annelien Bruins

Rebecca Harlem

Suniti Kanodia

Edward Niemcyzk

Rajesh Ramadoss

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Table of Contents

Executive Summary…………………………………………………………………………….. 3

Infant and Toddler Industry Overview………………………………………………….. 4

Sales and Retail in the Infant and Toddler Industry

Manufacturing and Production in the Infant and Toddler Industry Marketing and Product Differentiation in the Infant and Toddler Industry

KID Brands Business……………………………………………………………………………. 13

KID Brands Overview

KID Brands Corporate Governance

KID Brands Financial Analysis……………………………………………………………… 20

Historical Financial Analysis

Revenue Trends and Drivers

Cost Trends and Drivers

Balance Sheet

Cash Flow Off Balance Sheet, Liquidity, and Other Operating Metrics

KID Brands Competition and Strategic Position………………………………………. 35

The Competition SWOT Analysis

KID Brands Valuation and Liquidation Analysis………………………………………. 44

KID Brands Turnaround Plan………………………………………………………………… 52

Exhibit 1: Detailed Financial Analysis……………………………………………………… 60

Exhibit 2: KID Brands Products & Marketing Materials……………………………. 65

Bibliography…………………………………………………………………………………………. 71

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Executive Summary KID Brands is a designer, importer, marketer and distributor of branded infant and juvenile consumer products. The

company sells both proprietary and licensed products for children up to three years old. KID competes in various

segments including hard goods, soft goods, accessories, and toys. However, these four market segments are very

different, and KID does not appear to have clear strategies for each segment. Over the past few years KID has relied

heavily on inorganic growth to build its business. Specifically, it acquired two businesses: a furniture company and a

bedding/accessories firm. Although these acquisitions have increased top-line revenue KID's margins have suffered.

It is clear that by adding more products and product lines the company has become increasingly inefficient. KID is not

a leader in any of the segments it competes in. In addition, KID's main retail partners are large chain stores that retain

control of pricing decisions. Furthermore, KID's supply chain is far from streamlined; the company's distribution

system is too large for the size of its business.

This paper will demonstrate that KID Brands is in trouble and would benefit from substantial changes to its product

mix, operating structure, leadership team and marketing efforts. The paper will argue that by taking KID Brands

private (preferably in a leveraged buyout transaction) it will be able to enact a successful turnaround outside of the

public investor's eye. The paper will start by discussing the market and industry dynamics, and then move to

discussions about KID Brands' business, financial performance before addressing the market strategy relative to

competitors. Finally, it will conclude with a valuation of the KID Brands business and a roadmap for a successful

turnaround.

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The Infant and Toddler Industry

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Overview of the Infant and Toddler Industry

KID Brands competes in the infant and toddler market in four main segments: soft goods (bedding, blankets, etc.),

hard goods (nursery furniture, cribs, food preparation and feeding tools), accessories and décor, and toys and games.

In addition, KID Brands primarily competes in the US market with ~97% of total 2010 revenues attributable to the US

market. 1 Therefore, this section will focus on the US market for these product segments.

The size of the US infant and toddler industry is directly determined by the birthrate in the country. The US birthrate

declined 4.7% from 2007-2009 and declined 3% in 2010.2 As a result, the market for durable baby goods declined by

6% from 2007-2010 (taking into account inflation).3 The 2008 recession not only had an effect on consumer

purchasing patterns but likely also contributed to these declining birthrates. In addition, factors such as

unemployment and underemployment are negatively impacting spending across all consumer industries. Although

more mothers are waiting until they are older to have children, today the majority of new mothers are in the 20-35

year old range. These buyers are interested in obtaining good value for their money and adept at using online

communication and search tools to find the best deals. As a result, the shadow market for baby products such as cribs

and strollers has grown dramatically. Mintel Market Research reports that nearly half of all mothers are now buying

durable baby goods second-hand from websites such as Craiglist and eBay. 4 In fact, for households that make

$75,000 per year or less, an even larger percentage of mothers is making purchases second-hand.

The estimate for the US baby durables goods market is $9.8 billion. The durable baby goods market includes KID

Brands hard goods segment as well as some soft goods (i.e. mattresses), and accessories and décor.

Market Size for Baby Durables (excludes soft goods and toys market)

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1 Capital IQ. 2 Fiefield, Anna, "US Birthrate Falls 3% in 2010," Financial Times, November 18, 2011. 3 "US Market for Baby Durables," Mintel Market Research, March 2011. 4 Ibid. 5 Ibid.

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Infant and Toddler Product Segments

Furniture

In the furniture space there are many different products from essential products such as cribs to non-essentials such

as bassinets or co-sleepers. Mintel reports that 93% of all moms own at least one piece of baby room furniture, but

only some pieces are always bought first-hand. Mothers typically purchase products that are affected by safety or

sanitary conditions first-hand. Indeed, 70% of all baby mattresses are purchased new due to safety and sanitary

concerns.6

How Mothers are Buying Furniture Items

Bought New Bought Second-

Hand

Borrowed Received as Gift

Mattress 70% 10% 5% 21%

Dresser 57% 17% 4% 28%

Crib 56% 13% 6% 28%

Rocking Chair or

Glider

49% 16% 6% 31%

Changing Table 61% 11% 5% 25%

Toddler Bed 65% 16% 3% 17%

Bassinet/Co-Sleeper 44% 11% 14% 34%

Other Furniture 61% 18% 4% 28%

Survey of moms aged 18+ with internet access who have children aged four and under and have the above items

In addition to the buying conditions in the above chart, mothers typically re-use these furniture items with future

children. For example innovation is not as common in the furniture space as compared to other segments such as

baby mobility (strollers, car seats, etc.), and mothers do not feel as much of a need to buy new for each child.

Additionally, mothers are looking for furniture items that can be converted for various uses (i.e. crib with an attached

changing table) or an infant crib that can be changed into a toddler bed as the child grows. Close to 90% of all mothers

think that when a product can grow or adapt with a child, it makes it more of an attractive purchase.7

Mobile Baby Items

The baby mobility segment has the strongest market outlook among all baby durable products. Because many

purchases are made with safety concerns in mind, mothers are more eager to buy these items new as opposed to

second hand. Specifically 81% of all convertible car seats are purchased new and 70% of light weight strollers are

purchased new.8 Many mothers also purchase multiple car seats or strollers for varying activity needs or multiple

vehicles. As new advancements are made with regard to safety, mothers will also purchase new mobility items for

each child - rather than use secondhand items.

6 Ibid. 7 Ibid. 8 Ibid.

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Other Durable Baby Care Items

This is the space where safety is not as big of a concern compared to mobility. For example, mothers have a tendency

to re-use or buy secondhand items such as booster seats, playpens, and potties. Also, other items such as baby swings,

mats, bouncers, etc. are more discretionary in nature. Market research indicates that because these items are not as

essential as other items, they are often given as a gift. The baby swing is the most widely purchased item in this

category.9

Blankets and Linens

The market for blankets, bedding and bath linens has experienced little to no growth over the past few years. The US

market for bed and bath linens remained relatively stable at ~$11 billion in 2007 and 2008 and there is no indication

that there has been a significant upswing since then.10 The strongest performing segment in the bedding and bath

linens segment is the utility bedding segment which consists of functional necessities such as pillowcases, mattress

pads, and basic sheets. As in other consumer goods markets, discretionary spending has declined in this segment as

well since the recession. Customers are valuing price over any other attribute. In fact, Mintel Market research says

"Brand name is one of the least important factors considered by Mintel's respondents during linen purchases, cited by

a mere 17% of respondents who have purchased sheets or pillowcases in the last year." 11 As a result, bed and bath

linen suppliers typically do not use widespread advertising campaigns, as these are not very fruitful. Even large retail

chains such as Bed Bath and Beyond rely primarily on direct mail marketing and word of mouth campaigns as

opposed to traditional advertising.

Toys and Games

The US toys and games market has experienced slower growth over the past two years compared to 5-10 years ago,

and analysts expect continued moderate growth going forward. In comparison, consumer demand has increased

significantly in Asia for toys and games. Specifically, the US toys and games market is expected to grow at a compound

annual growth rate (CAGR) of .9% from 2010-2014, compared to the Asia Pacific market which is expected to have a

CAGR of 10% during that same period. 12 However, the US currently has the largest market for toys and games in the

world capturing 33% of the market compared to Europe's 30%, Asia Pacific's 25%, and 12% for the rest of the world.

The US market for toys and games is estimated to be anywhere from $30 Billion - $42 Billion. 13 Interestingly, the

infant and pre-school segment captures the largest share of the market with 16.2% of the toys and games market. Over

the past five years, electronic toys and games have become increasingly popular, negatively impacting the demand for

traditional toys. However, this has not seriously affected the demand for infant toys and games. The infant/preschool

segment for toys is estimated to be ~$3.5 Billion. 14

9 Ibid. 10 "US Market for Bed and Bath Linens," Mintel Market Research, March 2009. 11 Ibid. 12 "United States Toys and Game Market," Data Monitor. June 2010. 13 "US Market for Toys and Games," Mintel Market Research, March 2011. 14 Ibid.

8

Market for US Toys and Games 2004-2009

Market Share by Company in US Toys and Games Market15

15

Ibid.

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Sales and Retail in the US Infant and Toddler Industry

In the US, consumers continue to favor supercenter and value/discount retailers over more traditional retailers. Since

the recession of 2008-2009, consumer behavior has changed and as a result value retailers and warehouse clubs

continue to enjoy strong growth. Supercenters and warehouse stores are competing more aggressively with

supermarkets and drugstores as well. Analysts expect that these players will continue to dominate more traditional

retailers in the future reflecting a shift in mindset in US consumers overall. 16

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Infant and Baby Products Market Share by Retailer

Similarly, in the infant and baby products market, the top five retailers account for more than 75% of all sales in this

segment (shown above).18 Interestingly however, in 2009 and 2010, mass retailers such as Target and Wal-Mart saw

market share decline in the baby and infant segments. Specifically, Wal-Mart's market share declined 4.1% from

2008-2009 and Target's market share declined by 6.5% during the same period. Babies R Us was the only mass

retailer that saw market share growth of +1.3%. Market analysts explain that this is a result of several factors. An

16 "Sector Trends: Supercenters," Pricewaterhousecoopers, September 2011. 17 "Trends in the Retail and Consumer Sector," Pricewaterhousecoopers, November 2010. 18 "US Market for Baby Durables," Mintel Market Research, March 2011.

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increasing number of mothers are looking to online websites such as Amazon.com and second-hand online exchanges

such as eBay and Craiglist to make purchases. In addition, new entrants such as Bed Bath Beyond are taking market

share in this space. Bed Bath & Beyond currently only captures 2.1% of the market, but with its acquisition of retailer

Buy Buy Baby and further expansion of the Buy Buy Baby chain, its market share grew 25.8% from 2008-2009.19

Notably, Babies R Us is becoming more of a dominant player in this space. It is marketing its comprehensive gift

registry service and one-stop shop for all things baby-related. It is trying to differentiate by highlighting its complete

baby shopping experience with specialized sales staff and promotions. Since Toys R Us (the parent company) was

taken private in a leveraged buyout transaction a few years ago, it has been making significant changes to become

more competitive with Wal-Mart, its main rival. In a recent press release Toys R Us discussed how it is continuing to

come to market with more creative marketing and sales strategies. However, Wal-Mart has also fired back with

offerings that get back to its core strength - low prices. The retailer recently re-launched its layaway plan and

announced that it was planning to cut some popular toy prices to $15.20 Toys R Us's strategy is to come to market with

products that are exclusively sold through them and with the changes it has made since going private, it has

successfully taken some market share away from Target and Wal-Mart. 21 In the high-end space, Pottery Barn KIDs is

seeing significant declines in market share. The retailer primarily targets a more affluent customer base and likely

because of changing consumer preferences and more price conscious buying, it has seen declining revenues.

All in all, both the mass retailers like Wal-Mart and Target as well as the specialty baby retailers have a lot of

negotiating power and baby product suppliers such as KID Brands are often competing against competitors for shelf

space in these retail locations. PwC reports, "Supercenters have become a larger and larger portion of manufacturer's

sales, increasing dependence and reducing negotiating power." 22 Shadow markets have also become increasingly

popular. The chart below shows the percentage of mothers and their interest in purchasing second hand.

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19 Ibid. 20 Wal-Mart Company website. 21 "The Season's Hottest Toys, Including more than 30,000 Leappad explorers, hit Toys R Us Stores Nationwide Starting Saturday

at 6AM, " Toys R Us Press Release, December 9, 2011. 22 "Trends in the Retail and Consumer Sector," Pricewaterhousecoopers, November 2010. 23 Mintel.

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Manufacturing and Production in the US Infant and Toddler Industry

As in other consumer product segments, a significant portion of manufacturing for all segments of the baby and infant

market is now being done overseas in lower cost locations such as China, Indonesia, the Philippines, and Vietnam.

Although hourly wages in Mainland China and other low cost locations remain competitive, salaries are appreciating

in many of these countries. In addition there continues to be corruption, intellectual property, and regulatory risks

associated with doing business in Asia. Below are some trends related to manufacturing and doing business in China.

Increasing shipping costs are one of the reasons that companies have seen the costs of production increase in China.

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24 The US China Business Council.

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Marketing and Product Differentiation in the Infant and Toddler Market

In today's market mothers are both price conscious and internet savvy. In addition, over the past ten years, many

children's toys and products have been recalled because of safety issues. As a result mothers are turning to the

internet and other sources to perform thorough research on products before buying them. In fact, in March 2011 a

market research study revealed that 76% of mothers conduct internet research prior to making a purchase in this

segment.25 As a result, many companies with infant and baby products are taking the time to develop social media and

interactive mothers' forums on their websites. Companies such as Dorel and Graco offer community sections within

their websites where mothers can go to discuss products, safety and benefits.

Innovation is not important across all segments, but some players have been able to differentiate by bringing new

designs and components to historical products. For example, the Explorer from Phil & Ted's stroller transitions from

a single to double stroller for mothers that are planning to have additional children in the near future. Summer Infant

has come to market with a thermometer that has various uses for children of all ages. Because of their versatility and

adaptability, both products have done well in the market.26

Brand is also important, but only in certain segments. For example, in the accessories, soft goods, toys and games,

and non-essential hard goods segments, brand is not viewed as the important attribute when making a purchasing

decision. However, in segments where safety or style matter, brand is very important. Specifically, brand is very

important to mothers in the mobility segment for strollers and car seats. But looking at the market as a whole, there

are many segments where brand name is not important. In fact, private label brands have become increasingly

popular in the accessories, soft goods, and non-essential hard goods markets. Both Target and Wal-Mart are both

investing in private label lines to further compete in these segments. 27 Below is a chart that shows the percentage of

mothers surveyed in a market research study that own one or more products with a specific brand name. Graco and

Fisher Price are the two top brands in the baby durables market.

28

25 "US Market for Baby Durables," Mintel Market Research, March 2011. 26 Ibid. 27 "Trends in the Retail and Consumer Sector," Pricewaterhousecoopers, November 2010. 28 "US Market for Baby Durables," Mintel Market Research, March 2011.

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The KID Brands Business

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Overview of KID Brands

KID Brands is a designer, importer, marketer and distributor of branded infant and juvenile consumer products,

including infant bedding, nursery accessories and décor, kitchen and nursery appliances, food preparation products,

bath/spa products, diaper bags, nursery furniture, developmental toys, feeding and baby care items. The Company's

current strategy focuses on its proprietary brands; however, the Company markets certain categories of products

under select industry leading licenses (Graco, Serta, Disney and Carter’s). The product’s end-user focus is on newborns

to children up to three years of age.

Brands

KID Brands designs and markets branded infant and juvenile products in a number of complementary categories that

provide retailers and consumers with a complete nursery offering and other essentials. The products and

corresponding brands include: infant bedding and related nursery accessories, décor and gifts (Kids Line and

CoCaLo); nursery furniture and related products (LaJobi); and developmental toys and feeding, bath and baby care

items with features that address the various stages of an infant's early years (Sassy).

29

In addition to the Company's branded products, the Company also markets certain categories of products pursuant to

various licenses, including Carter's, Disney, Graco and Serta 30.

Marketing, Sales and Distribution

29 KID Brands Company Presentation January 2011. 30 KID Brands Website.

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KID markets products through a direct sales force of full-time employees. Additionally, select accounts are serviced

through independent sales representatives. KID maintains approximately 2,000 customers worldwide (predominately

North America, the United Kingdom and Australia) including mass merchandisers, baby superstores, specialty stores,

department stores, boutiques and online retailers. Despite the large customer list, KID maintains significant sales

concentrations among the top three accounts of Toys “R” Us / Babies “R” Us, Target Corporation and Wal-Mart

Stores, which combined totaled 67.9% of 2010 revenues. The table below details the reported concentration since

2007:

Larger customers pick up goods at KID’s regional distribution centers, located in South Gate, California, Cranbury,

New Jersey, Kentwood, Michigan, Eastleigh Hampshire and Sydney Australia. Small and independent customers are

serviced via common carriers. Additionally, CoCaLo and LaJobi distribute and utilize the service of previously

affiliated third party logistic providers (controlled by the selling shareholders).

Intellectual Property and Trademarks

KID Brands relies on trademarks, copyrights, patents and licenses to protect its intellectual property although it does

not consider the IP materially dependent considering the availability of substitutes in the market. KID Brands, Inc has

entered into licensing agreements with the William Carter Company, Disney Enterprises, Inc, Graco Children’s

Products and Serta, Inc31.

Employees

KID Brands employs 349 people domestically and in China, Thailand, Hong Kong and Vietnam. The 45 employees in

Asia are mainly involved with quality control of products32. The company markets its products through its own direct

sales force as well as through independent manufacturers’ representatives in the US, UK and Australia33.

Management Team

31 KID Brands, Inc Annual Report 2010, p. 6. 32 Ibid. 33 "KID Brands Inc Reports Operating Results," Gurufocus.com, March 31, 2011.

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Corporate Governance

Governance Structure

Raphael Benaroya is Executive Chairman as well as Chairman of the Board. The board has six members two of which

are CEO’s of companies that produce consumer products. Two other board members have finance experience (of

which one, Michael Zimmerman used to trade consumer and retail stocks). In addition, there is one managing partner

of an accounting firm. KID Brands subscribes to a "Complaints Procedure for Accounting and Audition Matters,"

"Corporate Governance Guidelines," "Code of Business Conduct and Ethics," "Code of Ethics for Principal Executive

Officer and Senior Financial Officers," and "Criteria and Procedures with respect to Selection and Evaluation of

Directors and Communications with the Board of Directors as well as the charters of the Audit Committee, the

Compensation Committee and the Nominating/ Governance Committee of the Board of Directors"34.

List of Board of Directors

Recent Departures from the Executive Team

In September 2011, the Company announced that Raphael Benaroya had been appointed Executive Chairman of the

Board following the immediate resignation of President and Chief Executive Officer Bruce Crain. The Board has

retained an executive search firm to replace Mr Crain.35 Mr Crain’s resignation does not seem to have been a result of

34 KID Brands, Inc Annual Report 2010, p. 8. 35 "Key Developments at KID Brands," MSN Money.

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anything other than personal reasons. In March 2011, KID Brands fired two of its executives of its LaJobi youth

furniture subsidiary for violating anti-dumping regulations on wood bedroom furniture from China36.

Recent Issues and Investigations

In December 2010, U.S. Customs selected the LaJobi subsidiary for a “Focused Assessment” of its import practices

and procedures. In connection with the notification, the Board of Directors formed a Special Committee to investigate

the matter further. The Committee found instances of incorrect anti-dumping duties applied to certain wooden

furniture imported from China, resulting in a violation of anti-dumping laws. The Committee and the Board of

Directors concluded that misconduct took place amongst certain LaJobi employees including misidentifying the

manufacturer, shipper and description of products. Effective March 14, 2011, LaJobi’s President, Lawrence Bivona,

and LaJobi’s Managing Director of Operations were terminated for cause.

KID has recorded $6.8 million and $0.3 million in the quarters ending December 31, 2010 and March 31, 2011 against

cost of goods sold. Two smaller charges were recorded for the quarters ending in June and September 2011 ($55,000

and $56,000, respectively). Management has noted that the Company may be given an additional fine of up to 100%

of the duty charged. Management has also noted that the Company has discontinued these practices.

In conjunction with the acquisition of Lajobi, KID entered into a service agreement with L&J Industries, whose

principal shareholders were the selling shareholders of Lajobi. The service agreement provided quality control,

compliance and various other services for goods shipped from Asian ports to the United States. Upon further review

of its importing, staffing and payment practices in Asia, management believes that payment into Thailand may have

violated criminal laws there. Additionally, management has found that employment practices in Hong Kong may have

violated criminal laws there. Management has discontinued the relationship with L&J Industries and has established

interim agreements in which they believe are in full compliance with local laws.

Customs Review

Following the review and discovery of issues with Lajobi, the Special Committee investigated the customs compliance

practices at KIDs Line, CoCaLo and Sassy. The Committee found that these subsidiaries filed incorrect entries and

invoices with U.S. Customs (specifically, incorrect product descriptions, classifications and values). Management

estimates that $2.4 million of aggregate additional duty costs will be due for the years 2006 through September 2011.

36 "KID Brands Fires LaJobi Executives," Home Furnishings Business, March 16, 2011.

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Historic Overview of Acquisitions, Divestitures and Other Deals

History

The Company was founded in 1963 as Russ Berrie and Company, which made children’s stuffed animals, gifts and

toys. The company’s shares started trading on the stock exchange in 198437. KID sought to focus on the infant and

juvenile market and in July 2002, acquired Sassy, Inc. for $45.0 million, followed by the acquisition of Kids Line, LLC

in December 2004 for $129.0 million. To expand the product portfolio, April 2008 saw two more acquisitions,

CoCaLo, Inc for $18.2 million and LaJobi Industries, Inc for $68.84 million.

Gift Business Sale

In December 2008, KID sold its former gift business to TRC for an aggregate purchase price constituting a senior

subordinated note issued by TRC with the principal amount of $19.0 million and a 19.9% equity interest in TRC. Both

of these investment balances were written off during the second quarter of 2009. In connection with the divestiture, a

license agreement was executed with TRC, permitting TRC to use specified intellectual property, consisting generally

of the “Russ” and “Applause” trademarks and trade. TRC was required to pay KID a fixed, annual royalty of $1.15

million. The initial annual royalty payment was due and payable in one lump sum on December 31, 2009 and

quarterly thereafter. TRC did not pay the initial lump sum Royalty payment, however, KID Brands 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. A settlement has been reached, however, as TRC is currently going through a Chapter 7

liquidation and a reliable estimate of the proceeds is not available. Our analysis assumes zero percent recovery from

the liquidation sale.

LaJobi and CocaLo Acquistions and Contingencies

In 2008, the company exited the Gift business and acquired LaJobi (nursery furniture and related products) and

CoCaLo (diaper bags, bedding, and accessories) in order to focus more on the infant and juvenile segments. After the

acquisition of LaJobi, the company concluded that no earnout consideration was due or payable to the LaJobi selling

shareholders. It was previously disclosed that an earnout between $12.0 and $15.0 million was payable. On July 25,

2011, Lawrence Bivona’s counsel demanded payment of the earnout. The Company is prepared to vigorously reject

this request.

37 KID Brands Profile Market Watch.com.

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KID Brands Financial Analysis

21

Historical Financial Performance

KID Brands’ revenue grew both organically and inorganically over the period of 2006-2011. In 2008 the company

exited the Gift business and acquired LaJobi (nursery furniture and related products) and CoCaLo (diaper bags,

bedding, and accessories) in order to focus more on the infant and juvenile segments. The Company managed to grow

revenue in 2009 during the thick of the recession, showing that businesses serving the infant and juvenile segments

are recession-resistant, if not recession-proof.

Key Financial Metrics, 2006-201138

Twelve Months ending

Key Financial Metrics 12/2006 12/2007 12/2008 12/2009 12/2010 9/2011

Sales in $ MM 147.1 163.1 229.2 243.9 275.8 264.9 Sales Growth 10.9% 40.6% 6.4% 13.1% (1.2%) COGS in $ MM 84.3 101.4 156.8 168.7 198.8 197.5

COGS/Sales 57.3% 62.2% 68.4% 69.2% 72.1% 74.6%

Gross Margin 42.7% 37.8% 31.6% 30.8% 27.9% 25.4%

SG&A/Sales 19.5% 19.6% 22.2% 19.6% 19.6% 23.1%

Net Profit Margin (incl items) -6.4% 5.5% -48.7% 4.8% 12.6% 7.0%

EBT excl items in $ MM 24.4 26.1 12.3 21.0 19.1 0.6

EBT/Sales excl items in % 16.6% 16.0% 5.3% 8.6% 6.9% 0.2%

The major challenge facing the Company is that its profitability has been decreasing over time, even with the exclusion

of one-time items, as shown in the chart below.

The declining profitability of the company is reflected in the share price, which is underperforming both the S&P 500

and a peer group of companies, as shown in the chart below39.

38 Capital IQ 39 KID Brands, Form 10-K, FY 2010.

22

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Revenue: Trends and Drivers

Revenue has been driven mostly by acquisition over the last few years. LaJobi and CoCaLo have contributed

significantly to the top line and have helped the Company round out its offerings and provide a complete range of

children’s products.

Breakdown of revenue by category, 2008-201040

Category 2008 2009 2010

Hard Good Basics (primarily LaJobi) 32% 33.30% 38.90%

Soft Good Basics (primarily CoCaLo) 41.70% 44.60% 38.10%

Toys and Entertainment (primarily Sassy) 12.90% 10.00% 11.80%

Accessories and Décor (primarily KIDs Line) 12.50% 11.20% 10.30%

Other 0.90% 0.90% 0.90%

Total 100% 100.00% 100.00%

A major problem facing the Company is the geographical concentration of revenue. Most of the Company’s revenue,

and virtually all of its profit, comes from the United States as shown in the table and chart below.

Geographical Breakdown of Revenue, 2007-2010, in $ MM41

Region 2007 2008 2009 2010

United States 156.5 220.7 235.4 266.3

Foreign 6.5 8.5 8.5 9.4

Royalties Receivable from TRC

The Company was supposed to receive an annual royalty of $1.15 MM from The Russ Companies (TRC) in the

transaction involving the sale of The Gift Business. However, TRC did not make the first annual payment, and KID

Brands only received one quarterly payment in 2010. Since TRC is now in bankruptcy, KID Brands does not expect to

receive any additional royalties from TRC for the gift business.

40 KID Brands, Form 10-K, FY 2010 41 Ibid

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25

Costs: Trends and Drivers

The major components of the company’s expenses are:

Costs of Goods Sold: This includes raw materials, the cost of production, and shipping.

Selling, General and Administrative Expenses: This includes licenses for using brand names such as Disney,

Graco and Carter, as well as expenses relating to the KID Brand’s direct sales force.

Interest expense.

Restructuring charges.

Impairment of Goodwill.

Asset Write-downs.

Income Tax.

The company is not affected materially by the following items:

R&D: The Company does not spend significant money on developing new products using R&D (which needs

to be expensed immediately).

Depreciation and Amortization: KID Brands is not investing in new production facilities or other machinery or

PP&E that requires depreciation or amortization. The business model remains that of developing ideas for

new products that are then manufactured overseas.

Items relating to currency are not significant, though the Company outsources production to China.

The Company is experiencing an upward trend in costs that is eroding profitability. As of 9/30/2011, pro-forma

EBT/Sales is 0.2% and has decreased from a high of 16.6% in 2006. It appears that the decrease in EBT/Sales over the

years is primarily due to increasing COGS as a percentage of Sales, as shown in the chart below. Delving further into

profitability, SG&A has held fairly steady over the years. So it appears that SG&A is not driving the decrease in

EBT/Sales.

26

Discussion of COGS cost drivers

The main categories of KID Brand revenue are the Hard Goods and Soft Goods categories. Together, they account for

77% of 2010 revenue. Both these categories faced substantial cost pressures in the years 2008-2010 due mainly to

commodity price increases and shipping cost increases.

Hard Goods: This category includes primarily nursery furniture such as cribs. These goods are manufactured

in the Peoples’ Republic of China for KID Brands. Due to increasing fuel costs in 2006-2010, shipping costs

from China to the United States for these heavy items also increased.

Soft Goods: This category includes mattresses, bedding and blankets. This category saw increasing raw

materials prices owing to the shortage of cotton, a primary ingredient in these products. Mattresses and

bedding are also bulky and voluminous and can be costly to transport from China.

In 2010, the company took a $6.86 MM one-time addition to COGS related to the settlement of faulty import

duty assessment practices alleged by U.S. Customs. This suggests that KID Brands didn’t do its due diligence

in the acquisition of LaJobi. The Company may be forced to take additional charges to COGS in future years

and restate prior earnings. These will also affect the cash position of the Company.

The commodity price increases, shipping cost increases and the additional cost relating to import duty

mismanagement at LaJobi explain the increasing COGS/Sales over the years 2006-2011, and hence the decreasing

profitability of KID Brands. Even without the additional customs duty, KID Brands is facing issues with profitability.

Interest Expense:

The Company’s interest expense has stayed consistent at an average of $6.7 MM over the past few years.

27

History of unusual and one-time charges

The Company has a history of asset write-downs and unusual charges in the years 2006-2011.

Year Category Expense ($

MM)

2007 Asset Write-down (10.0)

Other Unusual Items (2.9)

2008 Impairment of Goodwill (136.9)

Asset Write-down (3.7)

2009 Other Unusual Items (16.5)

2010 Restructuring Charges (0.7)

In 2007, the Company took a $10.0 MM charge upon regular testing of its indefinite-life intangible assets. The

specific charge was related to an agreement with MAM GmbH of Vienna, which was determined to be a finite-

lived asset and hence to be amortized.

In 2007, the Company took a total of $2.9 MM unusual charges towards inventory, web-site development for

the legacy Shining Stars products, and a gift segment impairment charge.

In 2008, the Company took an asset write-down of $3.7 MM in connection with impairment to the Sassy,

CoCaLo and LaJobi brand names.

In 2008, the Company also took an impairment charge of $130.2 MM in connection to a write-down of all

goodwill on the books. An additional impairment of $6.7 MM was taken in connection with the decrease in

value of the Applause trademark.

In 2009, the company took an aggregate non-cash $16.5 MM charge in relation to the divestiture of the Gift

Segment business to TRC. The Company determined that its $15.3 MM note from TRC was not collectable,

and also took additional charges to bring its total impairment to $16.5 MM.

In 2010, the Company took a $0.7 MM restructuring charge.

28

The Balance Sheet

Cash and Equivalents

Cash and Short-term investments have dropped steeply as the Company paid down long-term debt and took

advantage of a new revolver from the Bank of America to meet working capital requirements.

Accounts Receivable and Inventories

Absolute Accounts Receivable and Inventory numbers are steady to declining over the period 2006-2011. As a percent

of Sales turnover they are much higher in 2011 than in 2006 as shown in the chart below.42

Property, Plants and Equipment

Net PP&E drops over time as KID Brands transitions from a product manufacturing company to a product design and

manufacturing specification company.

42 Capital IQ.

29

Deferred Tax Assets

Deferred tax assets are a substantial portion of the balance sheet and need to be preserved through transfers of

control. The Company was GAAP-profitable in the last 12 months ending 9/30/2011 owing to a tax benefit of $18.5

MM. Earnings Before Taxes (EBT) were barely positive, even excluding one-time items.

Total Current Liabilities

Total current liabilities have been reduced dramatically over the years as the Company slowly lowered its absolute

Accounts Payable and paid off long-term debt from a new Revolving loan in Aug. 2011.

30

The Current and Quick Ratios show improvement in 2011 from access to a $175 MM revolving loan. The Company

used the new revolver to pay down the old term loan balance of $54 MM, and the new revolver balance is classified as

long-term debt.

Long-Term Debt

The Company has been converting its capital structure towards long-term debt. Short-term debt is technically zero in

2011 but is in fact funded by a new revolver from Bank of America; the new revolver balance of $65.3 MM on

9/30/2011 is classified as long-term debt43. The Company has access to an additional $12.6 MM from the new

revolver.

43

KID Brands, Form 10-Q, 9/30/11.

31

Cash Flow44

Cash flow from Investing shows a major drop in cash in 2008, following the cash acquisitions of CoCaLo and LaJobi.

Cash flow from Financing shows a spike in 2008 from the issuance of $100 MM in long-term debt.

The Company sees diminishing cash flows from Operations. A major part of the cash flow from Operations is the bad

debt reserve for customer accounts receivable. It indicates that the Company does not have any negotiating power over

powerful customers like Wal-Mart, Target and Toys/Babies R’ Us that account for approximately 70% of the

Company’s revenue in 2010. It also points to potential problems in KID Brands’ IT Systems and Shipping Controls.

According to industry practices, incorrect billing practices are causing the company to have large bad debt reserves.

44

Capital IQ.

32

Off-Balance Sheet, Liquidity, and other Operating Metrics

Off-Balance Sheet Obligations45

The Company owes $15.7 MM aggregate from 2010 to 2015 towards operating leases for buildings.

The Company owes $47.5 MM in 2010 and 2009 for Purchase Orders extended to suppliers for inventory

purchases.

The Company owes $54 MM in long-term debt and $2.7 MM in interest on the long-term debt. Short-term

financing is provided through a revolving credit line (limit in 2010: $28.3 MM) at Bank of America.

The Company owes $12.36 MM in royalty payments as of 12/31/2010.

Liquidity and Capital Resources46

In 2011, the Company obtained a new revolving loan with a credit line of up to $175 MM from Bank of America. The

2010 ending long-term debt balance of $54 MM and old revolver balance of $18.6 MM was paid down using this

revolver, and additional monies were obtained from the new revolver for short-term financing. The Company’s

balance as of 9/30/2011 was $65.3 MM from this new revolver, and this amount was classified as long-term debt as

permitted by applicable accounting standards. This is the only debt owed by the Company.

The New Credit Agreement47 provides for an aggregate $175.0 million revolving credit facility (the “New Revolver”),

with a sub-facility for letters of credit in an amount not to exceed $25.0 million, and a sub-facility for swing-line loans

in an amount not to exceed $5.0 million. Subject to conditions to lending set forth in the New Credit Agreement, loans

may be made up to the full amount of the New Revolver (without borrowing base limitations), swing-line loans may be

made up to the full amount of the sub-limit for swing-line loans, and letters of credit may be issued up to the sub-limit

for letters of credit.

Debt summary data48 is shown in the table below.

45 KID Brands, Form 10-K, FY 2010. 46 KID Brands, Form 10-Q, 9/30/2011. 47

Ibid. 48

Capital IQ.

33

34

General Company Operations Metrics

The company appears to be taking the rights steps to quickly lower or raise key ratios related to operations as shown in

the charts below. The average days sales out, inventories out, payables out and cash conversion cycle time have all

dropped significantly49.

Accounts receivable and inventories are turning over more often50 from 2009-2011 so the company operations are

running very well. One potential reason for the increased inventory turnover could be the change in product mix from

the Gift Segment to the more focused Infants and Juvenile segments over the period 2006-2011.

49

Capital IQ. 50

Ibid.

35

KID Brands' Competition and Strategic Position

36

The Competition

Crown Crafts

Crown Crafts produces infant and toddler bedding, bibs, soft goods and accessories. These include crib bedding,

blankets, nursery accessories, disposable placemats, cup labels, toilet seat covers, changing mats, diaper bags, and pet

blankets. Similar to KID Brands, Crown Crafts' main customers are mass retailers in addition to other discount

retailers, supermarkets, drug stores, and independent retailers. The company also manufactures most all of its

products in China. Like KID Brands, Crown Crafts has acquired licenses to sell products with the Fisher Price, Sesame

Street, Nickelodeon and Disney Brands.

Crown Crafts' net sales were up 4.5% from 2010 to 2011 due to introduction of new product lines and inorganic

growth. Crown Crafts CEO commented, "During the year, we made significant progress on critical strategic initiatives

including the diversification of our product line and channels of distribution." This included expanding sales into drug

stores, restaurant chains and the dollar store segment. In addition, the company is diversifying its product line into

new areas such as the pet industry with a pet bedding and accessories line. Further, Crown Crafts also supplies private

label products to Wal-Mart (Parent's Choice products), Target (Circo products) and Toys "R" Us (Koala Baby

products). 51

Summer Infant

The company is a designer, marketer and distributor of infant and children products mostly focused on health and

safety segments. Summer Infant offers more than 80 proprietary products. These include: nursery audio/video

monitors, safety gates, durable bath products, bed rails, booster and potty seats, bouncers, nursery furniture and a line

of bedding and other soft goods.52 Similar to KID Brands, Summer Infant sells its goods primarily to Babies R Us,

Target, and Wal-Mart, but also has significant relationships with Buy Buy Baby, Amazon.com, Mothercare, Argos and

Tesco. The company tries to differentiate from its competitors by highlighting the safety components of its products.

The company recently announced that its revenue increased 27% year over year in the third quarter of 2011 due

primarily from a more diversified product line and sales due to its recent acquisition of BornFree in March 2011. 53

Dorel Industries

Dorel Industries is a consumer products company that plays across many segments including the "juvenile services"

market. The company plays in the stroller and car-seat market, but also in other spaces such as the bicycle market and

furniture markets. In the juvenile space, Dorel manufactures car seats, strollers, high chairs, toddler beds, cribs,

infant health and safety aids, feeding aids, and juvenile accessories. The juvenile segment accounts for 45% of Dorel's

total revenue. Dorel's primary manufacturing location is also China. However, unlike KID Brands, Dorel does a

significant amount of business in locations outside the US; the US only accounts for 57% of total revenue. 54 Dorel saw

a slight increase in revenue year over year in the third quarter of 2011 (1.1%), but acknowledged that this was not due

to performance in the juvenile segment. Dorel's CEO commented, " We are disappointed with the results of our

51 Crown Crafts Website and 2010 10K 52 Summer Infant Website 53 Ibid 54 Dorel Annual Report 2010.

37

Juvenile segment, particularly in the U.S. Performance was at an unacceptable level due to the perfect storm of

rapidly increasing input costs and decreased consumer demands for juvenile products. Consumers maintained a tight

rein on spending and this meant we were unable to pass the majority of higher costs on to our customers."55

TOMY International

TOMY is a toy company that is headquartered in Japan. It has subsidiaries throughout the world. Its main brands are

Tomica, PLARAIL, ZOIDS, Pokemon, Disney, and Thomas. It has substantial market share in the infant and baby toys

segment. The company's main retail relationship is with Toys R Us, but has strong relationships with Target, Wal-

Mart, and Amazon.com as well. 73% of TOMY's revenue is in the US. 56

Summary of Key Competitor Facts

KID Brands Summer Infant Dorel Industries Crown Crafts TOMY International

Full Time Employees

349 218 4700 157 2535

Total Revenue $264.9 $233.9 $2358 $87.9 $427.3

% Americas Revenue

99% 93% 57% 100% 73%

Key Retail Relationships

Wal-Mart, Toys R Us, Target

Wal-Mart, Toys R Us, Target, Buy Buy Baby

Wal-Mart, Toys R Us

Target, Wal-Mart, Toy R Us

Target, Wal-Mart, Toys R Us, Amazon

Summary of Competitor Financials

55

Dorel Earnings Release, Third Quarter 2011. 56 Capital IQ.

38

KID Brands SWOT Analysis

Strengths:

Product Related:

- The company’s product portfolio includes a vast range of infant and juvenile products. By playing in almost all

categories of this industry, the company and its subsidiaries draw significant complimentary advantages.

- KID Brands has some good licenses and has also recently acquired additional licenses (e.g Disney license in

2010). The infant and juvenile market is heavily dominated by licenses.

Customer Related:

- The company benefits from positive industry characteristics and trends

o Demand for infant and juvenile products is less susceptible to economic cycles ---people tend to cut

back on their spending, much before cutting spending for the children

o Demographic trends such as Baby-Boomers doting on grandchildren, high divorce rates which lead to

duplicate requirements for infant and juvenile items like furniture and other essentials, and

increasing trend of disposable products will likely help the industry grow

Operations Related:

- Invested in a new IT System in 2010 which should generate significant benefit in the future if it can be further

integrated into the business.

Financials:

- Exhibited strong cash flow generation from 2007 to 2009. KID paid down $19.0 million of debt during 2009

and expected to pay down an additional $20.0 million during 2010

- The company has a new credit facility in place with favorable turns and low interest rates. Bank of America

has amended the terms several times to be more amenable.

- The company has improved working capital management during 2008 and 2009.

– From 2007 - 2011 - it improved AR turns by 3x. The company has invested in IT systems that have

helped it turn inventory and accounts receivable more often.

– Also average cash conversion cycle went from 275 in 2007 to 125 in 2011.

Weakness

Product Related

39

- The products are generic in nature and do not include items with any specific technological or medical patents

associated with them. This makes them susceptible to “me too” comparisons and a target of potential “knock

offs”.

- Licensing agreements with Carter’s and Graco are non-exclusive and subject to competitive bidding and the

related products are susceptible to price pressure.

- Growth and market share are dependent upon new product introductions.

- The company supports far too many product lines and overlapping product brands which makes it

unmanageable while dealing with logistic and order fulfillment. The company has not made an effort to

analyze the profitability of the various product lines and as a result is supporting many brands/product lines

which are likely negatively affecting the bottom line.

- The company is exposed to raw material pricing but is unable to pass on raw material price increases to its

customers due to the fact that the retailers have all of the pricing power.

Customer Related

- KID Brands’ customer base is dominated by large accounts like Toys “R” Us / Babies “R” US Inc (~47% of

2009 revenues) and Target Corporation (~12% of 2009 revenues)

- This concentrates the business risk and creates a weak negotiating position for KID Brands when it tries to get

more attractive sales terms.

Supplier Related

- Manufacturing in China represents 70+% of purchases and five largest suppliers represent 50+% of purchases.

Concentration of suppliers in Asia makes the company susceptible to rising costs, currency fluctuations,

product quality issues.

Operations:

- Management team has had significant turnover recently and the current team does not have much experience

in the infant and juvenile market.

- Composition of Board of Directors and management team seems to focus on ‘Wall Street’ experience versus

consumer goods experience.

Financials:

40

- With respect to the divestiture of the gift business, KID has received only the first of four royalty payments for

the year 2010.

- KID wrote-off a $15.6 million note receivable from Encore and the $4.5 million investment in the entity

associated with the proceeds from the sale of the gift business.

Opportunities:

Product Related: The product related opportunities for KID Brands can be summarized as follows:

Cross selling: Provide complete product packages /nursery solutions. This would involve working across

divisional units and assembling products from the different subsidiaries and brands to create a complete

package that would be attractive to anyone looking to create a nursery room with less time and effort. This

would no doubt require cross divisional cooperation between the various business units.

Branded and Design-led development: KID Brand sells products that are designed and manufactured as part

of the company’s proprietary brands and other products that are manufactured under third-party licenses.

Design led development is one of their core strengths. Furthermore, the licenses create price pressures from

competitors processing similar licenses. Hence focusing on branded and design led development and

exploring related opportunities seems advisable. Related to this would be an idea to retail their own licenses

along with manufacturing help, instead of directly retailing licensed products.

Minimize SKU’s: Rationalizing the number of SKU’s to eliminate overlap and duplication will facilitate better

inventory management and increase the minimum order quantities.

Tiered Pricing: Create a catalogue of products at all points on the price spectrum from entry price point to

high retail pricing. This would allow the company to effectively market to a new customer whose price

preferences are not known. It would be crucial to define clear product differentiation between the various

price steps to minimize/avoid inter category cannibalization. Associated with this opportunity would be the

opportunity to create low cost brands with special attention paid to functionality and robustness.

Customer Related:

In terms of customer and sales related areas, the largest opportunities exist in improving the profitability of

large accounts. Recently, these customers have experienced losses related to inventory obsolescence. In such

events, KID Brands often helps the retailers by offering rebates and credits to help move old inventory. This

could be avoided by taking steps to minimize inventory obsolescence for the company as well for the

customers. This would result in smaller and more frequent orders, which will improve the bottom line and

profitability.

Following this line of thought, KID Brands should also explore support of specialized product lines for certain

customers. One of its competitors is already providing private label support and specialized design capability

to large retailers like Target. KID Brands should look into this as a possible way of getting more business from

large retailers.

41

Currently the most important component of its distribution channel is the direct sales force. Another

opportunity that exists is expanded distribution channels to include web selling.

The Company has to date concentrated most of its sales and marketing efforts in the United States. The US

market is now saturated, and at the same time the population and economic growth in Asia is lending the

opportunity to expand market presence in these geographies. Given that most of the manufacturing is done in

Asia already, it may make sense to consider that market for expansion.

The company could get involved in more aggressive market testing for space and design concepts in advance

of product launches to avoid costly failures.

Competition Related:

Since KID Brands is playing in a very non-differentiated market, it is crucial for the company to find ways to

distinguish itself. Many of the opportunities listed above in the product and customer related sections can be

used to effectively position the company against the competition.

Supplier Related:

KID Brands should leverage its negotiating power on items like customs brokerage, inbound freight and

insurance for different business units. By creating a unified communication channel with the suppliers and

other service providers it could generate appreciable economies of scale for these operating expenses.

Operations Related:

Given the organization of the business with the subsidiaries, it would be beneficial to create a centralized

home office which will play a unifying role for the various divisions. Shared resources and shared disciplines

may benefit the whole in cost, operational advantage, and competitive synergies. Examples include MIS,

logistics, treasury, process quality, and business practices, web selling and public relations.

Threats:

Product Related:

- The majority of the products in KID's portfolio are not differentiated as they do not involve any particular

technological innovations or specialized design aspects. In that way these products are almost generic in

nature and hence are easy for competitors or new entrants in the business to “knock-off” or copy. This puts

tremendous pressure on the company to constantly innovate and anticipate market need and demand.

Changes in customer preferences put the company at risk of inventory obsolescence. In such cases KID Brands

helps the retailers to sell excess inventory by offering price concessions.

- Furthermore, the products retailing in the United States are subject to stringent safety requirements under

U.S. federal and other applicable laws and regulations, various industry-developed voluntary standards and

product-specific standards. This inevitably results in product recalls when products fall short of the

42

requirements imposed by such strict codes. KID Brands must prepare for such problems and the financial

burden they impose.

Customer Related:

- KID's customer base includes some very large customers that do afford product distribution efficiency and

economies of scale in terms of sales costs. Customers such as Target, Toys “R” Us and Wal-Mart account for

almost 70% of the business. However, they typically do not have long-term contracts with KID Brands, or

agreements with respect to returns and promotions, and are not required to purchase any specific number or

amount of our products. Lost business at this scale could significantly affect the company’s operations.

- Additionally, the company is dependent on the shelf space at these retailers for accessing the end customers

and any significant changes (like store closing or consolidation of the retailers) will affect net sales and

profitability.

Competition Related:

- The biggest threat to KID brands in terms of competition is the generic nature of the products which yields to

very low barriers to entry for new entrants to come in and take up market share.

- The Intellectual Property (trademarks and copyrights) that the company has created is not valuable or a

compelling advantage. Further, customers have very low substitution costs if they do decide to switch

suppliers or brands.

- Licensed products constitute approximately 38% of net sales. Not having exclusive rights to these licenses puts

competitive price pressure on KID Brands. Further, demand for such licenses and perceived threat of reduced

sales due to losing these licenses forces the company to make minimum royalty payments irrespective of

revenue generated, thus increases expenses. Of course, licenses granted to competitors limit the ability to

market products which reduces net sales and profitability.

- Other threats include the recent trend of retailers to import products directly from suppliers as well as mass

merchandisers creating private labels for generic products. This is putting the traditional customer in direct

competition with the company.

Supplier Related:

- KID Brands sources more than 70% of it’s manufacturing from China. While they are involved in the design

and quality control aspects, they are dependent on the local manufacturing facilities. The raw material and

labor costs are comparatively lower in this region, but they are on an increasing trend. Further, these prices

are subject to exchange rate fluctuations and also foreign political relations. Such events could affect the

bottom line due to fact that majority of the manufacturing activity occurs in China.

- In addition, the company’s business stands the risk of logistical issues which could jeopardize the supply chain

operations.

43

- Lastly, the product pricing is largely dependent on the inflation adjusted cost of raw materials (for e.g cotton

for soft goods,), transportation and other custom/duties imposed on transfer as well as availability at the

source.

Operations Related:

- The Company spent $1.3M to implement a new IT System in 2010. This system has still not been shaped to its

final productive form after a year and has caused noticeable disruption to the operations of the business.

- The company has significant exposure to foreign political relations and how these dictate import duties for

imported goods under US Tariff laws. The company is currently dealing with anti-dumping duties and related

interest for the Lajobi division. Assessment of their business practices and required changes could

significantly affect margins.

44

Valuation and Liquidation Analysis

45

Liquidation

We have estimated the liquidation value of KID Brands to range between $95.6 million and $133.7 million. Details

are presented in the chart below.

Noteworthy assumptions include:

Accounts receivable is assumed at a recovery rate of 50% to 75%. We assumed lower than industry standard recovery

rates, as an analysis of the accounts receivable allowance account indicates a high degree of charges against the bad

debt reserve. We have not found sufficient information indicating that the charges are write-offs of receivables,

however, we decided to err on the conservative side and assume these as write-offs. As the account analysis below

indicates (where we solved for the reduction in the reserve given the other three information data points in the

financial statements), we believe that write-offs for 2010 are 13.1% of net revenues.

Inventory balance sheet figures represent all finished goods.

Property plant and equipment is a combination of land, buildings, machinery and equipment, furniture and fixtures

and leasehold improvements. We assumed a 60% to 80% recovery rate on all categories except machinery and

equipment, where we assumed a 90% recovery on the high end of the range. We also note that an assumed 0%

recovery of leasehold improvements.

46

47

Valuation – Discounted Cash Flow Analysis

We have created a full set of financial projections for the years 2011 through 2015.

A major assumption in the projections is the divestiture of the LaJobi business unit during 2012 (discussed further in

conjunction with the Turnaround Strategy). We have assumed that this business would transact based on an

enterprise value to revenue multiple of 0.34x (enterprise value of $36.26 million) during 2012. This was derived by

observing certain publicly traded furniture companies with less than $700 million in revenue (notably Ethan Allen

Interiors, Stanley Furniture Co, Bassett Furniture Industries, Hooker Furniture Corporation and Flexsteel Industries –

see chart bel0w). We used a revenue multiple, as segment level operating statistics are not disclosed by KID Brands.

Publicly Traded Furniture Comparable Companies

We used the above universe to extract valuation metrics for the LaJobi business and assumed gross margin

percentage.

Revenue Projection

Revenue estimate for 2011 is based on year-to-date September 2011 with a flat projection for the fourth quarter from

the fourth quarter of 2010. 2012 assumes that the LaJobi unit will be sold mid-year and management will begin to

focus intensely on the remaining divisions. The renewed focus will see the strongest growth in soft goods category

over the projected period, as we believe this category will be less sensitive to the economy and product obsolescence.

Gross margin achieving a steady state of 35% by 2014

48

By observing the comparable company universe, we determined that LaJobi’s gross margin is 17.3% (based on Stanley

Furniture, Hooker Furniture and Flexsteel Industries). By backing out the LaJobi assumed gross margin, the

remainder of the business operates at a margin of 34.7% base d on 2010 gross profit results and 31.6% based on year-

to-date September 2011. 2011 will continue to have the negative drag on margins from the LaJobi business,

however, in 2012 we will begin to see improvements as the LaJobi business is sold.

Operating Expenses

We are projecting a significant reduction in operating expenses beginning in 2012, but remaining at 20% of net

revenues. The dollar amount will reduce based upon lower sales volume, but also a consolidation of the warehouse,

distribution and logistics functions globally.

Capital expenditures

Capital expenditures remaining above historical levels, predominantly due to a continued investment into a fully

functioning IT system and further investment required to integrate new global 3PL into the company’s systems.

Working Capital

For working capital assumptions, we relied on a normalized historical average for the projected period. One notable

exception is inventory turnover improving to 5.0x during 2013. We assume that the LaJobi inventory turned

significantly less than the other product categories and therefore with the divestiture of this category, overall turns

would improve.

Unlevered Free Cash Flow Analysis

Valuation – Assumptions

We estimated KID Brands discounted cash flow valuation using two methods to determine the residual value:

EBITDA multiple method and the perpetuity growth method. The EBITDA multiple method estimates the residual

value based on the 2015 EBITDA of $34.5 million and 7.5x multiple. The multiple was derived from the observed KID

Brands competitor set discussed in the Competition and Strategic Position section (specifically Summer Infant, Dorel,

Crown Crafts and Tomy International). The perpetuity growth method estimates residual value based on a growth

rate applied to the 2105 unlevered free cash flow. We assumed 3.0%, which is in line with the 2.7% calculated based

on growth during 2015.

49

Our assumption for the weighted average cost of capital uses the current market value of KID Brand’s publicly traded

equity and secured debt outstanding. Additionally we assumed the 3.0% cost of debt per the current Bank of America

facility, a 40% blended corporate tax rate, the yield on the 10-year Treasury bond at 2.01%, the equity beta calculation

of 2.90 and 6.0% market risk premium. We used 10.4% to discount the free cash flows in the projected period.

Refer to the chart below for details.

Valuation – Summary

Both methods yielded very similar results in the $7.45 to $7.50 price per share range. This represents a significant

premium to the current trading range (approximately 140% to December 14, 2011 trading values).

For further details and sensitivities please refer to the discounted cash flow analysis exhibit at the end of the report.

50

Leveraged Buyout Analysis We believe that the Turnaround Strategy that we propose will be best enacted out of the scrutiny of the public investor

and analysts view. Divesting approximately 36% of the company revenues will have significant valuation effects in the

public equity markets. Additionally, the consolidation of the distribution function may have a temporary negative

effect on earnings, which would also have public equity market repercussions. A leveraged buyout / take-private

transaction would allow the new management team to focus on making significant changes without the investor /

analyst community opinion affecting the equity value.

We believe that due to the current events at KID Brands (and the year-to-date stock performance decreasing

approximately 64%), a 10% premium would be an acceptable tender offer. Further, our opinion is that the negative

share price momentum will continue over the next twelve months. Assuming this premium, we constructed a sources

and uses table below to illustrate a transaction. We believe that 3.5x senior / 5.0x through the subordinated debt is a

transaction reasonably within market standards for a company of this size, however, this leaves a significant equity

check to be written (approximately 65% of the purchase price) by the acquirer. It is also noteworthy that this assumed

transaction would be 14.2x 2011 estimated EBITDA, which is well above the multiple established from the publicly

traded comparable competitor universe (7.5x). However, the transaction is valued at 6.0x 2012 projected EBITDA,

which we believe is a more normalized EBITDA (despite the 15.9% decline in 2012 revenues).

Sources and Uses

The assumptions above were run through a leveraged buyout model (using the previously discussed financial

projections) to generate investment returns on the equity investment by the acquirer. Below is the summary return

grid for years four, five and six of the investment and assuming an exit multiple range within the current publicly

traded comparable universe average of 7.5x. Assuming a 7.5x exit in 2015 (year 5), the acquirer would generate an IRR

of 33.4%, or 3.2x investment.

Investment Returns

51

The acquirer in this transaction will need to have investment experience with consumer goods companies and also

special situations / turnaround capabilities. Our initial prospective list would include: Sun Capital Partners, KPS

Capital Partners, LNK Partners and Patriarch Partners.

52

Turnaround Plan

53

Turnaround Plan

As discussed throughout this paper, the company is not performing well and has exposed itself to significant risk. The

below Porter 5 Forces chart summarizes the primary concerns we have for KID Brands.

Looking back at the competitor comparisons, we see below also, that the entire industry's margins are not very large.

However, KID Brands has the lowest EBIDTA margin among its peers and one of the lowest gross margins among

peers.

57

57 Capital IQ.

54

These margins are resulting from some of the factors already mentioned. Here is a summary of areas where KID can

be improved:

(1) No Product Differentiation: Very little product differentiation aside from licenses. However, in some

baby and infant segments such as accessories and soft goods, brand is not an important attribute when

making buying decisions. KID has also not launched any formal online or social media marketing strategy to

communicate with others and draw attention to its product attributes.

(2) Number of SKUs: The Company continues to expand its product base but is not clear if growing its portfolio

of products is offering any benefit from a production or sales standpoint. For example, in some segments such

as furniture, margins are very tight across the entire industry and KID may have the opportunity to evaluate

its performance across products to get rid of non-performing products or segments.

(3) Retail Price Pressure: Retailers have all of the power and likely push KID Brands to commit to certain

price points. There may be opportunity for further relationship building here.

KID Summer Infant TOMY Dorel Crown

Profitability Return on Assets % 1.8% 3.9% 7.1% 3.7% 9.6% Return on Capital % 2.1% 5.2% 9.2% 5.1% 12.3% Return on Equity % 16.1% 5.6% 11.2% 8.6% 13.1% Return on Common Equity % 16.1% 5.6% 11.3% 8.6% 13.1%

Margin Analysis Gross Margin % 25.4% 34.3% 42.3% 21.9% 21.2% SG&A Margin % 23.1% 26.6% 31.4% 14.6% 13.3% EBITDA Margin % 3.9% 7.7% 13.2% 7.0% 9.6% EBITA Margin % 3.4% 5.5% 10.9% 5.7% 9.3% EBIT Margin % 2.4% 5.1% 10.5% 5.4% 7.9% Earnings from Cont. Ops Margin % 7.0% 2.0% 7.0% 4.4% 4.6% Net Income Margin % 7.0% 2.0% 6.9% 4.4% 4.5% Net Income Avail. for Common Margin % 7.0% 2.0% 6.9% 4.4% 4.6% Normalized Net Income Margin % 0.2% 2.5% 6.5% 2.8% 4.7% Levered Free Cash Flow Margin % 2.3% (0.4%) (0.3%) 2.5% 8.9% Unlevered Free Cash Flow Margin % 3.6% 0.3% 0.1% 3.0% 9.2%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Gross Margin % EBITDA Margin % Net Income Margin %

KID

Summer Infant

TOMY

Dorel

Crown

55

(4) Information Technology and Organizational Tools: KID has the opportunity to expand the use of IT to

manage sales, orders and track customer movements.

(5) Bloated Distribution Operations: KID has several distribution facilities. For the size of the company it

would make sense for KID to look into streamlining this.

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Recommendations

Based on our analysis of the KID Brands business and financial performance, we have developed the following

recommendations. As discussed before, we believe that a Leveraged Buyout (LBO) makes the most sense for this

business. By taking the company private, we will be able to make the significant changes to the operating model

without the reaction of shareholders. Also, many private equity firms have in-house sourcing and operations teams

with expertise in streamlining manufacturing and sourcing operations. We believe that this disciplined third party

approach will help KID achieve the turnaround it needs.

(1) Product Line Profitability Analysis - KID Brands is in four very different business segments and has

thousands of product lines. However, in its SEC filings, the company does not disclose the profitability of each

segment; it only discloses top-line revenue for each of the four segments. We believe that this is likely because

there is something in those profitability numbers that describes where KID may be struggling. As a first step,

we would recommend that KID produce revenue and profitability numbers for each product. The team will

then be armed with the numbers to make strategic decisions. We believe that this information gathering and

analysis phase is critical to the success of the turnaround.

(2) Make decisions about Individual Business Lines - We believe that by going through the exercise above,

KID will be able to determine which product lines should be cut or even divested. We already know that KID

has come into trouble with its LaJobi line and evading taxes. Therefore, we think this is a sign that there are

issues within the company's furniture business overall. In addition, we know that the furniture business in the

US has been declining over the past few years with most growth happening in other countries. Finally, KID

has not come to market with a differentiated furniture product to compete with some of the more innovative

new arrivals such as the infant crib that transforms into a toddler bed. As a result, given that KID is selling an

undifferentiated furniture product in the US, it is likely not a very profitable business. We believe that buy

divesting the LaJobi business we will be able to streamline KID's focus and increase gross margins (see charts

below). As stated in the valuation section, by analyzing other furniture companies, we determined the

profitability of the furniture business and used that to determine the effects on KID's overall gross margins.

We determined that in the future this will bring KID's gross margins to 35%.

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Gross Margin Increase

(3) Streamline Distribution & Enhance Relationships with Suppliers - Currently, KID has an

unnecessarily large distribution capability. We would suggest that KID go out and hire a 3rd party

distribution and logistics provider. These providers have experience working in China and streamlining

processes for consumer goods companies. KID has done the right thing by building a staff of quality control

officers to manage operations in China; however, there is likely more that can be done there. By taking the

firm private, this will allow flexibility to send teams to China to make sure operations are running effectively.

In fact, many private equity firms already have in-house operations teams that are adept at managing sourcing

operations from China. KID will be able to leverage the Asia sourcing expertise in place at many private equity

firms in combination with the 3rd party logistics provider.

(4) Strengthen Management Team - From Day One, we will begin to assess the current management

structure and make appropriate changes. We believe that KID would benefit from a new CEO, particularly

someone with consumer products or youth products experience as well as experiences sourcing and

manufacturing in China. We will leverage the private equity firm's expertise in management strategy to help

with this effort as well.

(5) Brand and Marketing Strategy - KID Brands does not appear to have a cohesive marketing and branding

strategy.

In this segment there are two types of mother buyers. The first group of mothers is the group that is making

large purchases or registering for gifts in advance of a child being born. These mothers are doing research

before making purchases. They are looking to social media sites and online forums to understand the details

and attributes of each product. These mothers are also turning to family and friends to help make purchasing

decisions. The second group of mothers is the group who has already given birth and may be looking to add

more non-essential items such as toys, accessories and linens to their items. These purchases are usually

driven less by brand and more by price, convenience and design.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

KID Summer Infant

TOMY Dorel Crown

Gross Margin % Before Turnaround

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

KID Summer Infant

TOMY Dorel Crown

Gross Margin % after Turnaround

58

As a result, KID needs to build a stronger marketing strategy to get at both of these segments. First, KID

should spend time developing a social media strategy online. Most of KID's competitors already have a strong

online presence. Mothers today are internet savvy and want to find information about the products they are

buying. KID cannot afford to not have an online and social media presence. For example, the firm could

consider developing a newsletter or blog that would add new content to its site regularly and attract more

visitors. It needs to find ways to communicate directly with customers even if this is just information sharing.

Also, KID has the opportunity to rely less on licensed brands and more on proprietary brands in the segments

where brand is not a significant decision making factor. For example, in the accessories and linens market,

KID can use design-led development to come out with unique brand and design elements that set its products

apart from the competition. Because it will be divesting the LaJobi business and streamlining distribution, it

will have more funds available to focus on R&D and design.

(6) Build a Foreign Office and Global Sales Strategy - The US market for infant and baby goods is not

growing. Birth rates have declined slightly over the past few years, and analysts predict that this will continue.

However, in Asia and Latin America, birthrates are increasing. In addition, in countries such as China and

India, strong middle classes are emerging. Given the demographics of the US market, it is clear that a US-only

strategy is not sustainable for KID Brands. KID has the opportunity, given that it is already in China doing its

manufacturing, to try expanding into the Chinese baby market. In the short term, we suggest that KID take

some time to analyze the strongest global markets and consider where it has existing relationships to make a

transition easier.

(7) New Retail Relationships - As stated before, Toys R Us, Wal-Mart and Target account for over 50% of

KID's business. However, there are new and emerging retailers in the baby and infant segments. For

example, Bed Bath and Beyond recently purchased retailer Buy Buy Baby and is pushing more into the soft

goods segment at both its Bed Bath and Buy Buy Baby stores. Amazon.com is also becoming an increasingly

popular destination for online shopping. KID should reach out to these other retailers to cultivate

relationships. For example, perhaps KID would be able to build a new relationship with Bed Bath and Beyond

to display certain linens in specialized displays. Most of KID's competitors are already selling at Toys R Us,

Wal-Mart and Target, and KID has the opportunity to differentiate by finding another retailer where it can

better showcase its product. Further, KID should begin developing relationships with other emerging online

retailers such as Zoolily and Gilt Group. For example, Gilt Group runs flash sales every day. This would be a

good way for KID to unload any excess inventory and build its brand with new customer segments as these

flash sites typically attract a more affluent buyer.

59

(8) Private Label Production - The reality is that building a stronger brand is easier said than done. This is

even harder given that private label brands are becoming increasingly popular across all consumer products

segments. So, we believe that another strategy should be to approach Target, Wal-Mart or others to help

manufacture their private label brands. This would help bring in increased revenue but not require any

further marketing/SG&A investment.

(9) ERP/IT Management - KID recently put in place a streamlined IT/ERP system, but it has not become

effective yet. KID has the opportunity to leverage IT to integrate its sales process and rely less on its

traditional in-person sales force. It can build a more automated program where retailers can order inventory

online and perhaps integrate with online retailers such as Amazon.com. In addition, this will help the

company better understand which products are selling well, how quickly and in what regions. We believe

there are significant opportunities for KID to leverage IT to streamline processes and costs.

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Exhibit 1 - Detailed Financial Analysis

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Exhibit 2 - KID Brands Products & Marketing Materials

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Bibliography